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Swing for the Fences With These 5 Biotech Stocks

Just make sure they're only a part of a broader strategy

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Ah, the fickle world of biotechnology stocks and medical device startups. One day these small-cap stocks are close to doubling your money … the next, they’ve sucked your portfolio dry.

InvestorPlace’s Dan Burrows recently recapped the ups and downs of MAKO Surgical (NASDAQ:MAKO) as a case study. The company has pioneered a less-invasive knee replacement surgery, and MAKO stock had been soaring earlier in 2012. From January to May it ran up dramatically, from around $25 a share to $40.

Then in May, it fell off a cliff after disappointing earnings. And just last week, MAKO was kneecapped after a disappointing sales forecast. Now it’s around $15 a share.

In his article, Dan has a great analogy about the home run derby that is the world of small-cap stock investing:

“When swinging for the fences, even the most towering blast off the fattest cookie of a pitch can still come down on the warning track.”

It’s sad but true, particularly with biotechs. Just like in a home run derby, there really are no options for slow and steady progress like singles or walks. With biotech stocks, it’s all or nothing. These companies bleed red ink as they focus on research instead of sales — meaning either they come up with a landmark treatment and are set up for huge future profits and a big pharma buyout … or they fail to get FDA approval or impress doctors and fall to earth with a thud as the money runs out.

This, of course, actually is thrilling to many investors. They don’t mind the extra risk in exchange for the extra reward. After all, if you strike out three times but hit two home runs, that’s a pretty good inning.

If you’re not prepared for the very high stakes and high risks of biotech investing, stop reading now. But if you’re looking to hit a big home run, then consider taking a whack at these five biotech stocks. All are extremely volatile and have no guarantees — but they have potential for big success.

(Important note: These stocks have very small market caps and are thinly traded, so always use a limit order if you’re buying or selling one of these picks. The illiquid nature of these stocks means a big transaction can move the share price, so protect yourself. Oh, and it goes without saying you should do your own research, too, before dumping cash into these picks. I am an English major, not a doctor, after all.)

Trius Therapeutics

Trius Therapeutics (NASDAQ:TSRX) is a thinly traded biotech focused on the development of antibiotics for serious infections, including MRSA. Anyone who knows anything about antibiotic resistance and the threat of “superbugs” knows that medical professionals need a heckuva lot more than just penicillin in their pockets these days — meaning Trius is pursuing a very important area.

Some of the biggest names on Wall Street understand the potential of TSRX and are throwing cash behind the stock. Take Wellington Management, one of the biggest independent investment companies in the world with some $600 billion in assets. It just upped its stake by 445% last quarter. Vanguard Group, the mutual fund and ETF giant, also increased its stake by 160%.

Yes, Trius is bleeding cash, but the company currently has more than $95 million in cash and equivalents with zero debt. At the very least, the big institutional move into this stock might mean it’s worth a look. Shares are down 17% year-to-date, however.

Oncogenex Pharma

Oncogenex Pharma (NASDAQ:OGXI) is another very thinly traded biotech company that’s seeing big institutional buying lately, which could be a good sign. OGXI is a company focused on new cancer cures, and as of March 31, FMR LLC announced a 662% increase in its position in this biotech — FMR, of course, stands for Fidelity Management & Research.

The potential of new cancer cures is enticing, and Oncogenex has a number of ideas in the pipeline. However, it’s worth noting that unlike Trius or some other stocks on this list, it has been around a very long time — with its Nasdaq IPO way back in 1995. Bears might argue that this company has had way too long to come up with a successful product and point to the long-term trend for OGXI shares, which clearly is down. But the biotech has forged a decent partnership with Teva Pharmaceuticals (NYSE:TEVA) to support its pipeline (which might be greasing the skids for a buyout later on, to hear rumors). Shares of OGXI are up 26% year-to-date.

Article printed from InvestorPlace Media, http://investorplace.com/2012/07/swing-for-the-fences-with-these-5-biotech-stocks/.

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