Rule number one:
I started investing since 2017, literally from inside the lab. Being a PhD candidate in chemistry, I have the opportunity to gain real-life experience in working with state-of-the-art technology and dealing with real-time issues. This helps me to gain valuable knowledge and also to recognize several problems that remain unsolved in the chemical world. With this expertise, I decided to focus my investment on the chemical, pharmaceutical and biotech companies. Why? Considering the high investment returns of these industries in the past years, plus the increasingly important role of healthcare-related sectors in the current economic environment, chemical, pharmaceutical, and biotech are probably among the most appealing investment opportunities nowadays!
My first investments were in Biofrontera, Evotec, and Biotage. With the initial success, I started to go deeper and deeper in the field of stock research. Until now, I have published several articles on SeekingAlpha to share my investment strategies. In this site, I will share with you the three most important rules that you should always keep in mind before deciding to put money on an investment.
Find out the key numbers.
Before baking a cake, you need to prepare some ingredients. However, not every cake has the same recipe: each has its own "key" ingredients and flavor. Similarly, each company has its own story and its own key numbers. Therefore, depending on which type of companies you are interested in, you need to look for different information. For young biotechs, it is important to understand the potential market of a new drug as well as the burn rate for its research. For a more established chemical company, however, earnings, feedstock costs, and political events could play more important roles. That is why our site for Stock Chemical Industry focuses on the analysis of P/E ratio to make comparisons among chemical companies around the worlds.
Rule number two:
Find the peer group and compare
Identifying peers that are comparable (in terms of size, key products, etc.) is also an important technique you should keep in mind. Let's take a simple example: A car rental owner wants to estimate which car brand would bring faster returns on investment. He compares among Renault, BMW and Audi R8. Since the rental fees are different for each brand, he sees that the Audi would pay itself after 275 days of rental, the BMW after 400 days and the Renault after 466 days. Thus, investing in Audi seems to be the best investment.
But is it really the case?
In reality, a rental rate of $600 (for Audi) is quite high and not many people can afford it. Moreover, the initial investment on the Audi R8 is also around 4 times higher than that for the BMW. Thus, making decisions on "uncomparable" brands would lead to wrong decisions! On the other hand, when comparing between BMW and Renault, both at a similar price, we can see that the BMW is more lucrative and would bring the faster return. So, the more we compare, the clearer the picture becomes.
In the case of chemical companies, it is important to be able to identify key competitors to make comparisons. Of course, every industry has a lot of companies competing with each other. However, finding the direct, comparable ones would provide a much better assessment. This is the reason why I created the real-time database for chemical companies that have comparable size (based on market capitalization) and are exposed to similar risk factors (based on region).
Rule number three:
Understand the business model and key technology
Without digging into the data and knowing about the business model, I would not invest in any company. There is certainly luck involved in this process and sometimes things don't go as planned. If we do not have a certain conviction of the company's long-term perspective, we will be easily affected by the so-called "common reaction" among investors. This leads to overselling in periods of low sentiment or overbuying in periods of high sentiment, despite unfavorable prices. Therefore, to have a clear idea of our investment, we need to understand the company's business model and its key technology. Remember, the more we research today, the more we won't be affected by the short-term stock price fluctuation.
Don't have enough time for research or don't know where to start? Check out my analyses on SeekingAlpha.