Due Diligence

In this environment, there's not much to be excited about in the stock market. I'm hearing many aren't even opening up their 401k statements, knowing they're down over 50% from their 2007 peak levels, and knowing they've been declining for months on end.

I believe we haven't reached a secular low in this bear market yet, but I do believe when we do reach it, it will be the buying opportunity of a lifetime. In between, we may even experience violent bear market rallies, but the trend is still down.

It just doesn't feel like a bottom, because so many are trying to find it. Stock market bottoms usually aren't reached until the last bull has thrown in the towel. I don't think we're there yet.

Yes, some stocks are cheap, but they could get cheaper. Investors with a very long-term horizon (10+ years) will probably do well buying at current levels, and if the fear is missing the train, perhaps nibbling at solid companies with cash flow, dominant market share, and low debt levels may be tempting. But this falling sword isn't done falling yet.

Meanwhile, aside from precious metals, the only promising sector I see is biotech, as they look increasingly enticing as acquisition targets. Big pharma companies face daunting challenges going forward, as their pipelines are depleted and at risk of being decimated due to patent expiration. Pfizer will acquire Wyeth, and Merck is paying over $41 billion for Schering-Plough. Genentech is mulling over Roche's higher bid of $95 per share. Expect to see more mergers and acquisitions activity.

I've placed bets on a biopharmaceutical company that will announce results of Phase III clinical trails by the end of this month. It's a calculated speculation--if results are negative--either due to lack of efficacy or safety, it'll drop by 50%. However, if results are positive, it will triple. If a partnership agreement is offered to co-market the drug, it should double again. And if an outright buyout offer is made, it'll double again. I like that reward/risk profile.

I performed heavy due diligence on the company: no insider selling, phase I and II trials results, manufacturing facilities, preliminary feedback, competitive analysis, marketing partners, history, fundamental analysis, subjective analysis and technical analysis. All indicators look good, but with biotech, the odds are indeed against success. Volatility is high. In other words, biotech investing is not for the faint of heart. It can be disastrous, but it can also be extremely rewarding--both for investors and health patients. Good luck to all longs.