There are numerous ways people try to find winning stock ideas.
Perhaps a neighbor works at a strong company, a co-worker gives you a hot tip, or your broker stumbles upon some great research.
Success with any of these may be possible, but they're more likely to give you heartache and cause your wallet to be lighter. Instead of these methods, why not try using the million-dollar research the big firms are implementing to find your next stock idea? In this article we'll show you how.
The Piggyback Strategy
One strategy that has found winners in the past is what I call the "Piggyback Strategy" - similar to coattail investing. Basically, investors can use research from the big-name firms to find stock ideas in hot sectors. An example would be the niche diagnostics sector within the healthcare industry. There is not a widely recognized index that tracks the sector, however the HealthShares Diagnostic ETF (NYSE:HHD) is composed of a basket of diagnostic companies. Since HHD began trading in January 2007, the ETF is up over 25% in its first eight months.
How would the typical investor begin searching for diagnostic companies for their portfolio? The answer is the piggyback strategy. By analyzing the stocks that make up the ETF, investors are able to identify diagnostic stocks that have been fueling the move in the sector. in other words, breakdown the HHD and look for some big winners. (For more insight, read An Inside Look At ETF Construction.)
HHD is composed of only 22 stocks, therefore it is fairly easy to determine the leaders based on past performance.
Year-to-date, the two best performers gained over 90%! There is one little problem, however. Both stocks rallied on takeovers and are no longer investment options. That said, when there is M&A activity in a niche sector, it suggests a demand for the business and typically higher prices.
Meridian Biosciences (Nasdaq:VIVO)
The top (purchasable) performer on the list also happens to be the No.1 holding of HHD, which makes up 10% of the total allocation. Meridian Biosciences makes diagnostic test kits that analyze anything from blood to urine to detect a variety of diseases. The kits are used in hospitals, labs, and doctors' offices, and the stock is up substantially year-to-date.
Cytyc Corp (Nasdaq:CYTC)
The next stock, which is up 63% year-to-date, is another takeover winner. Cytyc has agreed to be purchased by Hologic (Nasdaq:HOLX), the No.5 holding in HHD. The two companies concentrate on women's health with systems for mammograms and detecting cervical cancer. The combined company will be the clear leader in women's diagnostic testing.
Myriad Genetics (Nasdaq:MYGN)
The fifth-best performer and No.2 holding of HHD is Myriad Genetics. The stock is a combination diagnostic and drug company, with the drug division treating some of the diseases it detects. Myriad Genetics makes molecular tests that are used to determine a patient's risk for certain cancers. The company is also developing a number of drugs for cancer. Its leading drug candidate, Flurizan, is going through the trials as a treatment for Alzheimer's disease.
The No.3 holding and seventh-best performer of the year, Quidel, is a maker of point-of-care rapid diagnostic products. The company gets 80% of its sales from tests related to pregnancy, strep throat and influenza. The stock had a major breakout in 2007 when it hit its best price level since 1986.
Did Your Portfolio Pass the Test?
If you fail to have any diagnostic stocks in your portfolio, you are not alone. Most of the stocks mentioned above are not household names, but the big winners rarely are. Investors can either select one or two diagnostic companies with which to gain exposure to the sector, or take the more conservative route by buying the entire sector with the HHD.
Either way, it is imperative to look at diagnostic stocks for your portfolio to pass the test.
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