by Alexander Moschina, Investment U Research
Friday, July 30, 2010

The average person gets a vaccination shot once every 10 years or so to prevent tetanus. Sure, we may pay for the occasional flu shot or some other kind of vaccination, but by and large, we avoid shots – quite ironically – like the plague.

Aside from the obvious health benefits, shots are only administered when absolutely necessary. And for most of us, that means rarely.

But for those who suffer from diabetes, the need for daily insulin injections can lead to unsightly bruises, scarring and grape-sized fatty deposits around injection areas. The ritual itself can be painful, too.

But despite the complications or the pain and inconvenience that come with injections, it remains the most common form of insulin delivery. But that may not be the case for much longer…

Mannkind “Just Says No” To Needles

MannKind Corporation (Nasdaq: MNKD), a biopharmaceutical company that develops and commercializes drugs that help fight life-threatening diseases, has created an insulin therapy that mimics the natural releases of insulin more effectively than current industry standards.

It also helps control glucose levels and fights the onset of hypoglycemia. But most importantly, the product is inhalable. As in no needle required.

The company, founded in 1991 and headquartered in Valencia, California, saw a 7.6% jolt on July 20 after the announcement that it had resubmitted a New Drug Application for inhalable insulin called Afrezza.

This came just three weeks after the FDA asked MannKind to provide more clinical data to support its product, as well as information about the specialized inhaler that is used to deliver it.

The speedy resubmission certainly inspired confidence in analysts and investors. And it’s easy to see why. Simply put, Afrezza is going to change the way insulin is delivered for the 23.6 million Americans currently living with the disease and the 1.6 million new cases that are diagnosed each year.

Insulin Injections Could Be Made Obsolete

Currently, the injection ritual of most insulin users goes something like this:

• After ensuring that the insulin is properly mixed, a rubber stopper on the top of the bottle is sterilized and the half-inch needle of a fresh syringe is pushed through to the insulin.
• The plunger is pulled back, bringing insulin into the syringe.
• The person then swabs the injection site on the body with alcohol. The skin around the area is pinched, the needle is aimed, and…

You get the idea.

With Afrezza, this time-consuming and unpleasant process could be made obsolete. An inhaler that is smaller than the palm of your hand delivers the powdered insulin therapy. It takes single-use cartridges that are simply activated by inhaling.

Afrezza: The Alternative to Daily Diabetic Injections

This revolutionary treatment will make life better for millions of afflicted individuals, many of whom may be under-medicating or skipping their daily injections because of the pain. Afrezza won’t just be an alternative option…

It will be the standard.

The FDA announced that it will make its decision by December 29. Expect MannKind’s stock to yo-yo plenty in the meantime, but once the drug is approved, the company is going to skyrocket.

Good investing,

Alexander Moschina

by David Fessler, Energy and Infrastructure Expert
Friday, July 30, 2010: Issue #1313

Oil.

A touchy subject these days, I know – even with cleanup crews in the Gulf successfully removing much of the spilled oil from the water.

But I don’t want to talk about U.S. oil in today’s article. Instead, we’re going to head south to check in on a company that has gained increasing international attention over the past several years, having made some of the world’s largest oil discoveries in recent decades.

We’re heading to Brazil and the offices of oil and gas conglomerate, Petroleo Brasileiro (NYSE: PBR) – or Petrobras, as it’s more commonly known…

Right off the bat, the company faces a problem: most of Brazil’s offshore oil is located between layers of salt nearly seven miles below sea level. As you can imagine, extracting and producing this oil in an economical way is a daunting task.

But Petrobras engineers and geologists think outside the box. The company has invented and perfected both seismic and drilling techniques along the way. And the initial risks now look like they’re going to pay off in a big way.

Or are they? Let’s take a look at the potential hazards and rewards for Petrobras…

Petrobras’ Underground Oil Bonanza

Four years… $224 billion.

That’s how much money Petrobras plans to spend on development of its offshore oil fields and onshore refining facilities between now and 2014.

This massive sum alone should be an indication of how much oil is down there and the level of Petrobras’ optimism. The current figure puts the “official proven reserves” at six billion barrels of oil, but some believe there could be 10 times more than that.

Frankly, I think even that number could be on the low side. I believe Petrobras has enough potential reserves (whether undiscovered or unannounced) to become the next Saudi Arabia of oil. Time will tell.

For now, though, the company’s other offshore fields are already churning out oil to the tune of nearly two million barrels a day. And there are many offshore areas that it hasn’t even explored yet.

