Biotech Investors and the Terrible, Horrible, No Good, Very Bad Day

Having trouble viewing this e-mail? Click here to view in a web browser.

Issue Number #1869

Investment U Today » Marc Lichtenfeld shares some tips for biotech investing... » Ryan Fitzwater reveals a new "super material" made from wood... » Find out how to look for successful short squeezes... Biotech Investors and the Terrible, Horrible, No Good, Very Bad Day by Marc Lichtenfeld, Investment U Associate Investment Strategist Wednesday, September 26, 2012 There's a children's book called Alexander and the Terrible, Horrible, No Good, Very Bad Day. It chronicles a kid's day that starts off with him waking up with gum in his hair, and it gets worse from there. On Monday, many biotech investors had their own version of Alexander's day, if they had money in two specific stocks... Peregrine Pharmaceuticals (Nasdaq: PPHM) dropped 78% in one day after the company disclosed that its stellar Phase II data for lung cancer drug bavituximab was not valid. The company blamed a vendor's mishandling of the information. ---------- Advertisement ---------- This "Unknown" Project is Worth More than 99% of Fortune 500 Companies That's right. A project that began on a small scale and was dismissed as a "pipedream" has recently been valued at over $300 Billion. That's more valuable than every Fortune 500 company but one! Here's how early investors could make thousands by the fourth quarter of this year. ---------------------------------------- Regardless of who's at fault, investors in the stock were nearly wiped out just three weeks after they were popping corks on champagne bottles. On September 7, the stock soared over 46% on news that bavituximab nearly doubled survival time to 11 months from 5.6 months. The stock closed at $4.50 that day. Monday, the last trade went off at $1.16. Questcor (Nasdaq: QCOR) also saw its stock price riding a roller coaster, but Monday was the scary downhill part. The company is under investigation by the Federal government for the way it markets its only product, Acthar gel, sending the shares plummeting 37% lower to close Monday at $19.08. The stock traded as high as $58.91 earlier in the year. These two examples show how lucrative and unpredictable small-cap biotech investing can be. Even if you had adhered to The Oxford Club's recommended trailing stop policy, it wouldn't have helped in these situations. When they fall, biotech stocks can fall hard, especially if the news is really bad or expectations were hyped beyond reality. But there are a few steps you can take to increase your chances of making money and, more importantly, not losing it all after one press release hits the wires. Spread your bets - Small-cap biotech stocks have the ability to become 10-baggers. They also have amazing stories. So it's easy to be tempted to put money in just one or two names and dream of buying your own island in the Pacific after the company cures cancer. But unless you're incredibly lucky, it doesn't often work out that way. Instead, take the amount of money you were going to put into one stock and spread your risk across five to 10 stocks. That way, one blow-up doesn't destroy the whole portfolio, and you increase your chances of picking a winner. It might only take one big win to make up for a few losses or stocks that go nowhere. Watch what the big boys are doing - Investors like to follow people like Warren Buffett. When Buffett is investing in Phillips 66 (NYSE: PSX) or any other company, it makes existing shareholders feel confident. And often, other investors buy shares after hearing that Buffett owns a stake. Warren Buffett doesn't invest in biotech, but fortunately there are a few institutional investors who have strong track records and are worth paying attention to. My favorites are the Baker Brothers. Julian and Felix Baker manage money for the Tisch Family and invest primarily in biotech. One has a Ph.D. in immunology from Stanford, the other studied business at Harvard. They have had successful early positions in big winners like Seattle Genetics (Nasdaq: SGEN) and Pharmasset - the latter was acquired by Gilead Sciences (Nasdaq: GILD) for $137 per share. Of course, not every position of theirs works out, but knowing what positions they have large stakes in is a great place to start looking for ideas. Another very smart investor is Sam Isaly of Orbimed Advisors. He recently added Auxilium Pharmaceuticals (Nasdaq: AUXL) and Illumina (Nasdaq: ILMN) to his portfolio. Take some profits along the way - You've won the biotech lottery. The tiny company that you picked got its drug through the FDA process and was approved. The share price took off. Maybe the drug goes on to become the next blockbuster. Or maybe it's unable to penetrate the market at all. But if you take some profits after the initial pop, you'll lower your risk, put some money in your pocket and be able to better handle the ups and downs of the stock since you'll have less at stake. If the drug does go on to become the next great cancer fighter, you'll still participate in the upside. But just because a company has a great product, doesn't guarantee it will sell. Several years ago, Nektar Therapeutics (Nasdaq: NKTR) and Pfizer (NYSE: PFE) created Exubera, an inhalable insulin. The drug was approved and expected to become a big seller. After all, who wouldn't want to use an inhaler instead of giving themselves a shot? Well, Exubera fell flat on its face. It only generated $12 million in revenue (instead of the expected peak of $2 billion annually) and Pfizer pulled the plug, taking a $2.8-billion charge. It took years for Nektar to lose the stink from Exubera, and its share price wallowed in the single digits after having spiked to over $20 earlier. Investing in biotech isn't about hitting that one homerun. To be successful, you need to manage your risk properly. So that when one of your stocks blows up (and it will, it happens to all biotech investors), it won't burn all of your investment capital. And if you have just a couple of winners, that could be enough to turn a very bad day into a very good year. Good Investing, Marc Editor's Note: Marc mentioned that his favorite whales to watch in the biotech sector are Julian and Felix Baker. You can easily track their current holdings with their 13F filings here. You'll notice their largest current holding by market value is Pharmacyclics (NYSE: PCYC). Click here to leave your comments on this article More from Investment U... Will Your Next Smartphone Have Wood In It? Wood mixed with electronics was thought to be a decorative combination of the past. But soon, a wood by-product could be used in all types of modern electronic devices. In fact, The U.S. National Science Foundation has predicted that this organic super-material will become a $600-billion industry within the next eight years. So here's what investors need to know... Click here for the full story How to Become a Member of The 1% in One Simple Step... America's richest people use this simple technique to make thousands in extra cash - every day. Find out exactly what they're doing right here... Click here for the full story Squeeze Someone's Shorts for Big Profits Most of you buy stocks. You hang on to them for anywhere from a few minutes to a few decades. You hope they'll go up and then you sell for a profit. Buy low, sell high... that's what we've been taught. But there are other investors who do the opposite - they sell high and buy low. Sounds similar, but it's a very different strategy. It's known as shorting stock. A short seller sells the stock first and buys it back later. If the stock is bought back at a lower price, the investor makes money. Here's how it works... Click here for the full story 10 stocks not addicted to QE... Related Articles: Now is the Time to Buy Healthcare Stocks Healthcare: The Sector You Must Be Invested in for the Next 10 Years Healthcare: The Hottest Stock Market Sector in 2012

