Placebo Pharmaceuticals

I once invested in a company that was developing new drugs. The news release the day its stock dropped 75 percent was almost comical. It went something like this: "(The company's) most touted drug was found to be no more effective than a placebo in clinical trials. Company withdraws product." The company was rated a five-star buy by Standard & Poor's before the drop.

— Dusty, online

The Fool Responds: This drives home the risks inherent in small drug companies that are working on a few promising medications.

If the formulas are ultimately proven successful in clinical trials, great. But many never make it that far. Big pharmaceutical companies pose less risk because they typically already have a stable of big sellers, plus a big pipeline of drugs in development. Many investors get excited by stocks with promising stories, but the stories don't always pan out. Don't get carried away by hopefulness. It's best to look for a track record of revenue and profits — along with, ideally, strong growth and competitive advantages.

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