4 Hot Biotech Stocks to Buy

More than a year ago, I recommended a basket of unknown and poorly covered biotech stocks I called the “four Cs”: Cepheid (NASDAQ: CPHD[1]), Cerus Corporation (NASDAQ: CERS[2]), Compugen Ltd. (NASDAQ: CGEN[3]) and Curis, Inc. (NASDAQ: CRIS[4]). Well, they all have risen dramatically, outperforming the general market. Cepheid tripled from its lows, Curis did the same, Cerus rose almost 400%, and Compugen did even better.

Does that mean these biotech stocks have had their run? I don’t think so. What I like about these four stocks is that they have the potential to trade against a sluggish or declining market, which is a good thing since I believe we are in a double-dip recession and corporate profits in 2011 are going to greatly disappoint Wall Street.

Cepheid (NASDAQ: CPHD[1]) makes diagnostic tests and dominates the market for rapid testing for MRSA and other hospital-acquired infections. It just received approval for a tuberculosis (TB) test that will enable physicians not only to get results in two hours, but to determine what kind of TB, allowing them to quickly prescribe the appropriate antibiotics. A very well-managed outfit, CPHD not only makes the best testing systems, it also has a razor-and-blade business model, which generates more revenue, and expanding margins thanks to licensing fees for its intellectual property.

The stock is volatile, and at around $19.50, it is near its 52-week high. Look at longer-term call options on the stock, but understand that CPHD options are fairly illiquid.

I began recommending this little outfit when it was trading around a buck, and it is now nearing $4. Cerus Corporation (NASDAQ: CERS[2]) makes the only system in the world that kills virtually all pathogens in donated blood as it is processed into platelets. Like I predicted[6], a conference last week on XMRV — a retrovirus found in blood and thought to be the cause of Chronic Fatigue Syndrome — popped the stock. The shorts got hammered and analysts took notice of the company. The company should turn profitable some time in 2011.

There are options on CERS, but they barely trade, so buying the stock is a better choice. Traders could combine a stock purchase with an options writing[7] strategy. (Disclosure: Michael Shulman owns CERS shares.)

Compugen Ltd. (NASDAQ: CGEN[3]) is the leading bioinformatics company in the world and a pure play on the evolution of the drug discovery business. You will not see CGEN’s products at your pharmacy, but the company licenses its peptides and proteins for a fee to the who’s who of the drug industry, and also receives a back-end cut of any drug that makes it to market using its discoveries. CGEN also has some promising prospects for internal development. Of the four biotech stocks listed here, CGEN is the one that trades most in line with the market.

As with Cerus, the options on this stock are very illiquid. So consider buying the stock, currently trading around $4.80, and perhaps writing some options.

Curis, Inc. (NASDAQ: CRIS[4]) is a highly speculative play on curing cancer through the manipulation of something called the Hedgehog pathway. The company disappointed investors with two sets of trial results this year for colorectal and ovarian cancer, both of which came from poorly designed trials. But the company currently has 15 other clinical trials under way with Genentech/Roche and NIH, two great partners. And some time next year, we should see results for a trial for basal cell carcinoma, which I am very optimistic about.

Currently near $1.30, this volatile penny stock trades like an option, so buy it and hang on for the ride. (Disclosure: Michael Shulman owns CRIS shares.)