I’m not someone who needs a pat on the back to feel good about my work.. However, even I’ll admit it’s nice to have my judgment validated – especially when it comes from a well-respected source like Barron’s.

That’s what happened last Saturday when the 88-year publication published a story about the small-cap healthcare stock Electro-Optical Sciences (Nasdaq: MELA). As a result, shares soared 19% on Monday.

What’s more, the author, Neil Martin, expects the stock to tack on an additional 50%, as the company’s melanoma detection device is expected to gain FDA approval and become a big hit with physicians and patients.

I couldn’t agree more. In fact, I came to the same conclusion about 18 months ago when I first recommended the stock to subscribers of my small-cap healthcare service Access. Most subscribers got in at $5.50 or below. Some even reported buying in the $3 range.

Today, the stock is trading around $9.50.

Question is: How do you find these small-cap winners – particularly in the minefield-laden healthcare and biotech sectors? Here’s the tried-and-tested method I use…

Unearthing Small-Cap Healthcare Stocks Isn’t Easy…

Unearthing mega winning small-cap healthcare stocks isn’t easy. It’s certainly not a case of just looking at a chart or some magical signal that tells me it’s time to get in. For me, it’s a multi-level process that is fairly time-intensive.

You see, I learned how to analyze stocks from two of the greatest contrarian analysts on Wall Street. Guys who demanded the best and didn’t accept anything less.

First, I had to pass rigorous exams. Then it was trial by fire. I had to sell my idea to my boss before I was even allowed to begin conducting formal research on company time.

If it wasn’t sufficiently contrarian or well below Wall Street’s radar, he’d shoot me down.

And believe me, I was shot down more times than a drunken frat boy in a room full of supermodels.

But the rejection served me well. It forced me to create a stock research methodology that would not only satisfy my boss, but also prove profitable for folks who took my advice. It’s the same process I use today to pick stocks for Access and The Xcelerated Profits Report.

It’s called the F.I.R.S.T. system. Here’s how it works…

Breaking Down the 5-Step Process of the F.I.R.S.T. System

F.I.R.S.T. is an acronym for a five-step process that ensures I cover absolutely everything before I get a recommendation out to the public.

• Financials: This is the first step. I check everything from how much cash a company has at the moment, to how much it will need in order to fund its pipeline products and operations. Before a company is even worthy of making it to the next steps, it has to pass my financial model, which estimates revenue, earnings, market size, market share, margins and a host of other variables to determine whether the potential growth will be good enough.
• Interviews: If the numbers tell me it’s a good opportunity, I move onto the interview phase. But I don’t just talk to the company’s CEO and CFO, I talk to doctors who are using the product, plus others who aren’t. I get on the phone with specialists in the field, independent experts, the warehouse foreman – anyone who can give me on-the-ground insight into the company’s performance and prospects.
• Research: If I still like what I hear, then I dig into the hardcore step – roll up your sleeves, burn the midnight oil research. I read scientific papers, journals, news articles and even blogs to establish whether the company’s products will be successful.
• Safety: Both from an investment and human interest standpoint, this is the most important step. Drug/device safety is critical. Even when drugs have successfully treated diseases, I’ve seen the FDA reject them because they couldn’t be proved safe enough. The FDA is very conservative right now and we don’t want to be in any positions where there is even a question of safety, no matter how well the drug works.
• Timing: From an investment perspective, once I know that I like a company, all that remains is a reason to invest now. I search for the catalysts that will move the stock in the next six to 12 months. At the moment, I’ve got plenty of companies on the backburner because even though I like them, investing in the shares now would be dead money for another year.

A Deeply Contrarian Investing Approach Is Critical

As I noted above, my investing experience is rooted in a deeply contrarian approach. Finding stocks that you won’t hear about anywhere else is a critical aspect of my stockpicking methodology.

For example, virtually no one was talking about MELA last year. I’ve recommended several other stocks that are also practically unknown to Wall Street. This includes a swine flu play, a bioterror therapeutic stock and two little device companies that are poised to take market share from the big boys – which should result in significant earnings growth or a buyout (or perhaps both).

