penny dreadfuls deliver if you do your homewor

THE bourse might be having another nervy turn, but in the so-called penny dreadful sector some savvy pundits are making enough money in a morning's work to retire on (and make a second fortune penning the how-to guide).

Given the lack of any professional buying, the pundits are day traders, but they're smarter and more organised than the average bear: by the time the Hot Copper brigade have latched on to the share momentum, they're already out of the stock and hoeing into French truffles for lunch.

The traders -- who possibly buy in concert -- don't appear to be taking advantage of any inside info, in that the buying doesn't take place until after the announcement. But they have certainly done their homework and what stocks are due to announce news such as a trial update or drilling result.

Sub-10c stocks to have enjoyed a stellar (but short-lived) run include Viralytics, Antisense Therapeutics, BioProspect and Benitec in the biotech sphere, copper hopeful Botswana Metals (BML) and Eden Energy (EDE) , which is involved in several iterations of the gas-to-hydrogen theme. We're talking about gains of several hundred per cent, with trading volumes that defy the trend of usually illiquid stocks.

Biotechs are a favoured target. For example, on January 19 biotech Viralytics announced the phase-one completion of a melanoma treatment trial for its lead compound Cavatak. The stock soared from 4c to a peak of 12c. Well, it sure was exciting news but even more so when the company announced the same news in 2008.

Even Viralytics managing director, Bryan Dulhunty, admits the modest nature of the disclosure, so much so that he had left on a family holiday ahead of the announcement.

"I was absolutely totally surprised [at the market reaction]," he says. "It was not an important announcement and there was nothing new in it."

The speculators then turned their attention to fellow biotech Antisense Therapeutics, which announced that its prostate-cancer treatment ATL1101 would be favourably reviewed in a journal. Antisense also announced that a subset of ATL1101 would be protected by an Australian patent.

While the company described the news as "value-adding outcomes", it's hard to see why the disclosure justified the ensuing 300 per cent share price hike (from 5c to a peak of 20c). A peer review is nice, but merely confirmation of previously released trial results. Securing a patent is reassuring, but pretty much expected and part of an ongoing process.

"Antisense was very surprised at the level of turnover given the announcement we had made," Antisense spokesman Simon Watkin says.

One natural reaction is to be horrified at the ephemeral nature of the gains. Another is: How do I get in on the game by pre-empting the smart guys' next move?

A feature of the buying is that it follows rather than anticipates an ASX announcement. This reduces suspicion on the part of the market surveillance people, as there's an ostensible reason for the share rally.

Identifying these likely targets is easier said than done.

Biotech watcher David Langsam of Biotech Daily says the stocks need to be inherently undervalued in the first place, as opposed to those that are penny dreadfuls because they're close to running out of money.

As always with biotechs, it helps to understand the science of the business. But even more useful is a sense of what stocks will react on the tickle of modestly good news. Among the sub-10c biotech plays, Langsam nominates Cellmid (CDY), Optiscan Imaging (OIL), Phylogica (PYC), Immuron (IMC), Resonance Health (RHT) , Healthlinx (HTX), Anteo Diagnostics (ADO), Biotron (BIT) and Genetic Technologies (GTG). And of course those that have had a run could fire again.

Langsam stresses that these stocks don't exactly rate up there with CSL or Cochlear, but at the very least they're cheap and due for a run.

The Australian accepts no responsibility for stock recommendations. Readers should contact a licensed financial adviser.

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