That’s the good news. Now for the bad…

Hello, Government… Goodbye, Common Sense

While history is littered with examples of failures from nationalized oil and gas investments (Venezuela, Russia, and Nigeria to name a few), Petrobras isn’t one of them.

Brazil formed Petrobras back in 1953, under the leadership of then-President Getulio Vargas. It remained a legal oil monopolist in the country until 1997.

Today, it’s the largest company in Latin America by market capitalization ($158 billion) and in revenue ($92 billion in 2009). It’s also the fourth-largest energy company in the world.

But the Brazilian government still has the biggest piece of Petrobras firmly under its management. In fact, all the unexplored oil blocks that Petrobras once had under its control have reverted to the Brazilian government.

Perhaps most importantly, though, the government holds 55% of voting control in Petrobras… despite only owning 33% of the shares.

And now it’s making a grab for even more control. It’s utilizing a controversial plan that would grant Petrobras production rights for up to five billion more barrels in return for more shares – and thus, more authority.

The question is: Why would the government bother? Do its officials know something that the general public doesn’t in terms of the estimated amount of oil sitting beneath Brazilian waters?

Perhaps. But the short-term reason is that it sees a potential cash windfall that it intends to direct toward social programs that it wants to implement.

Three Reasons Why Petrobras Could Soar Over the Next 12 to 18 Months

Not surprisingly, when the government announced that it planned to grab more control of Petrobras, investors began fleeing the company in droves.

Once a high-flier in the oil industry, Petrobras shares are down 25% since the beginning of 2010. The stock is trading at a significantly discounted price/earnings ratio to the likes of ExxonMobil (NYSE: XOM).

However, I believe investors’ fears about the government’s moves are overblown, not to mention fresh concerns over deepwater drilling. Once both subside, Petrobras shares could see significant upside from here, perhaps as much as 50% or more in the next 12 to 18 months.

Here are a few reasons why:

• The company plans to boost its production output by 9.4% per year, doubling production output to 3.9 million barrels per day by 2020. (It currently produces around 2.5 million barrels per day.) That’s a significantly better growth rate than all the other big producers.
• At 38%, Petrobras boasts the second-highest gross margins in the oil and gas industry. This is a key measure of profitability and by way of comparison, Exxon Mobil’s margins are running at about 29%, which is the average for the overall industry.
• Petrobras notched up trailing 12-month sales of $190 billion and annual sales growth north of 18%. It’s only a matter of time before the stock price catches up to these numbers.

Petrobras Isn’t All About Oil…

But lest you think Petrobras is all about oil… it’s not…

• It has operations all over the globe, with exploration or production efforts underway in 27 different countries on every continent.
• The company operates 112 production platforms, more than 8,000 service stations, 16 refineries and 10 thermoelectric power generation facilities.
• It’s also branching out into biofuels – big business in Brazil – and plans to spend nearly $3 billion on their development in the next three years.

Tasked with balancing Brazilian government interests, the need for huge amounts of capital, and fleeing shareholders, CEO Jose Sergio Gabrielli certainly has his work cut out for him in the months ahead.

But if you’re looking for a bargain in the oil patch, take a closer look at Petrobras. It’s a consistent over-achiever relative to its peers and its shares are currently selling at fire-sale prices.

And if you can handle a little stock market volatility, plus the ups and downs of the oil sector in particular, you could be richly rewarded a year or two from now.

Good investing,

David Fessler

Editor’s Note: You can bet that when it comes to energy and infrastructure developments, David Fessler is hot on the trail of the latest news. Whether it’s oil, natural gas, the electric grid, or alternative energy sources, he’ll show you how to profit from these critical sectors. Check out his Peak Energy Strategist for all the details.

by Tony D’Altorio, Investment U Research
Friday, July 30, 2010

Some 30 years ago, some tech-savvy people in India surprised the business world.

They set up back offices for western multinational corporations. And so, the Indian IT industry came about.

Today, it remains one of the most exciting business stories in the country.

So far, it has managed to stay relatively unshackled by government intervention and control. And in that, it symbolizes the new India. Independent, self-confident and ambitious…

India’s IT Industry

India’s information, technology and outsourcing industry makes good money. Generating annual revenues of over $60 billion, it has largely driven the country’s economic ascent.

It has grown remarkably well too. Take Infosys Technologies ADR (Nasdaq: INFY), which increased earnings at an average 60% per year from 1996 to 2004. Then, from 2005 onward, it still locked in growth of 36%.

And even though the industry gets most of its revenue from the U.S, Canada and Europe, it has stayed strong throughout the economic downturn. If anything, it became more efficient, tailoring services to help their clients survive the recession.

