Dykstra: Ride Forest Labs' Confidence

Forest's key asset is its sales force. As a marketing-focused company, Forest solicits research-oriented firms for opportunities to in-license potential best-in-class new products within Forest's therapeutic focus areas, such as the central nervous system and cardiovascular categories.

Each new product increases the productivity of Forest's existing sales force. The company has historically in-licensed late-stage products, but it is migrating to more early-stage opportunities.

In July, Forest posted a 34% quarterly increase in profits, but the performance failed to satisfy more optimistic expectations. Its leading product, Lexapro, fell short of analyst expectations, and since that time the company's stock price has taken a beating. Falling back on a common theme of mine, it's clear that the beating in this case was too severe.

Management reiterated its fiscal-year projections, indicating future strength. Furthermore, the company possesses nearly $1 billion in free cash flow to go along with zero debt. In the pharmaceutical business, a healthy balance sheet generally leads to a healthy and promising future.

Research and development, along with the ability to invest in new products, allow pharmaceutical companies to succeed.

With that in mind, I will place a limit order to buy 10 contracts of the January $30 DITM calls (FRXAF) for $8.90 or better.

Now, let's take a look at what the readers had to say in our regular Friday feature.

First, thank you for teaching me so much about this kind of investment strategy. Of course I also do my own homework and investigating, but your picks are the initial triggers that get me interested in a particular stock.

I've also made several of my own selections using the same criteria I've learned from reading your articles.

Second, I was very interested in your column on Morgan Stanley(MS Quote), but when I went to check on the pricing, I found that MSAK opened at $11.00 and never dropped below that price. Your article says you planned to purchase 10 options at $10.30 so I'm curious to know how you buy so much below the market. Am I missing something, or am I just confused about the date or price?

-- Stephen