If you’ve been joining our twice-a-week get-togethers for some time now, you’ve learned that I’m a focused and disciplined investor – and know that I ignore fads and refuse to chase “hot tips.”
I’m also very price sensitive: Although I’m hunting for stocks capable of delivering “moon-shot” price gains, I won’t pay a penny more than my charts or “black box” system tells me they’re worth.
To enforce that discipline – and to help pass along to you all that I’ve learned through the years – I developed the set of five rules that we talk about here each week.
But one of my best tools is also one of my simplest. It’s a roster of companies whose stocks I’d someday like to own, but that don’t currently meet my stringent criteria.
I call it my “Watch List.”
And through the years, this simple shopping list for stocks has ended up delivering some of my all-time-biggest winners.
And wait ’til you see my next winner – the “Watch List” stock with stratospheric profit potential that my system just upgraded to “Strong Buy.”
When Fear Breeds Profits
The sell-off that resulted from the credit crisis of 2008-2009 was the biggest bear market since the Great Depression.
Five years later, however, U.S. stocks are within 5% of the all-time high achieved in mid-September. There are a lot of great companies whose shares I would like to own, but my stringent guidelines signal that these stocks are still overvalued.
So if I can’t recommend the stocks, I do the next best thing: I put them on my Watch List.
And I wait – patiently, and for however long it takes.
I will wait months – even years, at times – to get the right stock at that perfect price.
This discipline can create some fascinating situations: Very often, in fact, I’ll see “the crowd” running for the exits, jostling and shoving one another in a panic-driven effort to get as far as possible from a stock that I can see is actually trading at a once-in-a-lifetime bargain price level.
So while those other investors are sobbing inconsolably about the loss they’ve taken on this stock, I’m inwardly thrilled (and sometimes outwardly grinning) at the “moonshot” magnitude profit potential that has literally fallen into my hands.
What this means is that I’m able to buy the stock at the optimum “entry point” – just ahead of the next big move higher.
And I believe that’s just what we have with the Watch List stock I want to tell you about today.
The company is Santarus Inc. (NasdaqGS: SNTS), a San Diego-based biopharmaceutical company whose shares could easily double in just two short years.
Santarus has a unique niche: It markets drugs that address the needs of patients being treated by physician “specialists.” In other words, these drugs aren’t run-of-the mill antibiotics – they are designed to treat such serious maladies as diabetes, high cholesterol, or autoimmune problems.
This is a stock that’s been on a roll, zooming all the way to a record high of $28.10 a share in early August.
That’s when the stock stumbled.
And it’s also when I added it to my Watch List.
Shares of Santarus have really hit the skids in recent weeks: On Monday, they closed at $21.88, down 22% from that record high.
When a market index suffers through a correction of that magnitude – 20% or more – it’s classified as an official “bear market.” Bear-market sell-offs are often overdone, setting up a nice rebound for investors who are able to identify the correct opportunity – and deploy the courage to act.
And my analysis of Santarus shows me that it’s time to move this stock off the Watch List – and onto the one for Strong Buy profit plays.
To see why that’s so, we need to take a closer look at the stock.
The “Super-Size Me” Economy
If you want one reason that Santarus has been able to generate such consistent profit growth, it’s this: The company has focused a lot of its energy on America’s No. 1 growth industry – obesity.
Some docs will tell you that U.S. obesity isn’t just a problem – it’s an outright epidemic.
And they may be right.
Nearly 26 million people in the United States have diabetes.
That’s more than 8% of the whole country.
The majority suffer from Type 2 diabetes, which is very often associated with being overweight later in life. Obese patients usually have high blood sugar, a condition with lots of complications.
Santarus has two drugs that help these patients improve their blood sugar levels, improving their health as a result.
GLUMETZA helps keep the levels under control and CYCLOSET can lower them without the patient needing to increase insulin levels.
Another drug – FENOGLIDE – targets high-cholesterol levels, another condition related to America’s growing waistlines. Then there’s ZEGERID, which reduces heartburn and other gastric problems.
