Top 10 Stocks For 2014

EI-EPD (Photo credit: markyharky)

By StreetAuthority

Chicago, Sept.26, stock trade .- It's one of our most popular pieces of annual research. Literally hundreds of thousands of investors have read -- and profited -- from this advice.

And since we first started publishing our annual Top 10 Stocks list, we've beaten the market seven out of 10 years. For comparison, shares of Warren Buffett's Berkshire Hathaway (NYSE: BRK-B) have only beaten the market five out of the past 10 years.

I've shared one of these stocks with you already. Last week, I told you about Philip Morris International (NYSE: PM). This tobacco company, while hated by most people, has raised its dividend nearly 85% since spinning off from its parent company in 2008.

And in today's article I'll tell you about another one of my "Top 10 Stocks for 2014."

But before I continue, I want to make something clear. I can't provide you with all 10 of my "Top 10 Stocks for 2014" here. I've reserved the report exclusively for my Top 10 Stocks advisory subscribers. It wouldn't be fair to them to give this list away to everyone.

But I can give you something even more valuable than just a couple of stock picks...
You see, I want to show you why these stocks made my list for 2014... and how you can find similar stocks on your own.

I think my 2014 ideas may end up being the most profitable in our history. As you can see in my chart, this group of 10 stocks has already beaten the S&P during each of the past five years -- that includes the sharp bear market we saw in 2008 and the powerful bull market we enjoyed in 2009 and 2010.


In fact, if you had invested $10,000 into this group of stocks just five years ago, your investment would be worth $22,950 as of the end of September -- a 129.5% total return. The same investment in the S&P would be worth just $14,590 -- a 45.9% return.

So what's the secret behind this performance?

Well, after years of research, I've found that companies with a few basic characteristics are the ones that consistently beat the S&P...

-- Companies that enjoy huge (and lasting) advantages over the competition.

-- Companies that are buying back massive amounts of their own stock.

-- Companies that pay investors each and every year by dishing out growing dividends.

I've found that more often than not, companies that match these three simple criteria are the ones that make you the most money long term.

It makes sense -- strong companies that take care of their shareholders tend to do better over the long run. These are the stocks that consistently create value for their investors year after year, delivering some of the market's biggest returns.

Take Enterprise Products Partners (NYSE: EPD), for example. EPD made my "Top 10 Stocks for 2014" list precisely because it meets two out of the three characteristics listed above.

Does EPD enjoy huge advantages over its competition? Absolutely.

The company is one of the largest pipeline companies in the U.S., with 50,000 miles of onshore and offshore pipelines.

Does it pay a steadily growing dividend? You bet.

Since 1998 EPD has raised its dividend 202%... from $0.225 per share every quarter to $0.68.

It doesn't take a Ph.D. to understand that this is the sort of stock that should continue to make money for its investors year after year.

And in recent years, EPD has done just that. Since 2008, shares have returned roughly 170%. That includes a nearly 20% gain since the start of the year.

Performance like this proves investing doesn't have to be complicated. There's nothing complex about investing in simple businesses that dominate their industries and return billions of dollars to their investors through dividends and buybacks. Yet it works.

Keep this in mind. It might be the most profitable investing lesson you'll ever learn.

Note: For more information about the rest of my Top 10 Stocks For 2014 --including several names and ticker symbols -- you can follow this link.

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If You Have a Burning Desire to Buy, Here's Where to Look

This is the Dow Jones Industrial Average over the last 40 years. (Photo credit: The_Smiths)

Momentum is strongest in small-cap and mid-cap tech stocks, while some blue chips offer bargains

By Sam Collins, InvestorPlace Chief Technical Analyst
New York, Sep.25, stock tips .- Blue-chip stocks took a hit for the fourth consecutive session as worries loomed over a possible government shutdown.

Banks were hit hard with JPMorgan Chase (JPM) falling to a four-month low after offering to pay $3 billion to the U.S. government to settle various claims. The Dow, S&P 500 and NYSE Composite all sold off during the last two hours of trading, but small-cap and mid-cap stocks held onto their early gains.
Consumer confidence for September declined to 79.7 from 81.8 in August, versus expectations of 79.8. Home prices for July rose 12.4% from year-earlier levels and were in line with expectations.
At Tuesday’s close, the Dow Jones Industrial Average was off 67 points to 15,335, the S&P 500 fell 4 points to 1,697, and the Nasdaq rose 3 points at 3,768. The NYSE traded 673 million shares and the Nasdaq crossed 422 million. Advancers led decliners on both exchanges by about 1.3-to-1.