When it comes to investing in small-cap stocks, conducting thorough research becomes even more critical. You really need to roll up your sleeves and put in the work because in most cases, you won’t read about them in Barron’s, see them on CNBC, or hear about them from an analyst until much later in the company’s development. And by the time everyone else notices them, we’re already sitting on nice gains.

Good investing,

Marc Lichtenfeld

Source: How to Unearth Explosive Small-Cap HealthCare Stocks

The same holds true for investing. Many investors who got beat up in the last “game” are still sitting on the sidelines, nursing their wounds – afraid to play.

But it’s clear – as evidenced in the markets recent 30% run-up that the best players are already back in the game. So what are they investing in?

Larger-cap healthcare stocks are often overlooked in any rally, as improving economic conditions – or the perception of them – often favor smaller cap stocks.

How do you pick a good healthcare company to invest in?

There’s no one better at investing in the healthcare sector than Venrock Associates, originally established as the venture investment firm of the Rockefeller family.

Venrock has been in the venture funding business for over 8 decades, investing over $2.3 billion in 430 companies with household names like Apple, Intel, Millennium Pharmaceuticals, and countless others.

The company pioneered healthcare venture funding way back in the 1960’s, and its historical portfolio contains five of the largest biotech firms ever created.

The average retail investor can’t invest with Venrock, but you can invest like them.

And a small-cap healthcare company you might want to consider is RehabCare Group, Inc. (NYSE: RHB). RehabCare is a provider of rehabilitation program management services in more than 1,200 hospitals nursing homes, outpatient care, and other long-term care facilities.

The company also owns and operates six rehabilitation hospitals and five long-term acute care hospitals.

Since the beginning of March, shares are up nearly 64%. And for good reason: RehabCare’s services are increasingly in demand by healthcare providers.

You see, rehabilitation is one of those things that few patients want to go through. It’s often uncomfortable and sometimes accompanied by a fair amount of pain. But the end result is quicker patient recovery, and less time spent in more expensive care facilities.

RehabCare recently announced quarterly results for the period ending March 31st, and results were outstanding. The company nearly doubled profits from the same quarter of the previous year, with revenue growth across all divisions.

Company President and CEO, John H. Short, Ph.D, commented: “We were very pleased by a strong quarter of consolidated revenue and earnings growth.”

Short indicated the company was reaffirming its fiscal 2009 guidance on all its divisions for the remainder of the year, on continued expectations of strong revenue and earnings in future quarters.

In light of the current financial environment, the company is taking positive steps to strengthen its balance sheet. Outstanding debt has been cut by two-thirds in the last year, and RehabCare continues to build a strong cash position.

Bottom-line, is that RehabCare has plenty of room to run for the rest of 2009, and likely beyond. Since this is a small cap stock, investors shouldn’t chase it. Look for a moderate It’s time to get off the bench and get back in the game…

RehabCare Group, Inc. (NYSE: RHB): Stock of the Day

Take a look at its chart below…

By making new lows, XLV should get down to its next support level at $20.72, possibly as low as $19.87 before a sustainable rally can get underway.

A rally back up to the trendline – currently around $24 – before the $20.72 area is reached, is probably a good selling opportunity.

Source: Ticker Of The Week: Healthcare SPDR (XLV)

This from Taipan Daily:

“$700 billion here… $700 billion there… after a while, you are talking about real money!”

Yeah, I filched the line. Supposedly it was originally uttered by famed Illinois Senator Everett Dirksen. Except it was supposed to be about a mere couple billion dollars. And no one’s really sure if he actually said it.

Here’s something I know he said, as I filched it from the Congressional Record of June 16, 1965:

One time in the House of Representatives [a colleague] told me a story about a proposition that a teacher put to a boy. He said, ‘Johnny, a cat fell in a well 100 feet deep. Suppose that cat climbed up 1 foot and then fell back 2 feet. How long would it take the cat to get out of the well?’