Earlier this year, Santarus introduced a fifth drug with a big potential upside.
The drug – known as UCERIS is an extended release tablet for patients suffering from ulcerative colitis, an inflammatory bowel disease.
The drug had recent quarterly sales of just $16.2 million. But Santarus is projecting sales will increase some 18-fold to roughly $300 million in the next few years.
A drug with revenue of that magnitude approaches “blockbuster” status – the Holy Grail for any drugmaker.
Santarus’ current revenue needs are well covered – as are those in the intermediate term.
And the company isn’t standing pat – for it has three additional drugs in its pipeline, namely:
- RUCONEST, designed to treat patients with a rare genetic disorder that causes swelling of the body. Santarus submitted the drug to the U.S. Food and Drug Administration (FDA) last April and expects to get approval in the next few months.
- Rifamycin SV MMX, which treats travelers’ diarrhea, an embarrassing, inconvenient and sometimes dangerous problem affecting globetrotting business folks and tourists alike. The drug is in Phase III clinical testing.
- SAN-300, a drug that targets multiple inflammatory and autoimmune diseases. With Phase I completed, the drug should enter Phase II trials by the end of this year
Five Reasons the Stock Will Double
With a market cap of $1.5 billion, Santarus trades at 15 times forward earnings, which is in line with the Standard & Poor’s 500 Index. That’s not pricey for a stock that my analysis says will double in value from the current level of roughly $22.
Let me show you why by running it through my “five filters” that comprise my tech-investing system.
- Rule No.1 – Great Companies Have Great Operations: We look for well-run firms. CEO Gerald T. Proehl has nearly 30 years’ experience in the field. He joined Santarus in 1999 after spending 14 years in management roles for global drugmaker Hoechst Marion Roussel Inc. He took Santarus public in 2004. The firm has a 36% profit margin and an 84% return on equity (ROE).
- Rule No. 2 – Separate the Signal from the Noise: If you really want to create wealth, you have to ignore the market’s many distractions and find companies with rock-solid fundamentals. The stock corrected in August on profit-taking because of an analyst downgrade that followed stellar earnings. But the company is making all the right moves for the stock to reenter its uptrend.
- Rule No. 3 – Ride the Unstoppable Trends: We look for stocks in red-hot sectors because they offer the best chance for life-changing gains. That’s clearly true in biotech. Because of a steady stream of new drugs approved for sale, the industry has been on fire over the last two years. And the long term looks great as aging Baby Boomers seek to maintain a high quality of life – and benefit from drugs that combat diseases as diverse as cancer, diabetes and arthritis.
- Rule No. 4 – Focus on Growth: As a rule, companies with the highest growth rates will give you the highest possible stock returns. In the most recent quarter, Santarus grew sales by nearly 90% and operating income by 392%.
- Rule No. 5 – Target Companies That Can Double Your Money: I believe Santarus will grow earnings per share (EPS) by more than 60% next year from this year’s estimated $1.26. I’m projecting earnings of about $2.90 a share for 2015. If the stock just continues to trade at the current Price/Earnings (P/E) multiple of roughly 16, the share price could hit $46 – for a gain of as much as 104%.
This stock meets all five of our double-your-money criteria. And we believe that the shares have that kind of potential. Given the recent sell-off, expect the shares to trade sideways for a time – making this a stock that’s in search of a catalyst.
That catalyst could come as soon as Nov. 4, when the company is scheduled to report its third-quarter earnings.
But once the stock gets ignited anew, we expect it to head for new highs. The performance will really accelerate once the shares trade consistently above their recently closing high of $27.26.
We’ll keep you posted.
[Editor’s Note: This is the first of several new stock recommendations that I’ve promised to share. In the meantime, I want to continue to hear from you all. In the meantime, let me ask you a couple of questions. First, what are your biggest concerns right now? For the near term? For the long term? Second, what technology trends that we’ve talked about here in recent months continue to hold your interest? I’d really like to hear from you on either or both of these points. And feel free to continue to let me know what’s on your mind below. ]