Only invest in biotech stocks.

Sound crazy? Maybe, but that's what I do. I'm not fazed by their high risk or jaw-dropping volatility. That's because when biotech winners hit, they hit big. Simply put: A basket of carefully selected biotech stocks will trounce the market over the long haul.

The ultimate growth industry
Health care is a sector with a massive demographic tailwind as baby boomers age and spending on drugs and medical devices skyrockets.

Then we have many major advances coming from small-cap biotechs. Thanks to their small size, a single drug can drive tremendous increases in value for a company like this. The lengthy and expensive clinical trials required to attain FDA approval serve as a steep barrier to entry, allowing companies that cross this milestone to maintain fat profit margins for many years.

These factors combine to give us an opportunity where explosive returns are to be found.

Growth investors can't afford to ignore biotech
Consider that the top-performing biotechs over the past five years have an average return of 736%. A $10,000 investment in this basket would be worth $83,600 today:


Return, July 2002 to July 2007







Ventana Medical Systems


Illumina (NASDAQ:ILMN)






Endo Pharmaceuticals (NASDAQ:ENDP)


United Therapeutics


Onyx Pharmaceuticals (NASDAQ:ONXX)


Average Return


Source: Capital IQ, a division of Standard and Poor's.

But looking at past performance alone does nothing to help us make money now. We need to understand exactly what was creating these monstrous gains if we hope to replicate that performance over the next five years.

To help address that issue, I looked to see if there was a defining characteristic driving the performance of these small-cap biotech companies.

That defining characteristic
As it turns out, one factor is pervasive in this group: explosive revenue growth thanks to new product launches. As a group, these companies have a compound annual revenue growth rate of 38.1% over the past five years. This is what happens when a small biotech with no marketed products hits it big with its first drug launch.

Consider Elan, a biotech whose gains have come on the back of world-class R&D efforts in multiple sclerosis and Alzheimer's disease. Last summer, Elan re-launched its multiple sclerosis drug, Tysabri, in partnership with Biogen Idec (NASDAQ:BIIB), and the company is now seeking approval for its use in the treatment of Crohn's disease. Also keep an eye on Alzheimer's drug bapineuzumab, which could be the most important Alzheimer's drug ever created. Bapineuzumab is in development in collaboration with Wyeth and is slated to start phase 3 trials later this year.

United Therapeutics has also done very well for itself in recent years. This biotech had just $30 million in revenue in 2002, nearly all of which came after the FDA approved its pulmonary arterial hypertension drug, Remodulin, in May of that year. Since Remodulin's approval, the company has done a great job in delivering top-line growth. Long-term shareholders have been richly rewarded with a stock price that has jumped from $12 to nearly $66.

The Foolish bottom line
The returns above show that, as investors, we need to be there before drug approvals happen if we want to lock in the big gains. This means we need to find high-quality drugs early in clinical development before their potential is fully recognized by the rest of the market.

As a biotech analyst on the Motley Fool Rule Breakers team, I focus on finding small-cap biotech companies on the verge of releasing new products. More importantly, I want to find them before anyone else does. If you'd like to take a look at the biotech companies I'm recommending today, click here to join Rule Breakers free for 30 days.

This article was first published on May 17, 2007, as "Start Making $67,000 Today." It has been updated.

Rule Breakers biotech analyst Charly Travers really does only own shares of biotech companies -- though he doesn't have a position in any company mentioned here. Biogen Idec is a Stock Advisor recommendation. The Motley Fool has a disclosure policy.