How to Find Your Next Winning Trade

All investors, big or small, should always review their trades.

In fact, I guarantee you that the best way to becoming a better investor is to review why certain trades were successful and others not so much.

Whenever you’re out of a particular trade, you can see things objectively… meaning you can more easily identify what you did wrong and ultimately learn from those mistakes.

In the end, you wind up reinforcing your investing approach and discipline so you don’t do something foolish next time.

Makes sense, right?

Let me give you a perfect example of how you can put this idea into action, and it comes straight from the pages of Inevitable Wealth Portfolio.

Back in September of 2009, we added Cubist Pharmaceuticals to our portfolio. At the time, the stock was trading for $21.55 per share. As for the company itself, it specialized in creating and marketing anti-infective drugs.

Now, I’ll note first that this was a financially sound company. Its balance sheet passed my initial tests.

So you can imagine that, at the time, our Cubist trade seemed like a slam-dunk. And the cherry on top was the fact that the company was hated by the market (probably why it was trading at such an attractive price!).

But we can all play the Monday morning quarterback scenario, can’t we?

Looking back, Cubist’s main growth driver is Cubicin — a medication that is used to treat certain blood or serious skin infections caused by drug-resistant microorganisms.

In fact, an estimated 880,000 patients were treated with Cubicin in 2009. And although the company had the resources to build its pipeline and had several candidates in Phase II trials, the market simply couldn’t look past the challenges to Cubicin’s patent.

Now, a short time earlier, a generic pharmaceutical giant named Teva Pharmaceutical (NYSE: TEVA) filed an abbreviated new drug application, which had the potential to destroy Cubicin’s franchise if approved.

So a generic drug’s challenge to Cubist’s cash cow weighed heavily on the stock price.

And although Cubist used its strong balance sheet to acquire another company to build its product line, the market still wasn’t impressed, as share prices remained flat, even falling lower.

Over the next year, Cubist’s revenue and earnings continued to grow, and the company started to build its cash position… yet the stock price barely budged.

Now, other investors avoided Cubist, completely missing the gap developing between the stock price and the intrinsic value of the business.

As you can guess, they were too busy looking for a new hot sector.

So when share prices increased to around $25 by the end of March 2011, it seemed that smart investors were starting to take a position.

Then, on April 5, 2011, the situation became even more profitable after Cubist announced that it had settled its patent litigation suit with Teva.

The result was that Cubicin would now have a longer patent life and could continue selling until the end of 2017 at the earliest.

In short, the company’s cash flow was sure to rise over the next several years.

On April 4, 2011 — the day before the court ruling — shares of Cubist closed at $25.25. The stock had opened more than 15% higher and continued to run.

Cubist hit our price target nearly two weeks later, closing at $33.27. It took about a year and a half to pull in solid gains of 54.4%.

And despite our profit, keep in mind that my readers and I are not pharmaceutical analysts — and we certainly didn’t know that the courts would rule in their favor.

What we did know was that we had a financially strong company that was trading at an attractive price sitting in our lap.

And when that combination occurs, you should be a buyer!

We were rewarded for our discipline and patience AND because we followed our rules — plain and simple.

Bottom line, the underlying value of the business was worth more than the stock price.

Cubist was a good example of how using my approach of buying financially strong businesses at attractive prices puts us in a strong position to profit.

Of course, this was just one example.

Truth is, my readers have had access to these exact kinds of attractive trades all the time.

But it’s not enough… I want YOU to experience these winners firsthand, too!

Click here to learn the full details on this investment strategy.

All my best,

Charles Mizrahi

Twitter: @IWPeditor

Charles cut his chops on the trading floor of the New York Futures Exchange before moving on to become a wildly successful money manager on Wall Street.

And with more than 35 years of recommending stocks under his belt, Charles has knocked the cover off the ball, compiling an amazing record of success and posting gain after gain for his loyal readers. He is the editor of Park Avenue Investment Club and the Insider Alert newsletters.

Charles is also the author of the highly acclaimed book, Getting Started in Value Investing.