Finding the Next Little Biotech That Could

A few weeks ago, Cramer recommended a small biotech stock called Nastech that ran up 13% after his approval. Nastech doesn’t have earnings, and it doesn’t have anything big on the market, yet it still could have made you 13%. Biotech stocks work in a strange way, and Cramer wants to teach you how to invest in them. He's been looking for the next Nastech, and he thinks he found it in Incyte .

Both Nastech and Incyte have some things in common. They are both well capitalized with lots of cash in their balance sheets (Incyte especially, with $330 million in cash and a market cap of only $580 million), and both companies are cheap, single-digit stocks. This is all good, but it isn’t what takes a biotech stock higher, Cramer says.

Small biotech companies like Incyte and Nastech don’t trade on earnings -- they trade on hope. The hope that one day, one of these companies will be responsible for coming up with a drug that is really worth something.

However, the area of tiny biotech companies with promising drug pipelines is gigantic, Cramer says, so the trick is to pick out the ones that are most likely to trade higher on a surge of hopeful expectations. You need a company that develops drugs for an array of markets. Incyte fits this bill with drugs in development for HIV, inflammation and cancer, to name the best end-markets. If you’re buying a stock that trades on hope, make sure it has more than one way to get people hopeful. Biotech companies with only one end-market have less of a chance of hitting a home run than ones with their hand in several.

But it isn’t enough for a company to be developing a bunch of drugs if their potential markets are tiny. The end-markets have to be big, Cramer says, which is why Incyte fits the bill by developing treatments for HIV, inflammation and cancer.

Bottom Line: If you’re looking for a biotech company that could go a lot higher on hope, Cramer recommends Incyte.

Questions? Comments?