are among the riskiest
, but there is also the chance of huge returns.
I'm not talking about 25% or even 50% returns on your
. Returns of 100%-plus are not uncommon over time.
All biotech stocks have a single goal: Bring drugs to the
Due to Food and Drug Administration regulations, this is a
long and slow process. It is said that one out of 1,000 drug
candidates that enter laboratory testing ever reach the human
testing phase. Those are huge odds for an investor.
Bringing a drug to the market can take years and sometimes
more than a billion dollars: The lab testing process takes three
and a half years before the first of three human trials. If a
drug makes it to the first phase, it has a 1 in 5 chance of
getting to market.
Count on volatility during testing.
Every smidge of good news could take the
higher, and every negative rumor could send it lower. If the news
is particularly bad, a once high-flying biotech stock can be
smacked down, never to recover. On the other hand, positive news
can easily double the stock.
So how can investors tilt the odds of success in their favor?
Nothing is certain in the crazy world of biotech
, but by following these three simple guidelines, you can
increase your chances.
It's always a good idea to spread your risk across
While most drugs fail the testing phase, it takes only one or
two to more than cover a company's losses and provide solid
profits. One nice feature about biotech: High risk levels
generally make a stock very affordable early on. In fact, many
promising biotech stocks can be purchased for less than $5 a
2. Check the
Does the company have steady funding lined up? This would
would be granted to the company when milestones in the drug
development/testing process are reached. Avoid firms that have
only have a single, non-recurring investment. Biotech is a
notorious cash burner, so steady payments are a must for a
Do the corporate management or owners have a stake in the
company? This would help ensure corporate health. Be cautious if
there is no insider ownership or if insider sells are greater
than insider buys.
With these tips in mind, here's a small biotech stock with
Retractable Technologies (
This company designs, makes and markets medical safety
Unlike some low-priced biotech stocks, Retractable has a
of more than $9 million in
of more than $25 million and only about $4 million in debt.
I like its insider ownership. Nearly 70% of the
are insider-owned. During the past 12 months, there has been one
insider "buy" transaction with no "sell" transactions.
The company's competitors --
Becton, Dickinson and Co. (
-- have 30,000 to 40,000 employees, compared with Retractable's
144. This says to me that Retractable is a much more agile and
scrappy company, giving it a serious competitive advantage.
Risks to Consider:
Biotech stocks assume risk but
huge upside potential. If a drug fails to pass testing or draws a
lawsuit, it could be detrimental for the company and its
Action to Take -->
A look at the technical picture shows Retractable to be a classic
breakout play. Entering long on a breakout close above $1.25 a
share makes sense. I wouldn't be surprised to see this stock at
$5 within 18 months.