As a result, Indian IT companies’ first quarter results look impressive.

The country’s largest outsourcing company, Tata Consultancy Services, beat forecasts. So did Wipro Technologies ADR (NYSE: WIT), the third largest. And surprisingly enough, much of their success came from the U.S.

Infosys, which ranks number two, did report a small drop in net income due to currency movements. But revenues picked up strongly and the company lifted its growth forecast to 20% from its April projection of 17%.

That surprised Wall Street, which expected the European debt crisis and a strengthening rupee to hurt the entire sector. Yet despite all that, investors still pocketed total returns of 60% – 100% from Tata, Wipro and Infosys.

Global IT Industry Spending on the Rise

Forrester Research reports that global IT spending is expected to grow 9.3 per cent this year from an estimated $1.4 trillion in 2009. Much of that should come from a rebounding financial services industry, IT outsourcer’s most valuable clients.

And emerging markets should play their part too. Along with other global entities, Indian IT companies want to expand ties in Asia, Latin America and the Middle East.

They have good reason for that too. Just take Wipro, which expects most of its forecasted $1.25 billion revenues in the next quarter to come from the Gulf region.

Similarly, seven years ago, Tata Consultancy took revenues of $100 million from emerging markets. Today, it makes $1.2 billion from them.

In the long term, those areas are expected to contribute about 20% of its overall revenues.

Tata particularly likes Latin America, where it has seven service centers. Its revenues from the region are well over $300 million. And it believes the region can easily become a $1 billion market in the medium term.

As Rising Costs Take Their Toll…

Of course, there’s always a bearish argument for every high-flying investment. And rising costs have taken their toll already on India’s IT companies.

For instance, in the past six months, Tata, Wipro and Infosys each had to increase pay by 10% – 20%.

Tata has already projected spending $200 million on salary raises in the next fiscal year. It suffered an employee attrition rate of 13.1% despite offering higher wages during the last quarter.

Infosys, on the other hand, has offered the highest salary increases of its top competitors. It hopes the move will keep employees satisfied and loyal.

Those companies have good reason to continue doing just that. Many technology sector insiders estimate that costs related to poached employees hit a record $2 billion in the past six months.

Now that hurts.

Still, they don’t seem too worried for now. In fact, each of them plans to hire more than 35,000 people this year to sustain their double-digit growth.

So while those costs could bite them sometime well down the road, right now, they make excellent investments.

Good investing,

Tony Daltorio

by Dr. Mark Skousen, Contributing Editor
Thursday, July 29, 2010: Issue #1312

If you want sound, classic investment advice, you’ve come to right place.

The lessons you’re about to learn are timeless and straightforward… but sadly, hardly ever followed.

What’s more, the financial crisis has actually substantiated this man’s classic formula for successful investing.

The formula I’m talking about comes from Burt Malkiel, finance professor at Princeton and author of the classic, A Random Walk Down Wall Street. You may recall that Alexander Green recapped his FreedomFest debate with Burton Malkiel on July 12…

As host of the annual FreedomFest event in Las Vegas, I’d invited Malkiel to participate in two sessions. One was at a luncheon, with his excellent speech, entitled: “My 40 Years Walk Down Wall Street: Timeless Lessons.” I highly recommend you get a copy for only $5 (call: 866.254.2057 for details on how to order the CD).

Malkiel’s other speech was entitled, “Can You Beat the Market?” This was what Alex talked about in his column here a few weeks ago. And with good reason – as Malkiel’s five rules illustrate…

Five Simple Steps to Beat the Market

Here’s Burt Malkiel’s five-step market-beating formula:

1. There’s No Need to Time the Market: Plain and simple, buying and selling in the short run doesn’t work over the long term. We talk about this frequently in Investment U. In order to make market timing work, you have to be right most of the time when you buy and sell. The vast majority of investors can’t do that consistently. And besides, you don’t need to time the market to be successful.
2. Use Dollar-Cost Averaging: Malkiel showed that dollar-cost averaging actually does better in a volatile market (like now) than in a steadily rising one. He cited an example: If you invested $1,000 a year for five years, you’d have $6,167 in a volatile (bear-bull) market versus only $5,915 in a steadily rising market.
3. Rebalance Your Portfolio Annually: Malkiel found that from January 1996 until December 2009, annual rebalancing between a stock and bond index provided lower volatility and higher returns. The best strategy is to sell your portfolio’s big winners and buy its biggest losers once a year.
4. Diversify, Diversify, Diversify: It sounds obvious, but diversification is crucial. Malkiel argues that simple diversification increases your returns with less risk (volatility). He uses the following extremely conservative portfolio: 50% bond fund, 25% stock index fund and 25% international stock index fund.
5. Cost Matters: The vast majority of actively managed accounts underperform the market indexes over the long run, especially because they cost more to run. So use non-actively managed index funds by the cheapest fund company – Vanguard.

