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The potential of biotech is as tantalizing as it is dangerous. For every home run on the scale of OSI Pharmaceuticals (shares of the company recently jumped from $38 to $98 in a single day after its cancer drug Tarceva scored FDA approval), there is a Genta-sized disaster (the company saw its stock drop 75 percent in early May after it withdrew its application for FDA approval of an experimental cancer drug).

Further confusing the issue is that biotech analysts have been as bad at picking stocks as any of their peers. An exception during the past two years is Jason Kantor, 35, an analyst with W.R. Hambrecht & Co. Kantor's recommendations gained 31 percent in 2002 and 77 percent in 2003. He scored by telling investors to focus on newer biotechs with promising drugs in the pipeline. His argument is that because Wall Street tends to spend less time researching smaller companies, the opportunity exists for a bigger payoff.

Kantor's favorite prospect right now is Seattle Genetics (SGEN, $7). The tiny biotech specializes in the field of antibody conjugation (a fancy way of saying that it is developing techniques to turn antibodies into "missiles" that go after cancer tumors). The company hasn't yet made it to the market with a drug, but three promising clinical trials are underway. Its drug to treat lymphoma is now in Phase II trials. Though it's losing money, the company has $132 million in cash socked away. What's more, it has forged partnerships with industry leaders Genentech and Celltech. Those deals have provided a growing revenue stream since early 2001. Investors should be warned: Seattle Genetics is a high risk. That said, if any of its drugs make it to the market, investors will be huge beneficiaries. Unlike many other biotechs, this company has retained the rights to its products and will reap the rewards if it is able to pass all the regulatory screens.