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Profit Opportunity: A Diamond in a Mud Pit

 April 04, 2008 10:45 AM

This is a very scary period of time for investors. Just when they think they have the market figured out, it turns out to be a head fake and the market changes track.

If not careful, this market could become more than scary. It could be come downright dangerous. For many investors, it already has. The losses are piling up.

Across the nation, investors are running for cover. Nearly all economic barometers show a recession on the horizon. It is time to head to your storm shelters. When the markets are destined for a major slowdown, you need to take action.

Unfortunately, the typical safe shelters no longer offer protection. They are filled with so many other folks running from the storm, they are weak and overfilled. Gold is a perfect example. Prices soared above the $1000 mark as investors fled the equities market seeking safety. But now prices have dropped and are showing signs of further collapse.

[Related -Stock Upgrades And Downgrades: ALU, FB, HPQ, MDCO, WMT, QCOR, ZNGA]

My advice for investors is not to seek shelter, but remain vigilant in the face of the storm. Remain in the equities market. If you are diligent and pay attention, you can come out with some very hefty profits when the headwinds subside.

The trick is to get out of all the high-flying growth stocks and head towards value. Small, speculative stocks are not going to go gangbusters overnight, or even over the course of a year, in this market. The strong companies that offer the products we need every day – even during a recession – are your lone shot at success.

Just bread and water, please

[Related -The Market's Highest-Yielding Pharma Stocks]

As this economic cycle shakes itself out, Americans are going to drop their nonessentials. They will not buy the new iPod. They will not go out to eat four nights a week. And they certainly won't splurge on a new house. But they will still get sick. They will still have babies. They will still buy groceries. And they will still put shirts on their back.

Invest in the nation's essential goods and services and your money will be protected against inflation and will still work towards making you rich.

There are dozens of companies out there that meet this criteria, but only one of them offers the kind of profit opportunity that makes my balding head break out in sweat.

When I first got into this business, I studied hundreds of drug manufacturers and the innovation and techniques they used to bring new drugs to the market. I quickly learned it takes just a few simple clues to uncover a nearly guaranteed profit opportunity.

The first essential is that the company has a strong pipeline of potential drugs in Phase II and Phase III FDA trials. A company can have hundreds of drugs in the first phases, but unless they have a handful actually making the grade, they are doomed for failure. If a company has at least two good drugs in Phase III, you know it is the real deal.

Next, insiders have to be buying.

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