Turn $100,000 into $250,000 in 10 Years

Putting all the parts of Malkiel’s formula together – index funds, dollar-cost averaging, rebalancing and diversification – he revealed the following chart to illustrate how a conservative investor would fare during the “lost decade” (2000-2010) when the stock market fell.

So let’s say you started with a $100,000 portfolio in January 2000.

You allocate your assets in the following way: 50% in a bond index, 25% in a U.S. stock index and 25% in an international stock index.

If you added $1,000 per month over the 10 years, you’d have invested a total of $220,000. With annual rebalancing and diversifying, you’d have a portfolio valued at $250,000 in 10 years.

Thus, by dollar cost averaging, rebalancing and diversifying, you’re ahead of the game in the “lost decade” when the overall stock market declined.

Now imagine how much better you’d do if you added an emerging markets index fund and gold to your portfolio. That’s exactly what Alex does in his Gone Fishin’ Portfolio.

Good trading – AEIOU,

Mark Skousen

Tony D’Altorio, Investment U Research
Thursday, July 29, 2010

The euro is up but Wall Street remains almost universally bearish on anything European.

Of course, one person’s junk is another one’s treasure. There are still significant opportunities to be had out there.

For instance, Germany, the world’s second largest exporter, has actually come out on top. The Euro’s fall has made its industrial goods even more competitive.

Just take Siemens AG ADR (NYSE: SI).

It has increased its bottom line by 50% from last year’s levels. And it raised its 2010 guidance by 20% to $9.7 billion.

Impressed yet? Keep reading…

Siemens is an industrial conglomerate involved in a number of sectors. That includes: information and communications, automation and control, power, transportation, medical and lighting.

The company is a leader in green efforts such as new smart grid technologies and energy-efficient, high-speed trains. It also leads in offshore wind generation and comes second in the onshore variety in the U.S.

In addition, it recently developed the world’s most efficient gas generation turbine. That wide range of businesses helps to shield it from the economic downturn.

Siemens in Emerging Markets

Along with its product diversification, Siemens has a firm grasp on emerging markets. And it announced plans not too long ago to expand its grasp over the next three years.

It will invest about €3 billion into Brazil, Russia, India and China through 2013. That will drive technology production especially made for a quick rollout in such areas.

Currently, Siemens’ Indian subsidiary, Siemens Limited, is working on 42 different products for its market, including traffic management technology, solar-powered X-ray machines, wind power generators and a smart Camera.

Average cost: €20 million.

Meanwhile, in China, the company has 13 engineering research projects. And it expects to launch up to 50 more projects in the next three years.

It believes that different design strengths across those countries will combine to create a new generation of lower-cost technology.

After all, despite fast growth in places like China, they still rely on largely cheaper goods. So if Siemens wants to really capture emerging markets, it has to price accordingly.

Siemens’ Emerging Markets Strategy

Siemens executives estimate that a market like India is 70% “base level.”

The company recognizes that the high-end, expensive technology it sells elsewhere won’t do very well in the developing world. So it plans to meet them right where they are.

Its bold strategy will no doubt have its critics, especially on Wall Street. But those fat cats should open their eyes, because Siemens’ business plan makes sense.

In countries like India, engineering skills can cost a tenth of what they do in Germany. And that kind of difference is a sure way to reduce the costs of the actual products.

By developing locally, it also avoids heavy duties and shipping fees. Still, Siemens argues that cost cutting isn’t its main focus; growth is.

It believes it has a small window to act before domestic companies begin taking over. Sunil Mathur, chief financial officer of Siemens Limited, agrees: “There are a lot of Indian companies competing with us in [their] home market. If we don’t get to these markets, other companies will.”

And it sees similar competition in the Middle East and Africa.

Siemens hopes that eventually, China and India will evolve into export bases. It can then use them to supply countries with similar stories, including Indonesia, Vietnam and Egypt.

With goals like these, don’t be surprised when this company goes far.

Good investing,

Tony Daltorio

by Martin Denholm, Senior Editor
Wednesday, July 28, 2010

When you’re traveling, what’s your preference when it comes to accommodation?

After a lengthy, recession-induced downturn, the latest industry figures suggest that more Americans are choosing hotels.

