The Next 5 Stocks to Buy?

There are some 24 million Americans afflicted with diabetes, according to the American Diabetes Association, and it's estimated an additional 1 million cases are reported each year at a cost to public health of around $170 billion each year. That's a large and burgeoning market to address for treatment and specialty pharmaceutical DepoMed (NASDAQ:DEPO) would like to see its Type II diabetes therapy Glumzeta receive wider distribution.

In the most recent quarter it looked like those goals are beginning to be achieved as revenue, primarily from sales of the drug, rose 75% to $6.3 million. While it also recorded a profit of $3.5 million, or $0.07 per share, that was more a result of a $7.5 million settlement received from Teva Pharmaceuticals (NASDAQ:TEVA) subsidiary Ivax. Still, losses compared to the second quarter of 2007 would have been cut in half without the payment and with more than $70 million in cash and marketable securities on the books, at its current burn rate it's not in any danger of running out of cash anytime soon.

Moreover, it recently inked a deal with CVS Caremark (NYSE:CVS) to make Glumzeta available to the pharmacy's customers as a Tier 2, brand preferred metformin. With a second drug already on the market and several in its pipeline, the setback last year of its post-shingle nerve pain therapy Gabapentin GR, for which it is taking a second stab at phase 3 trials, is gone from memory.

The stock is trading at around $4.00 per share or a little more than two and a half times the value of its cash. With two successful drugs on the market and a number of others in the pipeline, an investor wouldn't be taken to task for thinking those drugs are a cheap acquisition for someone at these prices.

Screening for likeability
DepoMed showed up on a screen of companies that have enjoyed growing investor support these days after starting off the year on the outs. DepoMed moved from a two-star Motley Fool CAPS rating at the start of the year to a three-star-star rating today, while also enjoying a valuation below that of the market.

CAPS is our 110,000-plus-member investor community that rates thousands of stocks on whether they will outperform or underperform the market. While not a predictive service, our data has found the returns of stocks in the CAPS universe correlated precisely with their relative CAPS ranking. Top-rated three-, four-, and five-star stocks outperformed low-rated one- and two-star stocks on an annualized basis.

Here are a few of the other companies the CAPS screener found that are currently enjoying significant investor support:

Source: Motley Fool CAPS; Morningstar.
*For next fiscal year.

Naturally, this is not a list of stocks to buy and sell, but rather a starting point for further analysis. Investors have raised their outlook significantly on these companies and it may mean there is still room to move.

A fine mesh filter
There's a bit of risk factored into DepoMed share price since many such specialty pharmaceuticals can be viewed as a bit of a speculation. There's no guarantee the other drugs in the pipeline won't suffer the same fate as Gabapentin did, which caused shares to tumble at the time. If it fails in its second attempt or the other drugs don't live up to expectations, even further market cap compression could be expected.

Earlier this year CAPS member REDSOXFANFORLIFE realized that while there were a number of one-time items boosting results, just as there were this time, sales continue to rise.

Appears to be headed in the right direction. A portion of 2007 gains came from terminating promotion agreement with King Pharmaceuticals. However, sales and income numbers are on the rise. I'm taking a risk and keeping my fingers crossed.

Yet top-rated CAPS All-Star member Scones figures that at these prices it's just too cheap to pass up, particularly when compared to its industry: "P/E of 3 in an industry averaging over 38....This one's too cheap to pass on."

Takes a CAPS bow
There are many ways to screen for stocks to beat the market. You can use the new CAPS screener to find other stocks you're gonna want to own and then start your own research on these stocks on Motley Fool CAPS. Read a company's financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made all from a stock's CAPS page. If you want to see what other stocks CAPS investors are marking up to four and five stars, head over to CAPS now -- it's completely free to join.