Johnny worked assiduously with his slate and slate pencil for quite a while, and then when the teacher came down and said, ‘How are you getting along?’ Johnny said, ‘Teacher, if you give me another slate and a couple of slate pencils, I am pretty sure that in the next 30 minutes I can land that cat in hell.’

Ah, That Ain’t Nuthin’

Way back in the dark ages around the middle of the previous century, Dirksen worried that President Lyndon Baines Johnson’s “Great Society” might bankrupt the country: “If some people get any cheer out of a $328 billion debt ceiling, I do not find much to cheer about concerning it.”

LBJ is infamous in conservative circles as a “BigGovernmentTaxandSpendLiberal,” second only to the big cheese himself, FDR. But he can’t hold a candle to the numbers thrown up by the supposedly fiscally conservative administration that is just now giving up control of the White House.

In 2008, the U.S. budget deficit was $455 billion. In the first three months of the current fiscal year of 2009 (commencing in October ’08), they managed to rack up a $452 billion gap. Looking forward, the folks at the Treasury, the Federal Reserve and the FDIC have committed to spending something along the lines of $7.2 trillion.

Oil’s Big Bounce begins on January 21st

In just days, two key conditions for soaring petroleum prices coincide for the first time in history.

Here’s how you could play it for 190 times your money or more…

Something’s Got to Give

Now, before you get out your fountain pen and stationery: I know Mr. Bush had to deal with a war or two, a massive financial crisis and a democratic majority on the Hill. It’s the raw numbers I want to focus on, and how they are likely to impact a couple of key early decisions on the part of the incoming Obama administration.

In 2007, one particular area that was only tangentially connected to wars or finance sucked up about a quarter – some $700 billion – of that $2.7 trillion Federal budget.

I’m talking about healthcare.

Not only did Washington spend a mint on doctors, hospitals, x-rays, drugs, et al, in 2007, the country as a whole doled out some $2.45 trillion, roughly 18% of our entire $13.81 trillion annual GDP.

Something’s got to give, if Obama is to have any sort of free hand at all, and I suspect I know what couch he will look in for some loose change.

Getting Killed at the Doctors

You won’t find a clue in Washington, that’s for sure. Rather, you have to look to a small (at least in comparison to the huge figures we’ve been bandying about) fraud case being settled as we speak up in New York state.

Seems that one of our larger health insurance companies has been bilking its policyholders for years now. Here’s how the scam allegedly worked: Your insurance company only covers a portion of the fee, no matter how much the doctor charges you for a visit or procedure. They call this fraction “usual and customary.”

UnitedHealth Group (NYSE:UNH) was supposedly determining usual and customary reimbursement through “independent research from across the industry.” That is to say, they weren’t taking anyone any worse than any other insurance company.

The Best Revenge

Turns out that all their “independent research” was coming from a single source, an outfit called Ingenix.

Now on the one hand, lots of other big insurers, like Aetna, Cigna and Blue Cross, also use Ingenix. On the other hand, Ingenix is solely owned and operated by… (wait for it)… UnitedHealth!

Unsurprisingly, management at UnitedHealth “respectfully disagrees” with New York Attorney General Andrew Cuomo’s finding that they cooked the books and overcharged millions of Americans. But they clearly don’t disagree all that much, because they are paying out $50 million to a special fund that will reimburse patients.

So here’s your first takeaway from today’s column: mid-dated, at-the-money puts against UnitedHealth Group (NYSE:UNH) could stand to make between 65% and 146% over the next few weeks as UNH’s recent rally unwinds.

The “Even-Newer Deal’s” Stealth Stimulus Plan

But here’s where it gets truly interesting. As I mentioned earlier, many of the other giants in this industry also use Ingenix to determine how much or how little they reimburse clients.

I believe that Cuomo’s case was just a trial balloon. (Think about how the states went after Big Tobacco last time they needed a little spending money.) This time around, they will basically force the big insurance companies to create a whole second “stimulus package” without writing a single government check.

I will keep you up to date as these cases progress, and offer additional short plays on the victims.

Source: Make 146%, Fix the Economy and Put the Screws to an Insurance Company, All at the Same Time… What’s Not to Like?