One of the
Market's Best Downside Hedges -- And
Most Explosive Profit-Producers
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By: Marc Lichtenfeld
Senior Analyst
Xcelerated Profits
Report & Smart Profits Report
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Published:
August 25, 2008|
I'm bullish on the biotech sector.
From groundbreaking new drugs and medical treatments -- to a
massive amount of repeat business that can dish some handsome
profits to investors, no matter what the rest of the market or
economy is doing (this is one of the best recession-proof
sectors) -- to a big wave of mergers and acquisitions, small-cap
biotech and healthcare stocks offer the greatest opportunities
in the market, in my opinion.
Rarely do investors have the opportunity to turn a few thousand
dollars into tens or hundreds of thousands of dollars.
Heck, you can even make millions, as early investors did on
Amgen (Nasdaq: AMGN). If you'd invested $5,000 in Amgen two
years after it went public, you'd have had your million dollars
13 1/2 years later, for a compounded annual growth rate
of nearly 50%. Even if your time horizon was shorter, you could
still have obtained a 300% gain in two years.
These are exactly the kind of profits that I aim for when I go
hunting for small-caps. But just how do you find the most
profitable opportunities while also lowering risk?
"Show Me The Money"
Read the business section of the newspaper. Log onto some
financial websites. Flip on the TV to the business channels.
You'll probably get some decent investment information somewhere
along the way. After all, there are countless analysts,
economists, and commentators only too happy to tell you which
sectors and industries are hot/cold and poised for an
upturn/downturn. And that's great. But it's only part of the story. It's like going to a
football game, but only staying until halftime.
As the saying goes, "Show me the money."
Alas, that's where it gets a bit tougher. Picking the right
companies that have the potential to hand you some handsome
gains. Sadly, a lot of commentators call it a day without
getting to this part.
I'm going to take you a bit further today. I'm going to show you
which sector I believe is poised for some big gains over the
next few years and show you the specific research methodology I
use to pick the best stocks from this sector.
More Biotech Buyouts In The Pipeline
The biotech buyout buzz continues to get louder. Bristol-Myers
Squibb (NYSE: BMY) is just one of several companies getting
busy.
It just offered $4.5 billion to buy ImClone Systems (Nasdaq:
IMCL) - its partner firm on cancer drug Erbitux.
The reason for the buyout boost is two-fold:
• Many "Big Pharma" firms have very sparse drug pipelines.
• The patents on their lucrative drugs are now expiring - and
without the exclusivity, they're open to more generic
competition.
But buyers are in a strong position at the moment. Healthcare is
a traditionally recession-proof sector; folks will always need
medical treatment and drugs, regardless of what the economy is
doing.
And given that the economy enjoyed several strong years of
growth, many also boast a hefty cash hoard. That, coupled with
the weak dollar, puts them in an advantageous position.
In addition to Bristol-Myers' proposed buyout of ImClone, Swiss
giant Roche offered $43.7 billion a few weeks ago to acquire 44%
of biotech heavyweight Genentech (NYSE: DNA) -- an offer that Genentech said
"substantially undervalues" the firm.
But the buyout buzz surrounding the biotech sector at the moment
is likely to mean companies paying hefty premiums to acquire the
objects of their affection.
With piddly pipelines and expiring exclusivity, Big Pharma is on
the prowl.
For example, earlier this year, GlaxoSmithKline (NYSE: GSK)
acquired Sirtris Pharmaceuticals (Nasdaq: SIRT) -- and paid 80%
more than Sirtris' closing price.
That's a serious premium to pay. But it's not even the highest.
In late May, Intercell paid a whopping 126% premium to acquire
Iomai (Nasdaq: IOMI).
With Big Pharma firms desperate to shore up their sagging
pipelines and protect themselves from expiring patents, they’re
paying up big-time.
With regard to Bristol-Myers, the firm has even indicated that
it's shifting its focus from pharma towards the biotech area. I
recommended the firm to Xcelerated Profits Report readers on
June 20th -- and we’re up about 11% so far.
The Five-Step Formula To Finding Biotech Blockbusters
Early on in my investment analyst career, I was privileged
enough to learn the ropes from two of the greatest contrarian
investors in recent decades.
