Start Making $53,200 Today

Invest only 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 skyrockets on drugs and medical devices.

Many major advances are 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 earn 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 to latch onto explosive returns.

Growth investors can't afford to ignore biotech
The top-performing U.S. and Canadian biotechs over the past five years have an average return of 432%. A $10,000 investment in this basket would be worth $53,200 today:

Source: Capital IQ, a division of Standard and Poor's. Results exclude penny stocks.

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

To help address that issue, I looked for a defining characteristic that drives the performance of these small-cap biotech companies.

That defining characteristic
As it turns out, there is a common factor: explosive revenue growth thanks to new product launches. Several companies on this list, including Elan, BioMarin, and United Therapeutics, have seen their fortunes improve dramatically because of successful drug launches. When a small biotech with no marketed products comes through with a successful drug launch, shareholders are handsomely rewarded.

Consider Celgene, a biotech whose gains have come on the back of two approved cancer drugs, Thalomid and Revlimid. The company had a phenomenal year in 2007, with revenue growth of 56% pushing the top line to a whopping $1.4 billion. This year, Celgene expects an equally strong year with 56% growth and $2.1 billion in annual sales, putting it in an elite class of biotechs.

It's no wonder this stock tops the five-year performance leaderboard.

Myriad Genetics has arrived at its success through a different path: diagnostics instead of drugs. Myriad's suite of diagnostic tests predict an individual's risk of developing certain types of cancer based upon his or her genetic makeup. For people with a strong family history of cancer, this type of information is invaluable.

Myriad's tests are delivering phenomenal financial results, with sales of $62 million in the most recent quarter, up 51% from the prior year. There are no signs that this growth train will slow down anytime soon.

Myriad also has a huge ace in the hole with its Alzheimer's drug Flurizan. Alzheimer's disease is a large pharmaceutical market with only a handful of modestly effective drugs. If Flurizan is effective, it will almost certainly be a commercial success. Results from the company's first phase 3 trial come out next month.

The Foolish spoonful of sugar
The returns above show that as investors, to lock in the big gains, we need to be there before drug approvals happen. This means we need to find high-quality drugs that are in early clinical development, before their potential is 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. To see the biotech companies I'm recommending today, click here to join Rule Breakers free for 30 days.

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

Fool analyst Charly Travers really does own shares of only biotech companies -- including Myriad Genetics. Myriad Genetics and BioMarin Pharmaceutical are Motley Fool Rule Breakers recommendations. The Motley Fool has a disclosure policy.