Hidden Stocks for High Returns

Although some investors pile into momentum stocks looking to ride the wave higher, others choose to buy into those overlooked by Wall Street and Main Street, preferring to find undervalued gems to invest in. The former flash and crash when the momentum goes cold; the latter have a better shot at delivering outsized gains over the long haul.

Endocyte (NAS: ECYT)










Source: Motley Fool CAPS. NA = not available. Both companies currently have negative earnings.

Naturally, we want you to look a bit closer at these stocks before buying. Maybe investors are stayingawayfromthesestocks for a reason, so make sure there's nothing seriously wrong with a company before you plug it into your own portfolio.

Gaining FDA approval for dicey investigational drugs is a difficult process even for established biotechs and pharmaceuticals. For up-and-coming small-cap drug shops it's a veritable minefield. Thus investors place a lot of stock on gaining partnerships for their drugs since the partner can pay for a lot of the R&D associated with the drug trials, which saves otherwise scarce cash, as well as navigating the gantlet the FDA requires companies to run through.

So tiny biotech Endocyte gaining a partnership deal with pharma giant Merck (NYS: MRK) in April for its investigational cancer therapy vintafolide was a significant achievement. Endocyte got $120 million upfront, with the potential for another $880 million in milestone payments, making the deal worth as much as $1 billion if the late-stage treatment is approved.

For a company without a product on the market and no revenues to speak of beforehand, it's an even greater achievement and explains why the stock has doubled since the deal was announced. Endocyte will be using the upfront money to pay for further testing, as it is responsible for a majority of the funding and completion of the ovarian cancer trial. Merck has become very interested in cancer research of late, having also recently acquired rights to a cancer therapy from Exelixis.

A baker's dozen of CAPS All-Stars have weighed in on the biotech and only one doesn't think it can outperform the broad market indexes, so let me know in the comments section below or on the Endocyte CAPS page if you agree this is the start of something big, then add the stock to the Fool's customized portfolio-tracking service to receive updates on its efforts to navigate the FDA's trial and approval process.

A powerful opportunity
Another cancer drug developer gaining attention is ZIOPHARM Oncology, and while it isn't partnerships that have driven it higher, analysts are perking up over the development of palifosfamide, a front-line cancer treatment that could see positive results from late-stage studies as soon as the end of this year. Jefferies Group listened in on the biotech's recent discussion on its R&D progress and came away impressed.

ZIOPHARM is developing palifosfamide using a synthetic biology platform that releases powerful immune system proteins that can kill cancer cells. Last year, Intrexon took a large stake in the biotech in exchange for it using its delivery system and allowing it to raise its ownership position the further along in studies the drug went. Intrexon CEO Randall Kirk, a member of ZIOPHARM's board of directors, has continued to buy large tranches of stock, most notably earlier this year when he dropped another $10 million worth.

Palifosfamide is a different avenue for attacking cancer, though other novel therapies from larger rivals like GlaxoSmithKline and Johnson & Johnson are approaching, as well as treatments from Threshold Pharmaceuticals (NAS: THLD) , which is pursuing TH-302 in fighting multiple types of cancer.

Despite the potential competition, CAPS member pchop123 says ZIOPHARM is the one biotech investors need to watch. You can add ZIOPHARM to your watchlist and let us know in the comments section below if there's a profitable future ahead for a company in the midst of some wild growth trends.

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At the time thisarticle was published Fool contributor RichDuprey holds no position in any company mentioned. Clickhere to see his holdings and a short bio. The Motley Fool owns shares of Johnson & Johnson and Exelixis. Motley Fool newsletter services have recommended buying shares of Exelixis and Johnson & Johnson. Motley Fool newsletter services have recommended creating a diagonal call position in Johnson & Johnson. The Motley Fool has a disclosure policy.
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