As a Fool keen to tap into long-term investment trends, I’m bullish on the outlook for the biotech sector. As such, I’ve been closely following the performance of the Oxford Nanopore (LSE: ONT) share price since the company’s highly successful IPO.
Should I be piling into the DNA-sequencer’s stock as soon as possible, or steering clear for now?
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IPO success story
Based on trading to date, it’s easy to think the former. Such was the scale of demand, the Oxford Nanopore share price exploded to 645p from its initial IPO value of 425p on 30 September.
Clearly, its involvement in tracking variants of Covid-19 over the last year or so has done the firm’s profile no harm at all. However, early investors also seem to think its plans to move into the applied genomics market — including areas such as agriculture and food safety — could light more fires under ONT stock in time.
Like every potential investment however, it’s worth asking what can go wrong as much as what can go right. I see two potential issues.
#1 Post IPO sell-off. Although the initial gains have been excellent, there’s no guarantee the Oxford Nanopore share price will continue to ascend, even if the company executes its plans perfectly. Regardless of quality, traders will routinely sell up once the buzz dies down. It’s worth noting that momentum’s already stalled a little. The stock changes hands for 577p, as I type.
# The growth is priced in. With the Oxford Nanopore share price charging ahead, the company quickly boasted a market capitalisation of £5bn after its IPO. Based on the growth potential, that’s not entirely irrational. However, this is still a nascent market and ONT only generated a little over £100m in revenue last year. It’s also unprofitable, and could be for years.
Considering the above, I won’t be investing in ONT just yet. Instead, I’m content to keep adding to my holding in Biotech Growth Fund (LSE: BIOG). This may seem like a rather odd decision. After all, BIOG’s share price has declined 18% over the last 12 months.
So, why BIOG over ONT? Three reasons:
1# Safety in numbers. The Biotech Growth Trust has 87 holdings, based on its latest factsheet. Given the aforementioned volatility often seen in the sector, I reckon this diversification makes it considerably less risky than ONT.
2#Great track record. Despite performing poorly in 2021, BIOG has done admirably for investors over a longer time frame. Since September 2016 (and despite the recent sell-off), the share price has climbed 71%. If shares had been sold at the February peak, the gain would have been 145%.
3#Small-cap focus. BIOG’s preference for small-cap companies helps explain recent underperformance. Since these have the potential to grow at a far higher clip than established heavyweights, the longer-term gains should theoretically be very good indeed. What’s more, BIOG offers exposure to fast-paced players in emerging markets such as China.
Obviously, the share price could continue falling for now. Regardless of what happens in the global economy, it’s also worth noting that only a minority of biotech firms become profitable. Those relatively high ongoing fees (which holders of ONT won’t have) will need to be paid whatever happens.
As things stand though, BIOG will remain my sole biotech holding. Oxford Nanopore goes on the watchlist. I’ll reassess if/when the froth subsides.