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10 Hottest Small-Cap Stocks of 2012

Biotechs make up most of this high-flying crowd

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#1: BioDelivery Sciences

YTD Performance: +670%

Have you gotten the memo about biotech stocks yet? The highest flier in the entire Russell 2000 is BioDelivery Sciences (NASDAQ:BDSI), a specialty pharmaceutical company that is focused on — you guessed it — cancer. Other areas BDSI is pursuing treatments in include pain therapy.

But rather than dive into this stock — shocker, favorable clinical results drove the rise and the company has finally started making money instead of bleeding cash — I want to offer a cautionary tale before you go racing for this top pick.

Consider that while huge gains are possible, the losses in biotechs are equally painful.

Cell Therapeutics Inc (NASDAQ:CTIC) is down 55% since Jan. 1. Amyris Inc (NASDAQ:AMRS) is down 67% year-to-date. Others are down even more.

It’s great when you catch lightning in a bottle with a development-stage biotech that figures it all out. But be aware that the flip side is a distinct possibility, and that this sector is perhaps the most volatile on Wall Street because one FDA report literally can make or break a company.

Jeff Reeves is the editor of and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at or follow him on Twitter via @JeffReevesIP. As of this writing he did not own a position in any of the stocks named here.

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