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The Dow industrials have turned away from the high of 15,710 made only four sessions ago, and have penetrated into the broad support zone of 14,760 to 15,400. Within that zone is its next meaningful support, the 50-day moving average at 15,310.

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The blue chips held for most of the day, but in roughly the final hour and a half of trading, the Dow plunged over 100 points, led by the financials. The bias is against the blue chips and in favor of small-cap and mid-cap stocks.

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The Nasdaq’s bull channel is much like the Russell 2000′s channel illustrated on Monday. Trading is clustered close to the top of its range, and so, with MACD overbought, the Nasdaq could pull back to its 50-day moving average at 3,657.

Conclusion: If you must own stocks or are a trader, grabbing the small-cap and mid-cap technology stocks appears to be the best near-term strategy since that is where the buying is concentrated and momentum is strongest.

Even the broad-based S&P 500 closed below 1,705, a near-term inflection point. Its next support is its 50-day moving average at 1,679. But volume was high on last week’s advance and has declined on the blue chips’ pullback. The bright side of the blue chips’ near-term weakness is that some big, profitable names can be bought at reasonable prices like my Top 6 Stocks to Buy for October
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Only Part of This Market Appears to Be Out of Gas

Image via CrunchBase

Small-cap and mid-cap stocks are leading the market, while the large-cap indices sag

By Sam Collins, InvestorPlace Chief Technical Analyst
New York, Sept.24, stock picks .- Stocks fell Monday, but the selling was primarily focused on the Dow Jones Industrial Average, which lost 0.5%. Some industrials, most utility stocks and technology issues, rallied, but financials took a hit.

Apple (AAPL) rose 5% following news of demand for its latest products, and BlackBerry (BBRY) rose more than 1% after a tentative agreement to be bought out by Toronto-based Fairfax Financial at $9 a share.

At Monday’s close, the Dow Jones Industrial Average fell 50 points to 15,401, the S&P 500 was down 8 points at 1,702, and the Nasdaq lost 9 points at 3,765. The NYSE traded 690 million shares and the Nasdaq crossed 427 million. Decliners beat out advancers on both major exchanges by about 1.3-to-1.

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After blasting to a new high on Wednesday, the Dow industrials have sagged and closed Monday almost on the first line of support, the upper band of a wide range from 14,785 to 15,400. Within the band is the important 50-day moving average at 15,304. MACD is turning down, as is momentum and RSI (not shown).

Click to Enlarge

But while the Dow looks tired and due for a rest, the Nasdaq has barely felt the pressure of the profit-taking that has hit the Dow. The Nasdaq closed Monday just below its bullish resistance line at around 3,800, and is nicely above its bullish support line and 50-day moving average at 3,653. MACD is bullish.

Conclusion: Again, the small-cap and mid-cap stocks are leading the market. But the indices that traditionally ignite markets to major bullish explosions, the S&P 500 and Dow, have low momentum readings, even appearing to be “out of gas” (see Monday’s chart of the S&P 500). And a close below the S&P 500′s 1,680 to 1,690 zone would be a negative jolt for the entire stock market.

But the Nasdaq and Russell 2000 are technically sound, and so the broad market will probably continue in the upper ranges of the support zones of each of these indices until late in October. A traditional Halloween treat may be the event that leads to another leg up.

