Help Yourself To “Hedge Fund-Style” Investing With This Powerful,
Five-Step Alternate Investment Strategy
Tuesday, March 25, 2008
The Smart Profits Report Issue #508 by Marc Lichtenfeld, Senior Analyst, Smart Profits Report When it comes to healthcare investing, I’ve found that my five-step alternate investment strategy is the only way to uncover the best stocks; and I call it the F.I.R.S.T. strategy. I use this investment strategy with my personal investments as well as those I recommend for The Xcelerated Profits Report so I was sweating as I read a recent press release on SinuNase™. “SinuNase™ achieved, as anticipated, superior resolution of the cardinal symptoms of chronic sinusitis (CS), as compared to placebo control arm…” Oh, man. The drug worked better than placebo. My heart was pounding. I detest missed opportunities – and hate to think that my abundance of caution may have steered subscribers away from a stock that was about to double or triple overnight. But there was more. And it proved that when it comes to investing in the healthcare sector, it pays to use a well thought out investment strategy. And in this case, the carnage that was about to ensue provided graphic evidence to support this… How The F.I.R.S.T. Investment Strategy Alerted me of 26 Deadly Words story continues below...
As the press release continued, 26 critical words immediately put me at ease: “The analysis of the unblinded primary endpoint data did not show the required level of statistical significance when comparing the SinuNase arm to the control arm.” Bottom line: The drug did work better than placebo, but didn’t meet the goals of the pivotal phase III trial. The drug was a failure and the stock would implode in the morning. While I certainly wasn’t overjoyed at the news, because I knew people that were in the stock, I must admit to feeling relief that my proprietary F.I.R.S.T. methodology had paid off and led me to the right conclusion. Five Steps To Strategic Investing As you may know by now, my specialized area of investing is in the healthcare sector. And F.I.R.S.T. is an acronym for a five-step strategy that I use to separate the potential blockbusters from the flameouts. When researching, my process includes digging into… Financials: I start by examining a company’s financials. Does it have enough capital to continue its research and development, market and commercialize a product, or simply to continue everyday operations? I also want to see what the financial picture will look like in a few years. What’s the competition like (now and in the future)? What percentage of market share is it likely to capture? Interviews: Like many things in life, investing in healthcare isn’t just about what you know. Who you know can be just as important. Having focused on the healthcare sector for many years, I’ve built up a pretty strong network of top contacts in the industry. So I Interview vital resources like top company executives, institutional shareholders, vendors, production workers, etc. Research: You can never do enough. I look at scientific papers, medical journals, industry statistics, opinion pieces, blogs – anything that will shed more light on a product and the disease or condition that it treats. Safety: The Safety of a drug is obviously critical. The Food & Drug Administration (FDA) has shut down many effective drugs because of side-effects or adverse events. In the wake of several high profile failures, the FDA is much more conservative today, so it’s more important than ever to prowl for any sign of safety concerns. If there’s even a hint that the FDA may sniff around an issue, we’ll pass on the stock. Timing: Once we get to the point where the company has satisfied the first four criteria, there needs to be a catalyst that will move the stock. Perhaps the company will release some clinical data soon, or a new product launch is expected. You don’t want your money to just sit idly for years. You need a reason to get in now. And I was certainly glad to have applied the F.I.R.S.T. investment strategy to the company I mentioned a moment ago… How A Fat Financing Deal Squashed My Investing Interest Last year, an acquaintance of mine – a stock market professional for years – introduced me to Accentia Biopharmaceuticals (Nasdaq: ABPI). It’s a small biotech company that has a novel approach of treating chronic sinusitis. I was intrigued and dove into the story – using the F.I.R.S.T. methodology, of course. - F: The financials looked fine, at least for an early stage biotech company.
- I: Having interviewed company executives and industry insiders, I came away impressed.
- R: My research showed that the market for chronic sinusitis was huge. If the drug worked, it would likely dominate the market for this condition.
- S: I was satisfied with the safety data.
- T: And with phase III results expected early this year, the timing couldn’t be better.
But one thing nagged at me. On pages 75 and 76 of the company’s 10-K, filed with the SEC, details of Accentia’s credit facility were discussed. The financing arrangement seemed quite expensive to me. Considering that the money came from an investor and not a bank, I thought that a bullish investor would be more accommodating in order to participate in the upside. However, Accentia had to pay a high interest rate on the money, as well as issue warrants to the investor. This didn’t feel right to me. I mean, if this was the next great drug and biotech company, why was the financing deal so expensive? Sure, small-cap biotech is inherently risky, but this credit facility implied there was more risk than usual. I called some contacts and spoke with management, but none of their answers alleviated my concern. “F.I.R.S.T.” Class, Institution-Style Research I say all this because after weeks of research, I planned to recommend the stock in our premium investment newsletter – the Xcelerated Profits Report. But ultimately, I passed. Although almost everything lined up in favor of a buy recommendation, almost is not good enough for me. And take a look at ABPI’s performance. From a close of $2.99 on March 24, 2008, investors crushed it on the bad news and it plunged almost 70% to less than $1 in one day. This definitely highlights the benefits of the F.I.R.S.T investment strategy and just goes to show that there’s no substitute for rolling up your sleeves and digging into the hard work when investing – particularly in the healthcare sector. This is the exact investment strategy used to chalk up the 99% win on the first half of one recommendation for XPR members late last year (and we’re up 97% on the second half right now). And it’s the investment strategy that forms the bedrock of a new product I just launched that will allow you to tap into institution-quality research called the Access Research Group; the exact same kind that I used to write for some of the largest, multimillion-dollar hedge funds in the world (and which they used to pay my company millions of dollars each year). Until next time… hoping your longs go up and your shorts go down. Marc Lichtenfeld
Today’s Smart Profits Notes:
- Another great way to gauge the potential success of a stock is to take a look at what the company’s insiders are doing. After all, these guys know their company better than anyone else – and if they’re buying shares, they’re hardly likely to be investing their own money if they think they’re going to lose it. Conversely, if insiders are bailing out, it could be indicative of problems within the company that Wall Street doesn’t yet know about.
- On a broader market level, there’s one reliable resource you can use to judge overall investor sentiment. It’s called the Volatility Index (commonly referred to as the VIX). It’s a favorite among options investors, who depend on volatility to move the price of their options. The VIX tracks fear or complacency within the market and can tip you off as to when the market might take a significant turn up or down. We’ve written a full report on the index – and how to use it – in our investment research section.
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