Top picks 2013: Illumina, H&Q Life Sciences

Speculators can buy a biotech stock while the more conservative should consider a biotech fund.

By TheStockAdvisors Dec 29, 2012 1:19PM
Droplet Falling from Pipette into Test Tube Andrew Douglas Radius Images Getty ImagesBy Nate Pile, Nate's Notes

Both of our top picks this year come from the biotech sector. Granted, investors can get more bang for their buck by owning individual biotech stocks; as such, our top speculative pick is Illumina (ILMN).

For more conservative investors who want to be involved in the sector (and we believe everyone should be!) without taking on the risk often associated with individual biotech stocks, we recommend Hambrecht & Quist Life Sciences Fund (HQL), a closed-end fund.

Over the past several years, Illumina has emerged as one the premier players in the genetic screening industry, offering systems (and associated consumables) for use in both low- and high-throughput screening situations across a variety of clinical, research, and commercial settings.

Though competition in the sector is fierce, management has been able to deliver stellar results year-in and year-out while many of its competitors have faltered.

We believe the stock ought to continue appreciating at a steady rate in the years to come based on the company's proven ability to respond and adapt to changing market conditions.

But it should also be noted that the stock may be a very attractive takeover candidate at current prices -- and 2013 may very well be the year in which an acceptable buyout is finally made by one of the large pharmaceutical companies. ILMN is currently a strong buy under $48 and a buy under $54.

Meanwhile, Hambrecht & Quist Life Sciences Fund invests in both publicly traded and privately-held companies doing work in the life sciences arena.

While we cannot predict how changes to the tax code as a result of resolving (or not resolving) "the fiscal cliff problem" may impact the fund's payout policy in 2013, as things currently stand, HQL has a policy of paying out 2% of its net asset value each quarter.

And given that this payout has historically been an integral part of the fund's approach to generating returns for shareholders, we are assuming that it will continue to exist in some form regardless of what happens in Washington.

With this fund, investors get "paid to wait" while these stocks grow and mature; we believe that shares of this closed-end fund represent a great way to participate in the sector. HQL is considered a strong buy under $14 and a buy under $16.

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