Bjorn Hanson, dean of the Preston Robert Tisch Center for Hospitality, Tourism and Sports Management at New York University, projects that average hotel occupancy during the busy June-August period will rise to 63.5%. That compares with 60% in June-August 2009. Quoted in the New York Times, he describes that increase as “dramatic,” stating that, “Typically, the movement would be 1%.“

Breaking it down further, Hanson estimates that business travelers will fill 6% to 7% more hotel rooms this summer than last year, while tourist occupancy will rise by 5% to 6%.

Increased hotel occupancy is just one barometer of the economic recovery. It seems the pickup in demand stems from both an economic upturn, as well as business travel driving the hotel industry’s rebound.

The Hotel Industry’s Double Play: Rising Occupancy and Room Rates

As Smith Travel Research confirms: “The more expensive hotels are recovering the fastest – and will continue to do so as business travelers come back.” Indeed, Marriott International (NYSE: MAR) says its Ritz-Carlton brand enjoyed a 15.9% jump in revenue per available room during the second quarter.

And while Smith Travel says occupancy rates are currently running at 55.8%, compared with the 63.1% peak in November 2007, room rates are rising, which is helping fuel the recovery. It estimates that the average room rate for business travelers this summer will be about 1% to 2% more than last year, while tourism/leisure guests will pay around 3% to 4% more.

And if you want to grab a last-minute room in New York, expect to pay 10% to 15% more than last summer. The firm predicts similar increases in Los Angeles, Boston, Washington, San Francisco and Miami later this year.

With demand increasing and room rates rising with it, hotels can now afford to be bolder with their pricing during peak periods, so you may not see as many great deals as before. One site I like is Travelzoo (Nasdaq: TZOO). The company sends a free weekly e-mail with its “Top 20″ travel deals (airfares, hotels, car rental, etc.) from across the sector each week. Some of them are excellent, so they typically don’t last long, though.

I’ll continue to monitor the hotel industry’s upturn throughout the rest of the summer and beyond, as it’s a key barometer of both business and leisure travel – and the strength of the wider U.S. economy.

Best regards,

Martin Denholm

by Tony D’Altorio, Investment U Research
Wednesday, July 28, 2010

The Deepwater Horizon disaster serves as a tragic reminder of oil’s shortcomings.

In particular, it shows how the industry is trying to operate in very tricky conditions when it comes to deep water drilling. As oil executives say, at such depths, the seabed is as remote as the moon. And it has the added threat of much higher pressures.

Yet for all the hazards, production won’t move back towards shore anytime soon.

In the 1970s, oil majors like BP ADR (NYSE: BP) and ExxonMobil (NYSE: XOM) were thrown out of the Middle East. That meant that government entities such as Saudi Aramco and the National Iranian Oil Company has control of 77% of global oil reserves.

That forced private companies to drill in ever-tougher conditions, such as underwater.

The U.S.’s intake of oil has also played its part. With only 2% of the world’s reserves, it consumes over a fifth of its annual oil output…

In other words, BP drilled deep into the Gulf of Mexico because the U.S. wanted it to. Or as Steve Robertson, director of oil consultancy firm Douglas-Westwood, said:

“The oil majors need deep water developments and so does the U.S. They have nowhere else to go.”

The Increasing Importance of Deep Water Drilling

Deep water oil represents a small fraction of global supplies. Yet it gains popularity with every barrel of oil pulled from onshore and shallow water fields.

Lawrence Eagles, JPMorgan’s head of commodity research, says, “A large chunk of the future oil that people have been expecting comes from deep water.” That includes the “golden triangle” of offshore Brazil, Africa’s west coast and the Gulf of Mexico.

The industry expects to spend $167 billion on deep water development from 2010-2014. Douglas-Westwood reports that’s up 37% from the previous five-year period.

Much of that will go towards new technologies. Thanks to previous advances, the industry has been able to access oil it could only dream about five years ago, such as the “ultra-deep” water of 5,000 feet or more it has taken to lately.

But oil companies might have pushed their machinery and know-how too far too fast.

A 2004 report for the U.S. government’s Minerals Management Service highlighted the risk that the rams on the blowout preventer might not work properly in very deep water… exactly what happened with the Deepwater Horizon.

It could have been human error. But it may have simply been that the industry was drilling where it had no business drilling yet.

Deep Water Drilling Costs

Deep water drilling also costs a spectacular amount.

The Deepwater Horizon alone was valued at $560 million. And its Macondo well costs about $100 million, which is typical for the industry.

Yet all of that money was spent to find an oil field expected to hold only a few tens of millions of barrels worth.