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Why You’re a Terrible Market Timer

 (Photo credit: koesteran)

By Rude Awakening

Baltimore, Aug.15, stock trade .- You're not an effective market timer. Don't beat yourself up over your shortcomings. After all, most retail investors buy when they should be selling. Then, when the market turns against them, they sell out right at the bottom. You're in good company… Main Street investors have a bad track record because they allow their emotions to get the best of them. They're more susceptible to fear and greed. They simply overlook the dangers of running with the herd and following their gut. So at first glance, the fact that more retail investors are taking an interest in stocks might be cause for concern… "According to the Investment Company Institute, the Great American Public has poured $92 billion into the stock market via stock mutual funds since the start of the year," reports MarketWatch. "To put that in context, in the first seven months of last year — when the market was much lower — they withdrew $180 billion… "The last time the investing public jumped into the Wall Street pool with both feet like this was in 2007. And they are investing even more this time around. In the first seven months of 2007 they invested $85 billion into stock funds." So is it time to sell out and head for the hills? Not quite… Yes, the market has generated some newfound interest from retail investors so far this year. That's not surprising at all. Investors are going to take notice when the broad market is up double-digits midway through the summer. However, we still have a long way to go before we make up for the record outflows that occurred from 2009-2012: The truth is investors have been on the run from stocks since the financial crisis. The market's definitely attracting some new money this year—but it's not a climax of years of mom and pop investors piling into a red-hot market. It wouldn't surprise me if all of these new investors are forced to endure a small correction sometime over the next several months. Shaking out some of the weak hands is fine with me. However, as I explained yesterday, I doubt the market will hit the reset button again at this stage of the game… The trend continues to tell you that consolidation periods and corrections are buying opportunities. Until this message changes, you should feel comfortable seeking out new investments.

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Free Markets: Just What the Doctor Ordered

English: President Barack Obama, Vice President Joe Biden, and senior staff, react in the Roosevelt Room of the White House, as the House passes the health care reform bill. (Photo credit: Wikipedia)

