Want to invest in some of India’s growing pharma stocks,
But don’t know which pharma stocks to pick ?
Here is a step by step checklist of which, how and when to buy these shares.
But first, if you want to learn all this and more in detail, check out our comprehensive course (here)
Onto the meat of the blog.
We’re going to be using a top-down approach for this blog.
Disclaimer:- You might need to consult a doctor or a medical student for this experiment.
Why ?
Since we’re going to be looking deep into potential viable cures for diseases, you need a second opinion from a medical professional to confirm your intuition.
Let’s start.
What price to buy ?
The industry PE of the pharma sector is 37.34,
So, if a stock which you think is good is trading 20% below that valuation, it is a potential buy.
What to buy ?
For this experiment we’re going to stick with large and mid-cap companies.
Why ?
Small & micro-cap pharma companies generally are very risky bets as their entire future depends on government approval of their new drugs.
If failed, you can lose half your money in a day so it’s better to stay away.
Since this is a practical experiment, make a list of 10 ailments that will still be around in the next decade or two.
Eg:- Diabetes, high cholesterol, cough & cold just to name a few.
I know this might get a bit dark as we’re betting on the fact that the people with these ailments neither die nor get cured.
Because the longer they’re on these drugs the more money the company makes, A.K.A., the more money we make.
But you need to understand that this is business and keep feelings out of this.
Coming back, so after you make a list of the ailments, go to the doctor.
Ask him if there are any more ailments and which are the most common.
Arrange them in descending order and make a list of the medication available and at what price it’s available.
It’s at this point you’ll need a spreadsheet.
What you need to do is figure out how many people in the future will have the ailment(with the help of the doctor) and out of that how many will pick each company’s product.
Add the potential revenue of each company, and you will have the top 3–5 companies which you want to invest in. (Don’t go above 3-5)
Now, obviously, put your money in the same ratio as their revenue.
What does that mean ?
Say you want to invest ₹100
And these are the companies whose revenue is as follows (table)
| Companies | Revenue |
| Company A | 500cr |
| Company B. | 200cr |
| Company C | 125cr |
| Company D | 100 cr |
| Company E | 75 cr |
This is the ratio you want to put your money in.
| Company | Invested Money out of Rs 100 |
| A | 50 |
| B | 20 |
| C | 12.5 |
| D | 10 |
| E | 7.5 |
| Total | 100 |
Now that you’ve decided what and how much to buy, let’s decide on the practical aspects of how to get in.
How to practically execute this ?
Figure out the current PE of each of the 3–5 stocks
Are they expensive ?
Or
Are they fairly priced ?
Any case other than cheap, you need to wait.
They need to be at least 20% cheaper than the industry PE for it to make sense to buy them.
Remember PE is dynamic, so adjust accordingly.
Now, every week, we calculate the fair 20% discount price of each of those shares.
Place a GTT order which will instantly buy them in case of a sudden sell-off.
Exit plan.
You exit any stock when the drug you made your investment decision on goes :-
Out of parent,
Fewer people suffer from the ailment
(I know it’s cynical)
Or
Any price change in the drug will affect revenue.
I hope you had a not fun (I know there were dark sides too) but an educational time.
Also, check out our latest course on options trading where we explain what BEP is (here)
If you have any questions about this, feel free to call our number (here)
It’s an Indian number so, for our German readers, save it and place a WhatsApp call.
That’s all on my side.
Summary
What price to buy ?
What to buy ?
When to buy & practical execution.
Exit plan.
Share this with a friend who uses the pharma products of companies you’ve invested in.
Also, did it get a bit too dark ?
It’s a harsh reality of this industry, but if you have any comments on it, drop them below.