Although we are still technically in a bear market for early-stage biotechnology due to lack of speculative funding from both VC’s and investment banks syndicating IPO’s, many public companies have been doing well. As a result we have a more bifurcated market with larger caps stable or growing and smaller caps in a funk. Nonetheless there is plenty of money on the sidelines that will drive stocks of companies with compelling products and technology. At the recent Rodman and Renshaw Investment Conference in November of 2009  the buzzword was “cash runway” as smaller cap companies with weak balance sheets need to retrench until new money comes back into the market. Nonetheless, Rodman continues to fund PIPES in the biotechnology sector as technology is progressing and deals are being done. Negative articles and “hand wringing” abound in the biotech market citing clinical trial failures, political concerns, a dearth of funding and a “breakdown of the business model." But these critics miss the point: the universe of companies and universities in the biomedical sector are trading and investing in R&D programs that result in drugs, diagnostics and services with the objective of improving healthcare.

It's time for an update on Cubist Pharmaceuticals (Nasdaq: CBST), a small, fast-growing drug stock we've been following here. Our technical and trading outlook has held to form (for once!), as we advocated picking up the shares in the mid-teens for a trade into the twenties. Yesterday the stock moved to new highs in 2010, hitting $21 bucks and change. This morning shares are off .20, but that's no big deal after a move of about $1.50 over two days. I still hold CBST and I'm not ready to sell it in case this rally gains momentum. The stock could easily trade into the upper 20s on a breakout above $22. To recap the Cubist story: The company grew 30% in 2009 and has a Return on Equity (ROE) of 60%. The general rule here at Rayno Report is we like growth stocks with an ROE that is higher than it's P/E. We started buying CBST with the P/E around 12. The valuation has expanded now giving CBST a P/E of 19. But given it's growth rate (30% in 2009, 160% over five years), that's still not too high. If the company lives up to its revenue growth plans in 2010, it can easly grow the valuation. So I'm hanging on to see what this company can deliver. Another item: CBST often comes up on the lists of potential acquisition candidates. Disclosure: Long CBST

Here is some delayed delayed housekeeping -- Cubist Pharmaceuticals, a company we've been watching closely on this blog, released a solid earnings report last week and the stock has moved into a solid uptrend. I still like this stock long term, but it's had a nice 20% run since December, so if you are trading it, you can take some off the table. However, the long term value thesis is that this was an undervalued stock -- and as of today it is still trading at a forward P/E of only 11. This, while putting up annual growth rate in the range of 30%, a return on equity of 20%, and an operating margin of 24%. Bottom line: Still cheap. Here are some highlights from the earnings:

• Operating income grew 52% over 2008
• Total net revenues for 2009 increased 30% over 2008
• Total net revenues for the fourth quarter of 2009 increased 27% over the fourth quarter of 2008
• GAAP net income for the fourth quarter was $22.7 million (unaudited), or $0.39 and $0.38 per basic and diluted share, compared to $94.5 million, or $1.65 and $1.43 per basic and diluted share, respectively, for the fourth quarter of 2008
• Consensus analyst estimates for the quarter for $0.34 per share, so the company beat on the profit side.

Chart still looks good, though it does look susceptible to a correction. I would add to this stock on pullbacks under $20, especially in the $18 range.

Nobody said investing, or trading, was easy. You can do all the work and the world and get the story right but still have a fatal flaw -- timing -- that screws things up. Cubist Pharmaceuticals (CBST) is a case in point for myself. Good company, making good progress, but trying to time the stock will drive you mad! The company announced on Monday that it met Wall Street's revenue forecast with $560.3 million in revenue, up 30 percent from a year earlier. It rallied on the news and is now trading at around $19, even though in the past few monts it has sold off as low as $16.  The company's primary product is an antibiotic called CUBICIN.  Here's the catch: Although it released the revenue numbers for the full-year 2009, it has not released its earnings yet. Those are due out on January 21. Strange, yes. This company comes up on a lot of value screens because it is a growth company with a relatively low P/E (12 based on next year's earnings). I want to buy small growth stocks with 30% growth rates in a recession, especially if they have P/Es of about 12. Cubist has some other impressive numbers: It's profit margin is 34%, it's Return on Equity (ROE) is 60%, and it has a five year growth rate of 159%. If you look at the stock chart above, you can see that the tricky part in this stock is picking your entry point! It's got a wide 52-week range of 13.81/23.40. It can sell off violently (20%) in a matter of days, or rally equally as powerfully. I must admit that I have traded this stock horribly and gotten chopped up in the past, but I'm looking to rectify that by going from a trading position to a longer term position. To correct my past abuse of this stock, I have resolved to build a long-term position. Eventually, if the company can sustain even 20% growth in 2010, the stock will break out. It's simply too cheap. Analysts estimates for 2010 have gone from 1.22 to $1.54 in the past year, according to Capital IQ, yet the stock has done nothing but chopped around. I think this is a $20+ stock.  Even if the earnings are disappointing next week, I would probably buy more on a correction down as low as $16, because I think it's rare that you find companies with these kind of growth numbers this cheap. My stop is at $15.50. (Disclosure: Long CBST)