By Ron Paul- Daily Reckoning

Washington, Aug.12, stock tips .- Lately, many have characterized this administration as socialist, or having strong socialist leanings. I differ with this characterization. This is not to say Mr. Obama believes in free markets by any means. On the contrary, he has done and said much that demonstrates his fundamental misunderstanding and hostility toward the truly free market. But a closer, honest examination of his policies and actions in office reveals that, much like the previous administration, he is very much a corporatist. This in many ways can be more insidious and worse than being an outright socialist. Socialism is a system where the government directly owns and manages businesses. Corporatism is a system where businesses are nominally in private hands, but are in fact controlled by the government. In a corporatist state, government officials often act in collusion with their favored business interests to design policies that give those interests a monopoly position, to the detriment of both competitors and consumers. A careful examination of the policies pursued by the Obama administration and his allies in Congress shows that their agenda is corporatist. For example, the health care bill does not establish a Canadian-style government-run single-payer health care system. Instead, it relies on mandates forcing every American to purchase private health insurance or pay a fine. It also includes subsidies for low-income Americans and government-run health care "exchanges." Contrary to the claims of the proponents of the health care bill, large insurance and pharmaceutical companies were enthusiastic supporters of many provisions of this legislation because they knew in the end their bottom lines would be enriched by Obamacare. To call the president a corporatist is not to soft-pedal criticism of his administration. It is merely a more accurate description of the president's agenda. When he is a called a socialist, the president and his defenders can easily deflect that charge by pointing out that the historical meaning of socialism is government ownership of industry; under the president's policies, industry remains in nominally private hands. Using the more accurate term -- corporatism -- forces the president to defend his policies that increase government control of private industries and expand de facto subsidies to big businesses. This also promotes the understanding that though the current system may not be pure socialism, neither is it free market since government controls the private sector through taxes, regulations and subsidies, and has done so for decades. Using precise terms can prevent future statists from successfully blaming the inevitable failure of their programs on the remnants of the free market that are still allowed to exist. We must not allow the disastrous results of corporatism to be ascribed incorrectly to free market capitalism or used as a justification for more government expansion. Most importantly, we must learn what freedom really is and educate others on how infringements on our economic liberties caused our economic woes in the first place. Government is the problem; it cannot be the solution. The fundamental problem with health care costs in America is that the doctor-patient relationship has been profoundly altered by third-party interference. Third parties, either government agencies themselves or nominally private insurance companies virtually forced upon us by government policies, have not only destroyed doctor-patient confidentiality. They also inescapably drive up costs because basic market disciplines -- supply and demand, price sensitivity and profit signals -- are destroyed. Obamacare, via its insurance mandate, is more of the same misdiagnosis. Gabriel Vidal, chief operating officer of a U.S. hospital system, sees this problem squarely in his daily work. As he explains, Obamacare will only make matters worse because it fails to recognize that "costs are out of control because they do not reflect prices created by the voluntary exchange between patients and providers... like every well-functioning industry." Instead, "health costs reflect the distortions that government regulators have introduced through reimbursement mechanisms created by command-and-control bureaucracies at federal and state levels," he continues. "But it is theoretically and practically impossible for a bureaucrat -- no matter how accurate the cost data, how well-intentioned and how sophisticated his computer program -- to come up with the correct and just price. The (doctor-patient) relationship... has been corrupted by the intrusion of government and its intermediaries (HMOs, for example) to such an extent that we can no longer speak of a relationship that can produce meaningful pricing information." Absent such pricing information, our system increasingly resembles socialist systems with centralized price setting, shortages, rationing, apathy and declining quality of care. As the situation deteriorates, fewer bright young people want to practice medicine and fewer foreign doctors seek to immigrate. The problem is acute and worsening. Obamacare's third-party insurance mandate is only the first step toward what the political left really wants: a single-payer government health care system. Meanwhile, conservatives seem resigned to a third-party insurance system and therefore fail to present a viable alternative to the American people. They continue to speak in terms of saving the health care "system," when in fact what America needs is a rejection of all government systems in favor of free market mechanisms. In a free market, most Americans would pay cash for basic services and maintain inexpensive high-deductible insurance for catastrophic injury or illnesses only. Health insurance would be decoupled from employment, which would unleash entrepreneurs who now fear quitting their jobs and losing their health insurance. Costs would plummet due to real competition among doctors, price sensitivity among patients and elimination of enormous paperwork costs. Doctors would be happier, spending their time treating patients, rather than managing their practices. Congress needs to let markets work by aggressively repealing health care laws, including: the HMO Act of 1973, the Medicare Part D prescription drug benefit passed in 2003 and the Obamacare bill passed in 2010. Furthermore, we must begin scaling back Medicare coverage altogether for younger generations so they will not rely on a system that cannot remain solvent in future decades. Only by taking these steps now can we begin to undo the harm done by government to the once noble field of medicine. Instead of mandating the same failed entitlement health care schemes that are bankrupting Europe, Congress should fundamentally re-examine the case for free market health care. Our current model, based on employer-provided health insurance, did not arise based on market preferences. On the contrary, it makes no sense to couple health insurance with employment. But federal wage and price controls instituted during World War II left employers with no alternative to attract workers in a tight labor market other than offering extra benefits such as health insurance and pensions. Over time, these nonwage benefits became the norm, especially since employers could deduct the cost of health insurance premiums from their income taxes, while individuals could not. The perverse consequence is that employees lose both their paychecks and their health insurance when they lose their job. As reliance on third-party health insurance grew, patients became detached from the true costs of their doctor visits. In the 1970s, the Nixon administration, along with the late Sen. Edward Kennedy, championed the cause of health maintenance organizations (HMOs). Congress accepted the faulty premise that HMOs would reduce costs through centralized management of patients, when, in fact, the opposite was true: More bureaucracy would only lead to higher costs, less accountability and worse patient care. In recent years, Congress has only intensified the problem with more laws and more regulations, especially with the disastrous Medicare prescription drug benefit. The drug benefit was another example of naked patronage to a politically connected industry, and it exponentially worsened the federal government's balance sheet. Obamacare will be the last nail in the coffin of our bankrupt entitlement system. More laws are not the answer. Instead, we need to allow a market system to operate that reflects consumer choices while rationally pricing services. In a market system, patients likely would pay cash for basic services while maintaining relatively high-deductible catastrophic insurance for serious illnesses and accidents. The cost of most routine medical care would drop if the patient paid the bill on the spot, especially if doctors no longer needed to employ large staffs solely to deal with insurance and billing. Let me repeat: We need a system in America where patients pay cash for basic services, and carry insurance only for serious illnesses and accidents. "Health maintenance" is the responsibility of each of us individually. We cannot continue to collectivize the costs of health care and expect things to get better. Authoritarianism is bad for your health. Congress should end the Obamacare mandate and allow market-based medicine to flourish.

