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Individual Investor
Jeremy Zhou
Director of Healthcare and Research,Financial Services
- Education UC Berkeley
- Qualifications BS Nutrition & Toxicology; Masters of Public Health; Registered Dietitian; CFA Charterholder
- Investment Experience 10 years
Biotech and Medtech
The U.S. healthcare industry, particularly Biotech and MedTech, is the core investment universe of my strategy. I use a combination of top-down and bottom-up fundamental analysis to evaluate potential opportunities and risks, with macro-factors primarily employed for sector allocation and rotation, and company-specific factors used for individual stock selection and weighting. Five key variables drive my valuation and assessment of the risk/reward profile for individual companies: balance sheet health, competitive landscape, pipeline status, product lifecycle, and clinical/regulatory catalyst events.
I use a combination of top-down and bottom-up fundamental analysis to evaluate potential opportunities and risks, with macro-factors primarily employed for sector allocation and rotation, and company-specific factors used for individual stock selection and weighting. Five key variables drive my valuation and assessment of the risk/reward profile for individual companies: balance sheet health, competitive landscape, pipeline status, product lifecycle, and clinical/regulatory catalyst events.
I begin with idea generation through screens, news filtering, corporate action monitoring and daily reading. I then evaluate promising ideas and rank them based on risk/reward profile. Payoff calculation involves approximating the intrinsic value of the company relative to its current price, while probability of success involves due diligence on some or all of the five key variables: balance sheet health, competitive landscape, pipeline status, product lifecycle and clinical/regulatory catalyst events.
My long-only portfolio allocation is primarily driven by two techniques: Fractional Kelly Criterion and Position Limit. I determine initial stock weighting by potential payoff and probability of success, which are inputs to calculating Kelly Criterion. I use position limit for rebalancing and risk management, where 10% to 15% is the maximum threshold for any single stock position in the portfolio. In addition, I use rebalancing techniques depending on whether the market is in trending or oscillating mode. Typically, the portfolio seeks to diversify across 25-30 positions. I do not anticipate high turnover in the portfolio.
I enter most trades with specific catalyst events and time horizons that I believe will lead to the closing of the valuation gap between current price and intrinsic value. I sell after the catalyst events happened, or if the catalyst events are no longer valid. Selling can also be triggered when positions reach full or over-valuation, even if catalyst events have not yet occurred.
The strategy described above takes advantage of several fundamental inefficiencies that persist in the U.S. healthcare industry. If there’s any significant change to U.S. policy involving drug/device pricing and reimbursement, this strategy may lose its edge and would require modification.
Model commentary
Simple trumps complex for biotech stock investing
3 November 2012
Here are the core questions I ask when valuing biotech stocks.
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