The right data is key to spotting trends

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One of the reasons that we created researchLAB was to identify and track companies like the makers of obesity drugs : Arena Pharmaceuticals (ARNA), Orexigen Therapeutics (OREX), and Vivus (VVUS).

Yes, they fit into broader categories such as "drug makers" and "biotechs," but the story runs deeper for these companies because they're closely linked to a specific social trend that is sadly growing. Just yesterday, a report predicted that more than half the U.S. population will be obese by 2030, marking a sharp increase from the already troubling levels.

The Food and Drug Administration refused to approve new obesity drugs for more than a decade, causing ARNA, VVUS, and OREX to languish. But they relented earlier this year, causing those stocks to double, triple, quadruple, and more. There was an initial spike in the spring and early summer, followed by some nice pullbacks. Now it's time to think about getting back on the train.

Just realize what you're doing and don't try too hard to understand the companies or their drugs. Analysts will model their sales and growth rates, which is all well and good, but it won't necessarily help you make money. Their valuations now are extremely high while meaning little. All that matters is that they're going up.

While that might sound cavalier, in my view it makes a lot of sense. The big story is that these companies have a bright future because obesity is a rising problem. Owning these stocks will let you ride that trend, so try not to over-think it.

Reading too many analyst reports and knowing too much about the companies can blind you to truth. (See this column for more.) Think about it like this: You don't need to understand the mechanics of an internal combustion engine to drive a car. You need to get on the road going in the right direction, and if it suddenly hits traffic or is the wrong route, you take another one. End of story.

Imagine that you know too much about the car you're driving. You're obsessed with its great engine and design but fail to notice the traffic jam--or, even worse, the collapsed bridge ahead.

It's a great car, you keep repeating to yourself, oblivious to the bigger picture. This happens again and again in trading, where investors fall in love with stocks and cannot see the truth.

One way to avoid this is not to know too much. Just have a general idea of what's going on and pay much more attention to the price action. ( researchLAB makes this easy because it's the only service out there that organizes companies thematically around products such as obesity drugs. It lets you easily discover and track such groups .)

Everything on the charts of ARNA, OREX, and VVUS indicate the road is wide open ahead. They've rallied and pulled back. Their stories are intact. Now is the time to think about jumping on board.

(A version of this article appeared in optionMONSTER's What's the Trade? newsletter of Sept. 19.)



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

Copyright © 2010 OptionMonster® Holdings, Inc. All Rights Reserved.


This article appears in: Investing , Options

Referenced Stocks: ARNA , OREX , VVUS

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