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'Forever' Stock The Next Berkshire?

President Barack Obama and Warren Buffett in the Oval Office, July 14, 2010. (Photo credit: Wikipedia)

By Street Authority

New York, Aug.15, stock picks .- Hidden inflation is an insidious devourer of profit. Forget what the Consumer Price Index is telling us -- higher costs don't always get passed on to the consumer. Sometimes quality is reduced instead.

Whether it's the bag of potato chips that's half-filled with air, the controversy of "pink slime," or the shrinking amounts of cake mix in packages that used to hold more -- whether we admit it or not, the inflation we've been worried about is already here.

It's the kind of environment where we see "Forever Stocks" shine. These are companies that have businesses built to last through bear markets, rising interest rates and, yes, inflation.

This "Forever Stock" has an operating margin of 44%, which gives it plenty of wiggle room to withstand economic hardships. Expected earnings growth is 11.8%, and its business model has started to turn the heads of some of the biggest players on Wall Street. The company has been referred to as a "Baby Berkshire" since it's an insurer with a large investment arm similar to Berkshire Hathaway (NYSE:BRK).

But why buy the baby version instead of Warren Buffett's eponymous brain child? As Buffett explains: "Our future rates of gain will fall far short of those achieved in the past. Berkshire's capital base is now simply too large to allow us to earn truly outsized returns." Berkshire is too big to generate the enormous returns it did when it was smaller and more agile.

The "Forever Stock" I'm talking about is insurer Markel (NYSE: MKL). Markel specializes in insuring niche markets such as summer camps, antique motorcycles, auto races and amusement parks. It faces little competition in these markets, which gives Markel the ability to adjust rates as economic conditions change without losing its client base.

The specialty insurance company recently reported mixed results on second-quarter earnings, mainly due to its $3.3 billion buyout of competitor Alterra. But that should hardly be taken as bad news. The acquisition increased Markel's book value by 12% to $452 per share, giving the stock a very attractive 1.17 price-to-book (P/B) ratio. Compare that with Berkshire's 1.45, and we start to see how Markel is the better value.

The size difference between the two companies reveals why Markel has the ability to invest in ways Berkshire cannot. Markel's market cap is just over $5 billion, less than 2% of the massive Berkshire.

Merkel's total operating revenues have increased 30% from last year, to $1.9 billion. This is attributed to a 27% gain in insurance operations as well as a 64% profit from Markel Ventures, the company's non-insurance businesses. Perhaps the most significant number is the change in cash and cash equivalents, up from $863 million last December to $1.7 billion as of June, which gives it even more flexibility in difficult economic environments.

While Markel is still more of an insurance company than Berkshire, it has been seeing tremendous success with the business investments that make up Markel Ventures. A number of diverse companies are held in this segment such as AMF Bakery Systems, a designer and manufacturer of high-speed bakery equipment, and Diamond Healthcare, a leader in behavioral health services.

And it's not just private equity that's driving returns, but investments in Buffett-approved companies likeCoca-Cola (NYSE: KO), Costco (Nasdaq: COST), American Express (NYSE: AXP) and a large stake in Berkshire Hathaway itself. All in all, Markel is a triple threat that has staying power and the maneuverability to snag attractive companies that the cumbersome Berkshire can't.

A telling sign that Wall Street is a believer in the company can be found by looking at institutional transactions. In the last quarter, 592,550 shares were purchased representing 6.7% of shares outstanding. Management has slowly been adding to its holdings as well and currently owns 14% of Markel's total market cap.

Risks to Consider: Markel is a property and casualty insurance company and has the standard risks of higher than expected losses on claims as well as being subject to interest-rate risk and market risk from its investment operations.

Action to Take --> Markel is a value buy based on its current P/B ratio of 1.17. Expected earnings growth of 11.8% gives us a price target of around $575 within the next 12 months.

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A Rare Opportunity To Own One Of Our Top 'Forever' Stocks While It's 'Hated'

English: The New York Stock Exchange on the day Bankrate.com was listed. (Photo credit: Wikipedia)

By StreetAuthority

Boston, Aug.8, stock trade .- Here at StreetAuthority, we love companies that have a wide moat around their operations and possess powerful long-term growth characteristics.

