Why Biotechnology Is Set to Bloom and Boom

Colin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The biotech sector has been growing rapidly in recent months; the NASDAQ biotech index is up 45% since a year ago, and the Arca biotech index is up 35% over the same time frame. Biotech companies solve some of the world's most pressing problems, including exploding food and energy demand. Several companies are poised to turn this demand into profit -- and offer investors excellent opportunities.

The World's Most Famous: Monsanto

Monsanto (NYSE: MON) is arguably the world’s most familiar biotechnology company. It has a market cap of more than $55 billion and revenue totaling nearly $15 billion per year. The company enjoys a healthy profit margin of 17.8%, and its year-over-year revenue growth now tops 15%.

Based on these numbers, Monsanto looks like a great investment. Furthermore, it enjoys a P/E ratio of 22, which is solid for a research-based company. The company also has a healthy balance sheet, with only $2.2 billion in debt compared to $4.7 billion cash-in-hand.

Monsanto is growing as the demand for food and the need to increase the productivity of food production systems are some of the key challenges of the 21st century. The United Nations expects global population to reach 8 billion by 2025, and higher living standards will only increase consumption per individual.

Monsanto is working to increase crop yields through a variety of technologies. For one example, it is working to create sturdier plants that are more able to stand up to changing weather conditions, which could lead to fewer global food shortages. These efforts could prove vital to global well-being as demand for food continues to surge.

The one problem with Monsanto is that it receives a lot of negative publicity for its work with genetically modified organisms and other controversial products.

Biotechnology in the Chemical Sector

Another hot biotech company is BASF SE (OTC Markets: BASFY), a large German chemical company. While BASF SE may not be familiar to American investors, it has operations in more than 80 countries and employs over 100,000 people worldwide. The company is involved in agricultural chemicals, enzyme products, and numerous other biotech fields.

One knock on the company is that its gross profit margin rests at only 5.82%. Still, with BASF SE moving to enter higher-profit sectors, such as producing thin films for superconductors, this margin could grow in the years to come.

Furthermore, BASF SE enjoys a trailing P/E ratio of 14.82, so it appears to be a good value when compared to other companies in the space. Finally, the company enjoys a return on assets in excess of 9%, suggesting that its management is making good use of the resources at hand.

The Biofuel Industry Could Be Set to Boom

Another way to play the biotech boom is to add a biofuel company to your portfolio. Companies such as Green Plains Renewable Energy (NASDAQ: GPRE) are converting natural resources like corn and sugarcane into ethanol and other biofuels. With energy demand rising and fossil fuel supplies depleting, biofuels could become essential to the global economy. Furthermore, biofuel companies generally won't carry the risk of stigma from consumers or environmental advocates.

Green Plains is well-positioned to take advantage of increasing demand for fuel. With a market cap of $426 million, Green Plains is one of the largest up-and-coming biofuel companies in the world. Despite its strong earnings growth potential, the company has a modest trailing P/E ratio of 15.81. While its gross profit margin is currently a meager 0.78%, it is important to remember that Green Plains is a new company still in the growth stage. Its revenue already stands at $3.5 billion, though this has declined 1.3% YOY.

Admittedly, an investment in any company at such a stage in its life cycle represents a risk. However, Green Plains could be a huge winner in the future. Green Plains’ biggest risk is that the biofuel industry is currently dependent on government support. With ongoing federal and state budget cuts, there is a risk that the US government will cut funding to the sector, which could hurt biofuel companies in the short term.

Closing Thoughts on Biotechnology

Some investors might be worried that the biotech industry is overheating. While this is a legitimate concern, hot growth in the sector is due to the strong future earnings potential of biotech firms; they stand to be big winners as consumer demand for food and fuel spikes. This means that the right biotechnology investment now could pay off big in the future. As research-based companies, biotech firms are high-risk since their research could fail. Still, these risks are outweighed by the strong potential for growth, and mitigated by investing in larger, more diversified, companies.

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Colin Tweel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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