The International Energy Agency estimated that deep water oil cost $35 – $65 to extract. And with tighter regulations sure to follow the recent disaster, it should rise even further.

What it comes down to it though, oil companies have very little choice. They can’t have a piece of the more easily accessible fields and they do still profit from deep water drilling.

So the question becomes: How high do oil prices have to rise in order to support safer deep water drilling?

Oil at All Costs?

Unfortunately, many more questions exist on the subject of deep water drilling. And as serious as the Deepwater Horizon accident was, it could have been worse.

What if the explosions had happened on BP’s Thunder Horse production platform? The size of a football stadium, it carries nearly 300 people on board and pumps out 250,000 barrels of oil a day.

Even BP admits that, “Everything about Thunder Horse is at or beyond the limits of the offshore industry’s experience.” That used to sound amazing; now it just seems scary.

Maybe it should have always sounded that way though. Drilling the deep for oil is not easy. And accidents there are even harder to correct.

Many industry insiders have likened BP’s efforts to stopping the broken well from gushing to the Apollo 13 rescue. And just like NASA, BP does have a control center in Houston with engineers staring at screens trying to work with remote craft.

Also similarly, the leaders in charge need to put their differences aside and work together. They need to give the American people the facts about energy and push for conservation.

Of course, the odds of that happening are unfortunately astronomical.

Good investing,

Tony Daltorio

by Marc Lichtenfeld, Healthcare Expert
Wednesday, July 28, 2010: Issue #1311

In the cellphone world, it’s all about “apps.”

In the oil and natural gas industries, it’s all about supplies.

And in the healthcare sector, it’s all about pills. Lots and lots of pills.

Blue pills, purple pills, sleeping pills, anti-depressants. They’re everywhere. It’s big business for Big Pharma and the companies are very good at marketing their products.

Comedian Chris Rock referred to this trend, noting that drug companies keep naming symptoms until they find one that you have:

Are you sad, are you lonely, are you hot, are you cold? You gotta take this pill! And they don’t even tell you what the pill does… they just keep naming symptoms. I saw a commercial the other day that said, “Do you go to bed at night and wake up in the morning?” I got that! I’m sick, I need that pill!”

America’s big pharmaceutical companies push their drugs on the public harder than any street corner dealer – and it’s proven to be a highly effective and lucrative strategy. In 2009, for example:

• Merck (NYSE: MRK) earned $12.9 billion on sales of $27.4 billion.
• Pfizer (NYSE: PFE) earned $8.6 billion on revenue of $50 billion.
• Novartis (NYSE: NVS) earned $10.3 billion on sales of $44.3 billion.

Good news for them. But what about investors?

The Clock is Ticking

There’s a huge problem looming for these mammoth pharmaceutical companies.

Starting as soon as next year, many blockbuster drugs will lose their patent exclusivity, which will open the floodgates to generic drug competition.

Pfizer’s massive Lipitor drug is one of them. Bad news, considering it generated $11 billion in sales last year. Another $3 billion worth of drugs will also go generic next year.

And it gets worse in 2012. Over $30 billion worth of brand-name drugs will face cheaper competition. That includes Merck’s Singulair, Pfizer’s Viagra and Forrest Labs’ (NYSE: FRX) Lexapro.

So what are the Big Pharma firms doing about it?

Biotechs on the Buyout Block

The executives at these drug giants aren’t sitting around, sipping Cognac and reminiscing about the glory days. They’re busy building up their drug pipelines by partnering with other companies. In some cases, they’re acquiring them outright.

And not all the objects of their affection are tiny biotechs that require a roll of the dice and a large tolerance for risk.

Already, we’ve seen Roche buy major biotech firm, Genentech. And another big biotech, Genzyme (Nasdaq: GENZ), is reportedly a target of Sanofi-Aventis (NYSE: SNY). GlaxoSmithKline (NYSE: GSK) and Johnson & Johnson (NYSE: JNJ) are also being mentioned as possible suitors of Genzyme.

Here are a few others that could be acquired in the next 12 to 18 months.

• Bristol Myers Squibb (NYSE: BMY)

Over the past few years, this large cap drug company has been repositioning itself as a biopharma organization.

While it loses its patent exclusivity on Plavix next year, Bristol-Myers has a deep drug pipeline. Within it are some very promising cancer drugs that the firm acquired when it bought Medarex last year.

While Bristol-Myers boasts a market cap of over $42 billion, it’s still small enough and attractive enough for one of the drug giants to acquire it. Right now, it’s trading at a reasonable valuation and offers a dividend yield of over 5%.