Investing in these companies is often quite simple. You buy shares -- and put them on the shelf. Year after year, they appreciate in value. Over the course of many decades, they deliver substantial investment returns. We call these "Forever Stocks."

Yet the ride isn't always quite so smooth for some "Forever Stocks." Even companies like GE (NYSE:GE) or IBM (NYSE: IBM) hit a rough patch, temporarily falling deeply out of favor with investors. And when that happens, savvy investors know to pounce, buying shares at marked-down prices.

Such an opportunity exists now with a company headquartered 5,000 miles south of the New York Stock Exchange. Brazil's CPFL Energia (NYSE: CPL) is a very good company having a very bad year. Shares are far from their recent highs, though as the dust settles, look for this stock to rotate back into favor.

Brazil's largest electric utility, CFPL was forced by the Brazilian government to roll back its rates in 2012 in an effort to lower consumer prices. Investors were none too pleased, as it became immediately apparent that the company's dividend couldn't be sustained: A $1.37 a share payout in 2011 had shrunk to $1 in 2012. This year, the dividend will likely be 80 to 90 cents a share. Yet that should mark a bottom, and in coming years, powerful demographic trends should help CFPL to again become a robust dividend grower.

Power To The People
Although the Brazilian economy is undergoing growing pains as it transitions from an emerging economy into a developed economy, the long-term trend of an expanding middle class implies an ongoing need: more power to run refrigerators, air conditioners, washing machines, TV sets and other appliances bought by folks who only recently developed the spending power to buy such goods.

And CFPL has been at the forefront of that trend. The utility's sales base has grown from $3 billion in 2004 more than $6.5 billion today. More importantly, the demographic trend is far from played out.

Just as we saw here in the U.S. in the 1950s, a rising middle class creates a new wave of spending on goods and services that generates a further employment expansion. We saw that in Japan in the 1960s and '70s and in South Korea in the '80s and '90s -- and we're now only part of that way through that process in Brazil. Though the Brazilian economy is currently the seventh-largest in the world, it is likely to crack the top five by 2030.

By CFPL's own estimates, Brazil's power needs will grow at least 5% annually through 2019. That may not seem like much, but it's a 40% increase from 2012 levels. (To put that in context, total electric power demand in the U.S. has risen less than 10% over the past decade.) The Brazilian government agrees, and its Ministry of Mines recently approved a 10-year power generation expansion plan that will deliver an additional 167 gigawatts to the Brazilian grid.

The Currency Kicker
Unlike U.S.-based "Forever Stocks," an investment in CFPL has an added wrinkle. Investors are exposed to currency movements, which can impinge or magnify stock price gains. Lately, it's been an impingement.

Since the summer of 2011, the Brazilian real has lost more than 30% of its value against the U.S. dollar, which has had a direct negative impact on Brazilian share prices as they are converted back into dollars. This currency could fall further in the near term, but long-term trade flows suggest it is already becoming quite undervalued, and the stage is set for an eventual rebound in the real. That would provide a tailwind to CFPL's shares (and its dividend) as well.

Risks to Consider: The majority of Brazil's electricity is derived from hydroelectric power, and a drought in the country would put a severe strain on the nation's utilities.

Action to Take --> CFPL Energia reports second-quarter results Aug. 8. At that point, management is likely to focus on the state of the current dividend as well as potential future growth for the payout. Though this stock has fallen by more than a third over the past 18 months, its current dividend yield, in the 5% range, along with dynamic growth prospects, should help this stock to move back into favor in the quarters ahead.

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How to Fine-Tune Your Biotech B.S. Detector

Prescription placebos used in research and practice (Photo credit: Wikipedia)

By Investment U

Chicago, Aug.8, stock tips .- When a woman, claiming to be the wife of a deceased general from Nigeria, writes to us saying she needs our help getting $10 million out of the country and in return we'll get 20% of the money, most of us know that's a load of bull.

But when the CEO of a publicly traded biotech company tells us his drug is the next great thing? How do we know if he's being truthful, hopeful or is just a plain scam artist?

All stocks, especially those in the biotech sector, are susceptible to overhype, which leads to disappointed investors.