~ SHARE INVESTMENT U ~ If you enjoy reading Investment U, why not share it with your family and friends? Simply send them this link, so they can sign up (for free, of course). Find the Print Version for this Issue, here. ~ QUESTIONS ~ Republish Investment U on your Website or blog for free. Learn how. Have a question for our editorial team? Contact us.

© 2012 Investment U All Rights Reserved Investment U · 105 West Monument Street · Baltimore, MD 21201 North America: 1 855 402 3939; Fax: 1 410 223 2650 International: +1 410 226 2070; Fax: +1 410 223 2650 E-mail: CustomerService@InvestmentUInfo.com | Website: www.InvestmentU.com Disclaimer Information and Privacy Policy Note: You are receiving this e-mail as a part of your free subscription to Investment U. Keep the e-mails you value from falling into your spam folder, Whitelist Investment U To manage your account or stop receiving Investment U, click here. To cancel by mail or for any other subscription issues, write us at: Investment U · Attn: Member Services · 105 West Monument Street · Baltimore, MD 21201 Nothing in this e-mail should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended in this letter should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company. You're receiving this message because you subscribe to the Investment U e-letter. If you wish to post a comment on any of our articles, or contact our Customer Service team, please see the instructions above. Do not reply directly to this e-mail, as your message will not be read or answered. Also, please keep in mind that securities laws prevent us from issuing personal investment advice to our readers. We're prohibited from answering such questions or giving that information via e-mail or over the phone. Protected by copyright laws of the United States and international treaties. This Newsletter may only be used pursuant to the subscription agreement and any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), in whole or in part, is strictly prohibited without the express written permission of Investment U. 105 W. Monument Street, Baltimore MD 21201