• Biogen (Nasdaq: BIIB): With a solid drug pipeline and a blockbuster multiple sclerosis drug in Tysabri, which doesn’t face generic competition until 2015, Biogen could be an attractive takeover target. Activist shareholder Carl Icahn is pushing for the company to be sold.
• Celgene (Nasdaq: CELG): Some of the healthcare media are speculating that Celgene could be bought out, too. Many large cap pharmaceutical companies would love Celgene’s oncology portfolio, its $2.6 billion in annual sales and earnings per share of over $2. However, the stock is already trading at takeover-like valuation. It’s hard to imagine a pharmaceutical company CEO justifying paying a premium over Celgene’s current price.
• BioMarin (Nasdaq: BMRN): If the companies I mentioned a moment ago are interested in acquiring Genzyme for its rare disease drugs, they should consider BioMarin in this area, too. BioMarin specializes in rare diseases, whose drugs command premium pricing. Additionally, BioMarin has already proven it can bring drugs to market, as it’s expected to generate nearly $400 million in sales this year and earn $0.10 per share.

Bottom Line: Many pharmaceutical and biotech stocks are cheap right now. And with demand for medicine only increasing and the potential for mergers and acquisitions in the sector heating up, now is a good time to take a look at the group.

Hoping your long go up and your shorts go down,

Marc Lichtenfeld

Editor’s Note: The Centers for Disease Control labels it “the next evolution in medical treatments.”

The U.S. Health Department says, “virtually any disease may be potentially cured.” It backs up this statement by stating that this groundbreaking new remedy could trigger a cash explosion of almost $500 billion.

And the cause of such optimism? “Bio Seeds” – one company’s revolutionary technology that produces human cells in a lab and could cure eight of the world’s most deadly diseases, including cancer, heart disease and diabetes.

What’s more, this company is about to legally sidestep the FDA and fast-track the breakthrough in 64 countries within the next six weeks. For your chance to claim the incredible gains that could come from this, the time to jump on board is now. Get all the details on this remarkable story here.

by Alexander Moschina, Investment U Research
Tuesday, July 27, 2010

Everyone loves a good surprise. Especially investors.

But when a company like Cytec Industries Inc. (NYSE: CYT) surprises on earnings as it did July 20, shareholders skip astonishment and go straight to ecstasy.

The Woodland Park, NJ-based company reported a $61.8 million net income for its second quarter, compared to a $24.8 million loss during the year-ago quarter. That was a record high for the specialty chemicals leader.

So how did the firm pull off such a feat – swinging from a loss to a profit – so quickly?

Here’s how it happened…

The Ingredients of a Record-Breaking Quarter

There’s one simple reason the chemicals giant is on a tear: The world needs its products now more than ever. In North America alone there was a 40% rise in sales.

Impressively, the company has seen a greater need for its products across ALL divisions:

• Cytec’s Building Block Chemicals sales exploded 89%. Greater demand for building block chemicals (particularly acrylonitrile and melamine) drove product value up 75%.
• The company’s Coating Resins sales got a 25% boost, jolting profits up to $369 million (a 27% increase over 2009’s second quarter).
• Additive Technologies sales increased 5% to $66 million due to a growing demand across the global chemical market.

And Cytec projects an earnings increase for all its products. Early predictions put 2010 Building Block Chemicals’ earnings between $7 and $10 million. But now, after the recent quarter, the company expects profits between $25 and $30 million.

Projected earnings for the Engineered Materials department went from $650 – $680 million to $730-$760 million.

And the story is the same across the board.

On average, analysts expected Cytec to yield a profit of $2.52 per share in 2010. Bold, considering the company itself only projected a range between $1.90 and $2.40.

But then Cytec released its quarterly earnings report – and included an updated earnings projection of $3.20-$3.50 per share. That’s based on a 2010 revenue projection of $3.2-$3.4 billion, up from an earlier estimate of $2.7-$3 billion.

As Cytec Drives Up Its Share Price…

Cytec’s unexpected earnings increase drove its stock up 17.5%, putting it near the top of the week’s gainers. And clearly, both the company and analysts across the board expect sales and earnings growth to continue at least through the end of the year.

With Cytec shares up nearly $10 after just a few days, it’s not hard to see why some analysts have slapped a strong buy recommendation on the stock. And if the company springs an earnings surprise again, we’ll see shares soar even higher.

Over the coming months, as industry demands increase, there will be a lot of stories like this. The difference here is that few others will likely produce such extreme gains.

Cytec is a leader in an industry that will soon enjoy a flood of customers that are ready to spend, so these quarterly jumps could continue for some time.

