Looking for Outrageous Upside

Outside-the-box thinking and investing from John Mauldin.

"I'm looking for outrageous upside [in biotech stocks],” Mauldin told Benzinga during a recent interview. “I'm buying stocks where if I buy ten stocks, I fully expect three or four to go to zero, then be looking for the ten-to-fifty-bagger on two or three of them, and then the others just to do okay – to be bought by somebody, that type of thing.”

As the President of Millennium Wave Advisors and the author of the Thoughts from the Frontline newsletter, Mauldin is one of the most respected financial experts in the world. If he were to recommend that investors follow his path to invest in small- and micro-cap biotech stocks that are in the early stage, people would listen. But instead of using his expertise to boost a particular stock, he warns against making such a dangerous move.

“I would not suggest anyone to follow my lead on that,” Mauldin insists. “But I think – as I have written – that biotech is going to be a bubble, and at one time in my life, dear God, please, I just want to be at the beginning of a bubble.”

Considering Mauldin's view on the matter (“I'm buying those stocks even though I know that they are likely to go down in a recession,” he admits), some investors might think he's crazy. But it's that kind of attitude – willing to take enormous risks while urging others to take another path – that makes him one of the most trustworthy experts in the field.

"I think biotech has been and probably always will be [ripe for M&A activity] because that's the only way the big giants will survive – by being able to buy someone else's technology,” Mauldin said. “That what's they do; how else are you supposed to get through this crisis? I hope the companies on my radar will resist that call to sell and hold out for the longer term. I don't know how successful they will be at that.”

Still, Mauldin is hopeful for the future. “I wish my stock – the management I am working with – would avoid that because there is some huge upside,” he said. “We are talking about, by the end of the decade – maybe within five years – the end of cancer, the curing of all kinds of cirrhosis of the liver and cirrhosis of the kidneys. Viruses, within five years, should be, by and large, something that you can go to Walgreens (NYSE: WAG) to get a patch and slap it on your arm.”

“They Went Out and Hocked the Family Jewels”

During the interview, biotech wasn't the only topic that Mauldin explored. Warren Buffett and Bank of America (NYSE: BAC) also came to mind.

“They are just locked out of the public market at a price,” Mauldin said regarding BAC's recent developments. “If you're willing to meet Warren Buffett's price, you're not locked out of the market. There's money on the table for you and that's what happened. What did they do [this week]? Taking profit on their Chinese investments that at one time were part of the family jewels; they went out and hocked the family jewels as well. That's what you do when you're raising money.”

Mauldin believes that Bank of America's management is “proactively doing what they can to raise money as fast as they can.”

“A lot of people keep running numbers, and you might have a trillion dollars in non-performing loans, but you only lose two-hundred billion because there are assets underneath to back it,” Mauldin explains. “They are out there raising working capital, no question about it – they have a lot of cash on hand. They're doing something now, pre-crisis. They are raising capital – this is what they should be doing. This is what Lehman and Bear should have been doing and didn't. It kind of suggests to me that [Bank of America CEO Brian Moynihan] is being proactive and getting out ahead of the curve. That's what good management does.”

Commodity Trading Funds

While these uncertain economic times are sure to rattle some investors, Mauldin is seeing opportunity in commodity trading funds.

“I am a big fan of commodity trading funds,” he said. “You can now find them in funds that are available on your mutual fund platforms. These are traders that have been making money year in and year out as trend-followers. I like that; I like funds that trade. I would like to own natural resources for the long term.”

Financial Regulation

Finally, Mauldin took a moment to discuss the challenges of financial regulations.

“Government regulations are the biggest hindrance to growth in this country,” he said. “I was just reading that the average small bank has 1.2 people to deal with government regulations for every one person making loans. What's wrong with this picture?

"I think shareholders should be allowed to vote to say, ‘No, our company does not need to comply with Sarbanes-Oxley. We are perfectly capable of doing it without having to comply with Sarbanes Oxley,' and use the old standard of an audit.”

For large corporations, Mauldin said that it's hardly a big deal. “It's a rounding error in their budget,” he continues. “If you are a $10MM in revenue company and you are spending $1MM on compliance, that is a lot of money. That money could go toward new technologies that will hire new employees. Sarbanes-Oxley was a bane of job growth and job creation in small businesses. It should be totally, utterly repealed, along with Dodd-Frank.”

Unfortunately, Mauldin believes that we fixed all the wrong things. “We didn't fix credit default swaps,” he said. “CDS need to go on an exchange. They didn't go on an exchange because banks are making too much money. They had enough money to lobby to keep regulators from getting into their personal piggy banks. That is just wrong.”

To hear more from the President of Millennium Wave Advisors, don't miss our full interview with John Mauldin.

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