These Guys Are Out to Cheat You

Marc Lichtenfeld
by Marc Lichtenfeld, Chief Income Strategist, The Oxford Club
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A Note From the Editorial Director: Investing in biotech companies whose drugs are still in development is not a game for amateurs to play on their own, and Marc Lichtenfeld's column today is a great reminder of why. The drug-development business can be wildly profitable, but it's also speculative... and that's when everyone is honest. And as Marc shows us today, they're often dishonest.

If you haven't already, it's time take notice of the amazing gains Marc has delivered his Healthcare Profits Alert subscribers. They enjoyed a 69% average gain last year, including eye-popping winners like 419% for Celldex (Nasdaq: CLDX) and 188% on NPS Pharmaceuticals (Nasdaq: NPSP). For access to Marc's expertise, and his finely tuned B.S. meter, click here.

- Andrew Snyder


If you were to take a trip to an exotic location that had hidden dangers like man-eating crocodiles or dangerous plants, surely you'd bring a guide.

Yet many investors try their hand at speculating on small-cap biotech stocks without having an expert help them. It's not that these investors can't figure out a good stock from a bad one. But in small-cap biotech particularly, the waters are rife with danger - not only from the ordinary risk that comes with investing in new technologies, but from manipulation and outright fraud.

I'm sitting at the airport in San Francisco, going over my pages and pages of notes from presentations and meetings at the J.P. Morgan Healthcare Conference. But what's sticking out most to me are not the amazing new life-saving innovations that I learned about or the brilliant scientists that I met, but the flip side of that equation: the scammers who prey on the little guy.

During the week, I met:

  • An analyst who admitted that he puts buy ratings on stocks even though the companies are garbage because his top priority is making money for himself.

  • An investment banker who talked up a company he was bringing public by merging it into a shell corporation of a defunct retailer. Biotech is tough enough when you have honest people trying to do honest work. What do you think the likelihood of success is for a company whose only way of getting funding is to merge into the shell corporation of a bankrupt retailer? My guess is this company is not the one that's going to cure cancer.

  • Newsletter writers incredulous that I don't buy the stocks I write about first in order to benefit from the move that the stocks sometimes make after I recommend them. (The Oxford Club has a strict policy that its editors are not allowed to write about anything they own.)

  • A CEO who blew so much smoke up my skirt that I wasn't sure if he was trying to pitch his company or date me.

Don't get me wrong, it wasn't all bad. There are still some great companies like Novartis (NYSE: NVS) and Roche Holding (OTC BB: RHHBY) in the big-cap pharma space doing great things.

I also came away very optimistic about the future after seeing the work of small- and mid-cap biotechs like OvaScience (Nasdaq: OVAS), GW Pharmaceuticals (Nasdaq: GWPH) and Alnylam (Nasdaq: ALNY).

The point is that biotech can be a tough game. The companies have to prove their drugs are safe and effective and can pass the regulatory process, and after all that there is no guarantee that the drugs will be a commercial success.

If you're going to speculate in the space and you're not an expert yourself, be sure you're using a qualified guide, whether it's me through my Healthcare Profits Alert or someone else. There are too many man-eating investment bankers, analysts and newsletter writers out there waiting to take advantage of your optimism.

Good investing,

Marc

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A Less Volatile Healthcare Play

Investors looking for a less volatile way of investing in the healthcare space should consider a company that provides services to healthcare providers. With the advent of Obamacare bringing millions of new patients onto the insurance rolls, hospitals and health centers are likely to be busier than ever.

A company like Owens & Minor (NYSE: OMI) is a great example. No, it doesn't offer the kind of rocket-ride potential that small-cap biotech stocks sometimes deliver, but this supplier of consumables to health institutions has offered solid, steady growth since Alexander Green recommended it to Oxford Club subscribers in 2009.

Alex updated Members in October:

"Based in Mechanicsville, Va., Owens & Minor is a major supplier of basic consumable supplies to hospitals, clinics and surgical centers. It distributes more than 220,000 medical products through 55 distribution centers to more than 4,500 healthcare providers.

"Owens' catalog represents more than 1,600 manufacturers as well as more than 2,000 items from the company's own high-margin label MediChoice. Make no mistake, this is big business. Company sales topped $9 billion over the last 12 months.

"The economic slowdown forced many hospitals to cut back on big-ticket, high-technology products like imaging and diagnostic equipment. But they can't avoid buying gloves, bandages, needles and syringes, sutures, trays and basic nursing products. And those are just what Owens provides.

"Since 2007, sales growth has averaged 13% a year. And Owens is keeping the competition at bay by making delivery and inventory management as fast and efficient as possible. Its 55 distribution centers run 24 hours a day, seven days a week.

"This keeps hospitals - which spend $0.40 of every dollar they spend on the supply chain - from having to stockpile goods. Owens' bar code-scanning and voice-communication devices get hospitals exactly what they need in small bundles as soon as they need them.

"Its supply-chain business gives Owens a chance to cross-sell its consulting services to do inventory control and automate ordering for clients, too.

"Many hospitals, in fact, have closed their warehouses entirely and rely on Owens for just-in-time deliveries. Given that the health-care industry is looking for ways to cut costs, it's easy to envision more hospitals and clinics following this model.

"The revenue stream here is highly predictable. Many clients with long-term contracts with Owens buy exclusively from the company. And it has few contract cancellations. The company boasts a 98% customer satisfaction rate.

"Right now Owens serves more than 4,000 hospital and surgical centers. But there are more than 2,000 other hospitals and 3,700 surgical centers that are potential customers. So there is plenty of room for growth here.

"Its business is in the sweet spot. Hospitals are under pressure to cut costs. Obamacare is requiring more Americans to obtain health insurance. And tens of millions more are being added to Medicaid. That means demand for Owens's services will only rise.

"I estimate the company will earn $1.90 a share this year. But net income should rise to more than $2.25 in the year ahead. And this recession-resistant stock is a low-risk investment with a 2.7% dividend yield.

"In short, Owens is making a lot of money keeping Americans alive. And its business prospects could hardly be healthier. Expect good news when the company reports quarterly results on November 4."

- Bob Keaveney with Alexander Green

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