How to Unearth Explosive Small-Cap HealthCare Stocks
by Marc Lichtenfeld, Advisory Panelist
Friday, August 28, 2009: Issue #1078
How do I know if I’m doing a good job for my readers and subscribers?
Simple. The stock market tells me every single day.
I’m not someone who needs a pat on the back to feel good about my work.. However, even I’ll admit it’s nice to have my judgment validated – especially when it comes from a well-respected source like Barron’s.
That’s what happened last Saturday when the 88-year publication published a story about the small-cap healthcare stock Electro-Optical Sciences (Nasdaq: MELA). As a result, shares soared 19% on Monday.
What’s more, the author, Neil Martin, expects the stock to tack on an additional 50%, as the company’s melanoma detection device is expected to gain FDA approval and become a big hit with physicians and patients.
I couldn’t agree more. In fact, I came to the same conclusion about 18 months ago when I first recommended the stock to subscribers of my small-cap healthcare service Access. Most subscribers got in at $5.50 or below. Some even reported buying in the $3 range.
Today, the stock is trading around $9.50.
Question is: How do you find these small-cap winners – particularly in the minefield-laden healthcare and biotech sectors? Here’s the tried-and-tested method I use…
Unearthing Small-Cap Healthcare Stocks Isn’t Easy…
Unearthing mega winning small-cap healthcare stocks isn’t easy. It’s certainly not a case of just looking at a chart or some magical signal that tells me it’s time to get in. For me, it’s a multi-level process that is fairly time-intensive.
You see, I learned how to analyze stocks from two of the greatest contrarian analysts on Wall Street. Guys who demanded the best and didn’t accept anything less.
First, I had to pass rigorous exams. Then it was trial by fire. I had to sell my idea to my boss before I was even allowed to begin conducting formal research on company time.
If it wasn’t sufficiently contrarian or well below Wall Street’s radar, he’d shoot me down.
And believe me, I was shot down more times than a drunken frat boy in a room full of supermodels.
But the rejection served me well. It forced me to create a stock research methodology that would not only satisfy my boss, but also prove profitable for folks who might take my advice. It’s the same process I use today to pick stocks.
It’s called the F.I.R.S.T. system. Here’s how it works…
Breaking Down the 5-Step Process of the F.I.R.S.T. System
F.I.R.S.T. is an acronym for a five-step process that ensures I cover absolutely everything before I get a recommendation out to the public.
- Financials: This is the first step. I check everything from how much cash a company has at the moment, to how much it will need in order to fund its pipeline products and operations. Before a company is even worthy of making it to the next steps, it has to pass my financial model, which estimates revenue, earnings, market size, market share, margins and a host of other variables to determine whether the potential growth will be good enough.
- Interviews: If the numbers tell me it’s a good opportunity, I move onto the interview phase. But I don’t just talk to the company’s CEO and CFO, I talk to doctors who are using the product, plus others who aren’t. I get on the phone with specialists in the field, independent experts, the warehouse foreman – anyone who can give me on-the-ground insight into the company’s performance and prospects.
- Research: If I still like what I hear, then I dig into the hardcore step – roll up your sleeves, burn the midnight oil research. I read scientific papers, journals, news articles and even blogs to establish whether the company’s products will be successful.
- Safety: Both from an investment and human interest standpoint, this is the most important step. Drug/device safety is critical. Even when drugs have successfully treated diseases, I’ve seen the FDA reject them because they couldn’t be proved safe enough. The FDA is very conservative right now and we don’t want to be in any positions where there is even a question of safety, no matter how well the drug works.
- Timing: From an investment perspective, once I know that I like a company, all that remains is a reason to invest now. I search for the catalysts that will move the stock in the next six to 12 months. At the moment, I’ve got plenty of companies on the backburner because even though I like them, investing in the shares now would be dead money for another year.
A Deeply Contrarian Investing Approach Is Critical
As I noted above, my investing experience is rooted in a deeply contrarian approach. Finding stocks that you won’t hear about anywhere else is a critical aspect of my stockpicking methodology.
For example, virtually no one was talking about MELA last year. I’ve recommended several other stocks that are also practically unknown to Wall Street. This includes a swine flu play, a bioterror therapeutic stock and two little device companies that are poised to take market share from the big boys – which should result in significant earnings growth or a buyout (or perhaps both).
When it comes to investing in small-cap stocks, conducting thorough research becomes even more critical. You really need to roll up your sleeves and put in the work because in most cases, you won’t read about them in Barron’s, see them on CNBC, or hear about them from an analyst until much later in the company’s development. And by the time everyone else notices them, we’re already sitting on nice gains.
Good investing,
Marc Lichtenfeld
Related Investment U Articles:
- Healthcare Investing: How to Make Money in the Healthcare Sector
- Cold-Blooded Investing: How to Overcome Emotional Stock Attachments
- Four Potential Small-Cap Superstars to Break Out of The Healthcare Sector
- The Art of Setting Stop Losses in the Healthcare and Biotech Sectors
- Prediction: The FDA Will Reject This Drug… And Take This Stock Down
2 Responses to “How to Unearth Explosive Small-Cap HealthCare Stocks”
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Marc is a senior analyst at Investment U. His investment career started out at the trading desk of Carlin Equities in San Francisco, CA, where he executed dozens of trades each day for his clients.
This article on “How to Unearth Explosive Small-Cap HealthCare Stocks” really helps when you are tracking small-cap healthcare stocks
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Obviously, any average joe does not have the time and/or resources to do the five steps. So, I hope you, my dear ones at the Club, help us out and keep us out of trouble. And you do. Many thanks.
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