News Analysis date published New: 
Friday, July 13, 2012 - 08:30
New Date created: 
Friday, July 13, 2012 - 09:31
New Date last updated: 
Friday, July 13, 2012 - 08:30

This Biotech Stock is Ready to Explode

Friday, July 13, 2012 8:30 AM

Biotech investing is the most exciting, highest-reward investment an investor can make. Not only is there the potential for huge gains, but the direct involvement with companies that may have a pivotal role in saving lives is icing on the cake for biotech investors.

But as in every investment, high reward equals high risk. Nowhere is this more true than in biotech investing.

No matter how promising a company's drugs appear, it's the U.S. Food and Drug Administration that oversees and approves the clinical trials required before a drug is approved to be developed and distributed in the United States. In this sense, investing in a company in its early-stage of clinical trials is akin to making binary bets. If the FDA approves a particular drug, then investors of that company get excited and money pours in, lifting the stock price. If it rejects a new drug, then investors become discouraged and dump shares, resulting in a plummeting stock price.

That's why it's important to understand the subtleties of this segment before making an informed investment decision.

The first and most common way to evaluate a biotech stock is by looking at the drug pipeline -- the drugs the company has in various stages of approval. It's important to observe which diseases are being targeted and how innovative the treatment is. In addition, the drug concept should make sense. Experienced biotech investors call this the feasibility of the mechanism of action (MOA). MOA is important to because it differentiates a copycat from a true novel drug. Copycats have a much higher chance of being FDA-approved, but lower profit potential. A novel compound faces much more difficulty in the approval process, but the profit potential can be astronomical.

It's easy to conclude that most traditional stock valuation metrics fall flat on their faces when it comes to valuing biotech companies in early-stage clinical trials. Except for one tradition metric: Insider buying.

I'm a huge adherent to following the insiders when it comes to making investment decisions. Academics call this the Alignment Theory, which states that the performance of a firm is positively affected as the level of insider ownership increases.

A gem of a biotech
Screening for investments using the Alignment Theory is how I discovered Amicus Therapeuticals (Nasdaq: FOLD).

In the past six months, insiders have purchased about 1,140,000 shares representing 4.69% of all shares outstanding in this small company. The company focuses on the discovery, development and commercialization of orally administered small molecule drugs targeted at the treatment of lysosomal storage disorders and diseases of neurodegeneration.

Unlike many of its brethren, the company, despite posting losses, has beat earnings estimates each of the last three quarters. The stock price has been in a serious uptrend, climbing 16% in the past seven months and 22 % during the past three months.

If that's not enough to peak your interest, the giant GlaxoSmithKline has a partnership interest of about 20% in a rare disease treatment with this firm. Talk about a thumbs up from a highly pedigreed player in the space.

I don't want to bore you with scientific talk about this companies products, but suffice to say it has several drugs in phase-2 and phase-3 trials. Positive preliminary results have been announced from a phase-2 trial for its Pompe disease treatment, an enzyme disorder that causes patients to have progressive muscle weakness respiratory insufficiency.

I find the technical picture very bullish for long positions right now. Price has fallen off its highs, but hit support bouncing back toward the highs. It's currently in a classic technical value "buy" zone set up.

Risks to Consider: As stated earlier, biotech investment is extremely risky. No matter how good your analysis, everything rides on the drug-approval steps, which are dictated by the FDA. Although we can make educated guesses, no one can know for sure whether a particular company will succeed. Stops and proper position sizing is all the more critical in the volatile world of biotech investing.

Action to Take -- > I like this stock so much right now because it's signaling bullishness on many fronts. Pullbacks, like the most recent one, create great buying opportunities. I expect to see this stock at $10, an upside potential of almost 70%, within the next 12 months.

David Goodboy does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.