I've had my share of winners and losers over the years and have dealt with all kinds of companies. As a result, I believe my B.S. detector is pretty sensitive. Let me help you fine-tune yours.

When evaluating biotech companies, consider:

1. What kind of language does the company use?

Do its press releases sound like hype? Most reputable, science-driven companies won't use words like "stunning" or promote that something it accomplished has never been achieved before. Its language will be more guarded.

Additionally, what does the CEO say? When discussing the effectiveness of his company's melanoma drug, Synta Pharmaceuticals (Nasdaq: SNTA) CEO Dr. Safi Bahcall once told me, "it's either water or it's not water. And we know it's not water."

He was right. It wasn't water. But it wasn't medicine, either. The Phase 3 trial was stopped early because the death rate among patients taking the drug was significantly higher than those who did not receive it.

I compare that to the conversations I've had with the management team from Compugen (Nasdaq: CGEN), whose stock spiked 45% on Monday on news of a collaboration with Bayer.

I've spoken with management many times, and while Chairman Martin Gerstel is an enthusiastic supporter and spokesman for the company, I've never once heard him make a promise that his company's technology will lead to marketable drugs.

He certainly thinks it will, but that's a big difference between claiming it will and making sure investors understand there is still work to be done before anything is proven.

Additionally, Gerstel already made his fortune selling his former firm, Alza, to Johnson & Johnson (NYSE: JNJ) for $10.5 billion. He doesn't need to spend his time and energy on making money. He's in it to try to change the way medicine is developed.

Some quick research on an executive's background may shed some light on their motivation for getting involved with a particular company.

2. Are trials placebo-controlled and double-blinded?

When a company runs late-stage clinical trials, particularly for cancer, you want the trials to be randomized, placebo-controlled, double-blinded trials. That means neither the patient nor the doctor knows if the experimental drug or placebo is being delivered. (In cancer cases, the placebo is whatever drugs are considered the standard of care, as it would be immoral to not treat a cancer patient.)

Not knowing which drug is being taken is important to avoid a placebo effect - where a patient might feel better or a doctor might look for data points that suggest the patient is recovering based on the belief that the new drug is effective.

Additionally, by comparing the drug being studied to a placebo or standard of care, the evidence of whether it is safe and effective should be clearer than when it is simply being studied alone.

Sometimes, for various reasons, a double-blinded, placebo-controlled study isn't feasible. But usually it is. If a company is running a Phase 3 trial that is open label (everyone knows that the patient is receiving the drug) and you can't find a valid reason for it - run, don't walk, away from the stock.

3. How many patients?

Sometimes, a company will proudly announce the results of a clinical trial. In cancer drugs a 30% response rate can be enough to get approved by the FDA. But if, in a clinical trial, a company announces 12 out of 30 patients responded to the drug, that's not exactly an impressive sample size.

Of course, if it's an earlier stage study, the trial did exactly what it's supposed to, which is to determine if the drug is worth being developed further. But a company that is hyping the results based on a small number of patients is more interested in promoting its stock than good science.

Not to pick on Synta again, but it recently issued a press release saying that four out of 15 breast cancer patients saw tumor shrinkage when taking its drug ganetespib. That's great. The problem is the study was supposed to enroll 70 patients.

So why is the company releasing data on just 15? It's not like all 15 had a response rate. That would have been newsworthy. The recent data was not. So why did it release it early?

4. Who is promoting the stock?

Do you ever get those promotions that tell you why a stock is going to skyrocket? If the company names the stock in the promotion, read the small print very carefully. There's a good chance the firm hired a stock promoter - which is usually a pump and dumper.

A company can get a large amount of shares or cash (or both) in return for promoting the stock to retail investors. While those investors are buying, the promoter and company insiders are selling.

Never buy a stock that you learn about in a promotion if the fine print says that the promoter has been compensated for sending you the information.

Keep in mind that Investment U and The Oxford Club do not accept or receive compensation from companies for writing about individual stocks, funds or any other kind of investments.

Investing in biotech stocks can be incredibly rewarding. But because these stocks can fly so quickly, there are people out there trying to help them take off, whether the science justifies it or not. It's in your best interest to be able to discern whether the CEO or other spokesperson is sensible or a hype artist.
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