Good investing,

Alexander Moschina

by Karim Rahemtulla, Options Expert
Tuesday, July 27, 2010: Issue #1310

It’s time to take a risk.

But not like 99% of the other suckers in the market, who spy an opportunity and, with little regard for their own financial well-being, jump in with both feet.

No… we’re going to take much better approach to risk.

If you remember from my article last week, I outlined the pitfalls of trying to profit from declining stocks by selling them short.

It’s a risky strategy, with two main problems…

• Liquidity: When you want to short shares, you have to borrow them from your broker. This isn’t usually a problem when you want to short larger stocks. But it can be trickier when smaller stocks are involved.
• Unlimited Losses: Need I say more here? If the share price goes against you – i.e. the stock rises – your risk is theoretically unlimited. Because you don’t own the shares in the first place (you’re just borrowing them), you eventually need to replace them. And if you’re paying more to do that than the price at which you borrowed them, you’re sitting on a major losing trade.

However, you do need to be able to “go short” without worrying about liquidity or being totally exposed to unlimited losses, which you can do with an options strategy known as a bear spread, but first let me give you a bit of background…

A Balanced Portfolio: The Short and Sweet of It

Because the market doesn’t always rise, part of a balanced portfolio should include being able to successfully capture gains when stocks fall. When a downward trend develops, you don’t want to get caught on the sidelines because you’re either too scared or because you don’t know how to do it.

For example, let’s say you think that the financial sector is going to collapse again, you have three choices:

1. Shorting: In this case, you’d short the Financial Select Sector SPDR (NYSE: XLF) – the exchange-traded fund (ETF) that holds a basket of major financial stocks. The problem is that your risk is unlimited. I mean, if I knew for sure that a stock was going to collapse, I wouldn’t be sitting on a plane writing this article while en route to speak at a conference. I’d be long retired. Here are better ways of doing that without resorting to the risky shorting strategy…
2. Buy Short-Term Put Options: Again, you could use XLF here. They’ll cost you less upfront, but you’re not saying that you can predict the future when you buy a short-term option. Risk is limited.
3. Buy Long-Term Put Options: Why not give yourself the luxury of time by using LEAPS instead of short-term options? If you buy a LEAP put option on XLF, you put time on your side (one to two years, specifically) and you can make an educated guess based on information at hand. Risk is limited to the money you invest.

There’s another great way to grab downside gains, too…

The Breakdown of a LEAP Bear Spread

Again, using LEAP options, the bear spread strategy allows you to reduce your initial outlay. The trade off is that it also caps your return.

This is a type of options strategy that you use when…

1. You think a stock is headed lower, but not necessarily going out of business.
2. When you’re trying to short a volatile stock, since options premiums are much higher on volatile stocks.

Here’s how it works:

• Stock XYZ is trading at $40, but you think it’s headed for $25.
• You can buy $40 put options for around $5, with a one-year expiration.
• In order to control 1,000 shares, you buy 10 contracts (there are 100 underlying shares in each options contract). So your total cost is $5,000 ($5 multiplied by 100, then multiplied by 10 = $5,000).
• Risk: Limited to $5,000.
• Profit: If XYZ goes to $25, you’ll make a $10,000 profit:

  $40 minus $25 minus $5 (the cost of the option) multiplied by 1,000 (the number of shares you’re controlling) = $10,000.

Pretty nice. But it could be even better.

The $12,000 Short Spread

Instead of risking $5,000 to make $10,000, you could risk $3,000 to make $12,000. Here’s how…

• Buy the same $40 strike option for $5.
• But against that option you sell a $25 put option, which is trading for $2. Your cost is $3 ($5 minus $2). For the same 10 contracts as before, that would cost you $3,000.
• Risk: $3,000
• Profit: If the stock falls to $25, the upside is $12 (or $12,000):

  $15 (the spread between $40 and $25) minus your $3 cost for the spread, multiplied by 1,000 (the number of shares you’re controlling) = $12,000.

You accomplish three things here…

1. Pull almost half your investment off the table.
2. Increase your potential return.
3. Lower your risk to the amount you spent on the spread – not a penny more.

The catch is that if the shares move lower than $25, you’re still only entitled to the spread and no more.

So if you want to capture gains from a stock’s downside, think twice before going down the “short road.” Instead, use put options to accomplish the same thing, but with less cost and less risk.

But not just the put options that everyone else uses. Use LEAPS, so you can control the amount of cash at risk. It sure beats the unappetizing thought of sitting on unlimited risk and getting a call from your broker, asking you to send more cash because the underlying shares went to the moon.

Good investing,

Karim Rahemtulla

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