The research process these guys taught me was the reason why
hedge fund clients paid our company millions of dollars a year.
Plain and simple -- it worked.
As I branched out into the more specialized world of small-cap
healthcare and biotech stocks, I tweaked the system a little to
fit -- and have named this proprietary research methodology F.I.R.S.T. Here’s how it works:
Financials: First, I rigorously examine a company's financial
statements. Because many of them are still in the infancy stage,
I want to get a clear understanding if they'll need capital,
when they'll need to raise it, and what that would mean to our
position if that happens. We strive to thoroughly understand the
marketplace in which it operates in order to model for sales and
earnings.
Interviews: We talk to everyone: From company executives to the
warehouse foreman. From globally recognized physicians to
private practice office managers. We speak to large
institutional shareholders and insiders. We even talk to the
short sellers. Anyone who can add depth to our research can
expect a call or visit from us. The Rolodex is stuffed full of
contacts -- and we're adding to it all the time.
Research: This is where we earn our stripes. We meticulously
pour over SEC documents, scientific journals, periodicals, even blogs, in order to gather information that will either support
or contradict our thesis. Trust me, we don't just want data that
will tell us how right we are. If there are problems with our
argument, we want to know about it before we ever issue a
recommendation and put money on the line. In fact, we toss out
over 90% of the ideas that we look into.
Safety: Critical in the healthcare field. Some of the biggest
causes of blowups in the sector are because of safety concerns
(remember Vioxx?) Even if you have a stock that rises on
optimism over the company's new drug for some debilitating
disease, it can easily implode if the drug can't be proven safe.
We spend a lot of time looking carefully at safety data. We'd
rather pass on a potential blockbuster if we think there is a
reasonable chance that the FDA will shoot it down over to safety
concerns.
Timing: There are many of great, young companies doing amazing
things in medicine. However, if there is no catalyst to get the
stock moving, we’d rather wait on the sidelines until the time
is right and our money will grow relatively quickly. Of course,
we’ll always try to get in before pivotal events such as
clinical trial data releases, or FDA decisions, but we don’t
want to get in too early and have our money just sit there doing
nothing.
I used this very system to make a winning recommendation on
BioMarin (Nasdaq: BMRN) -- one of very few profitable biotech
companies.
Recommended to Xcelerated Profits Report readers in August 2007,
we took 99% gains on the first half of the position on December
14, 2007 and 63% on the second half on June 24th.
BioMarin has three marketed products that treat rare diseases.
And although the patient populations are small, the drugs carry
a hefty price tag -- well into six figures per year -- and
insurance companies have signed on to pay for it.
Suffice it to say that I’m very bullish on biotech right now.
Promising new drugs, combined with Big Pharma's desperation for
growth, should enable the sector to outperform over the next
several years. If you can handle a little risk, you’d be wise to
add some exposure to the sector in your portfolio.
P.S. In a couple of weeks, I’ll be hosting a conference call
with the management team of the next recommendation for my
healthcare investing service -- a company that I believe could be
the next Celgene (Nasdaq: CELG). It's in late stage clinical
trials for a cancer that has no cure. If the drug succeeds -- as
all my "institutional-style" research indicates it will -- it
will own the rights to the first drug ever approved for this
type of cancer.
Plus, it recently partnered with one of the seven largest
pharmaceutical companies to manufacture, market and sell the
drug. And, like Celgene, this little company is sitting on a
pile of cash. As for the upside -- tremendous: The market for its
drug is larger than Celgene’s today.
In the five months since I started the service, we've enjoyed
impressive results, with our picks up 21%. To find out all the
details, please call our VIP Services Team at: 888.570.9830
(inside the U.S.) or: 410.454.0498 (overseas).
Marc Lichtenfeld is Senior
Analyst for the
Xcelerated Profits Report
and
Smart Profits Report,
Director of Research of Access and a
specialist in biotechnology. Marc
started as a trader before moving to
the contrarian Avalon Research Group
and Weiss Research, where his buy
recommendations routinely beat the
S&P 500 return by 17% over a
six-month period. Marc also enjoyed
a successful spell as Senior
Columnist at TheStreet.com, where he
broke several major stories on
biotech companies. His investment
approach blends fundamental research
with the timing tools of technical
analysis.
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