The Weight Loss Wars

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)

I like a medical miracle as much as the next guy, maybe more. But the truth is I'm all about the money.

I like biotech because no other sector provides the opportunity to enjoy explosive gains on great breakthroughs. Take a look at this biotech index (NBI) for the past year and you'll easily see why the sector is so enticing.

As an industry, biotech has left the S&P 500 in the dust. And keep in mind that the index is just an average. I prefer to spot individual companies on the verge of a breakthrough and scoop up 100% returns.

The Weight Loss Wars

There are two biotech companies that are in a race to bring new weight loss drugs to market. They are Arena (ARNA) and Vivus (VVUS).

By looking at the Food and Drug Administration's calendar of upcoming events biotech investors were able to spot when the new drugs created and tested by these two companies would be up for approval. If approved they were likely to become blockbusters. That means the unprofitable companies that created the drugs would be on their way to becoming billion-dollar corporations.

When Good News is Bad News

Every investor has heard the phrase, "buy on the rumor and sell on the news". Well, the rules are different with biotech. We know when a decision is coming but we don't know what it will be. We do know that a positive decision could mean huge gains. And a negative decision will result in potentially disastrous losses.

Here's the trick. A positive decision means big gains for a very short time. Sometimes corporate insiders dump millions of shares on the market to take advantage of a "thumbs up" price-spike from the FDA. Of course that can leave ordinary investors with empty pockets. That's why the biotech rule is "sell BEFORE the news".

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