(CLDX) From the Mailbag: Should You Dump Small Caps?

I’m sorry, James, but I can’t endorse your idea.

If you want to make money in the markets, small caps must be part of your portfolio. They outperform large caps over the long term and will add several percentage points to your overall return.

But small caps are risky, right?

On an individual basis, they certainly can be more speculative than your average S&P 500 stock. However over the long, intermediate and short term, small caps have outperformed large caps during the past 15 years.

Over the past five years, the Russell 2000 (an index of small cap stocks) beat the S&P 500 by 155% to 120% and over the past year 26% to 21%.

Long term, the difference in the returns is even wider.

You say you’re feeling especially gun-shy because you got hurt by the dot-com implosion. So take a look at the chart below comparing the Russell to the S&P, beginning right at the top of the dot-com bubble. You can see even during the collapse, the Russell 2000 did no worse than the S&P and went on to much higher gains.

If you bought the Russell right at the top and held until today, you’d have gained 100.1%. During that same period, the S&P 500 gained 26%. Some difference.


That 100.1% number rings a bell with me. It’s a complete coincidence, but that was the average gain on the positions in my biotech trading advisory last year. But instead of waiting 14 years, subscribers achieved 100.1% gains in an average of four months.

Not every stock was a winner. But a lot of them were. Of the 26 closed positions, we had gains of more than 400% in Celldex Therapeutics (Nasdaq: CLDX) and of 775% in NPS Pharmaceuticals (Nasdaq: NPSP) calls. There was even a 128% gain on calls of Novartis (NYSE: NVS).

In fact, I was told a few weeks ago that it had the best one-year track record in the 25-year history of the Oxford Club. It was so hot that we decided to rename the service Lightning Trend Trader. (We have a special opportunity underway right now for new subscribers. Click this link to learn about it.)

So how did I do it?

Intelligence that mere mortals could only dream of? Hardly.

The ability to read company 10-Qs for 16 hours a day? Uh, no.

But I did pick up on a few patterns that have led to stocks taking off when certain events occurred.

First, we needed the right companies. I selected companies that had treatments for diseases that had a significant need. A company developing a “me too” drug isn’t likely to generate a ton of sales or get Wall Street hot and bothered.

The market either had to have lots of patients or, if it’s a rare disease, the ability to generate a lot of revenue.

Next, I looked for companies flying under the radar. If every talking head on TV and writer on the Web is discussing it, chances are the stock isn’t going anywhere even if the company comes out with good news.

I want to catch the market off guard. That’s how you make big money in the market.

Think about what would have happened had you invested in 2009, when no one else was. Sure, they might have called you crazy at the time, but you’d be the one laughing now. Same thing with these small biotechs.

Avoid the Bad Apples

Now, sometimes there are valid reasons these small cap names are beaten up and you should avoid them. But many times, the company has a real drug and for various reasons, the company hasn’t shown up on anyone’s radar yet. Those are the kinds I like to find.

And here’s the thing: We don’t have to wait until the drug is approved by the FDA and has generated millions of dollars in revenue. In most cases, we’ll be long gone by then.

Instead, we’re looking for earlier catalysts – the release of clinical trial data, for example, or a partnership announcement. The fact is, you can make a ton of money in the biotech sector without ever investing in a stock that makes a marketable drug. Sounds crazy, but it’s true – if you’re in and out early enough.

A few triple-digit winners can make a big difference in your portfolio. Remember to look for major catalysts in out-of-favor companies. You’ll have less risk and larger gains.

Do you have another question for me, or one of my colleagues at The Oxford Club? Leave a comment below or email us: [email protected].

Good investing,

Marc



View original at: Investment U

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