This week, we examine biotechnology expert Marc Lichtenfeld’s investing strategy as well as his recent pick of Enzon Pharmaceuticals, Inc. (Nasdaq:ENZN), a stock that not only ranks among his small-cap favorites, but one that has caught the attention of noted activist investor Carl Icahn.

Lichtenfeld is a senior analyst for the Xcelerated Profits Report and Smart Profits Report. He was a professional trader previously as well as a columnist at TheStreet.com.

Regarding his investment approach, Lichtenfeld says, “When it comes to health-care stocks — particularly the smaller-cap names — nothing replaces the roll-up your sleeves, work-till-your-eyes-are-blurry research.”

The analyst has developed a proprietary process called the F.I.R.S.T. system, which is a five-step method he uses use to narrow his watch list of potential buys. Let’s review each of the five components:

Financials:

He begins with examining a company’s financials. “In the health-care sector, it’s important to understand whether a firm has enough capital to continue its research and development, market and commercialize a product, or simply to continue everyday operations,” he says. Only after he is comfortable that there is a “growing and robust business,” will he move on to the next phases.

Interview:

Lichtenfeld emphasizes the important of learning about the people behind the business. As such, he takes the time to interview top company executives, institutional shareholders, vendors, production workers, even the short sellers. Indeed, he says, he will seek information from “anyone who has inside knowledge of a company and how it works before investing.”

Research:

Next comes the “hardcore” research, he says. “I spend hours poring over scientific papers, medical journals, industry statistics, opinion pieces, blogs — anything that will shed more light on a particular product and the disease or condition that it treats,” Lichtenfeld says.

Safety:

Next up, the advisor focuses on the safety profile of a biotech or health-care company’s drugs. “This is critical. The FDA has shut down many effective drugs because of side-effects or adverse events,” he says. “If there’s even a hint that the FDA may sniff around an issue, we’ll pass on the stock.”

Timing:

Once he is comfortable with the previous steps, his focus shifts to the “timing” of a potential buy. “There needs to be a catalyst that will move the stock,” he says. “Perhaps the company will release some clinical data soon, or a new product launch is expected.”

One of Lichtenfeld’s current stock picks from his Xcelerated Profits Report is Enzon Pharmaceuticals, a biotech with a market capitalization of $403 million.

Among Enzon’s products is Oncaspar, which is used in conjunction with various chemotherapeutics for the treatment of acute lymphoblastic leukemia. Its Abelcet is used primarily to treat immuno-compromised patients with invasive fungal infections, while DepoCyt is an injectable chemotherapeutic agent approved for the treatment of patients with lymphomatous meningitis.

"One of the big reasons why we recommended Enzon was because some major institutional investors are clamoring for change at the company,” he says. “They contend that if Enzon was better at maximizing its true potential, the stock could easily vault from its current undervalued state and generate some real wealth for its shareholders.”

He says that Pequot Capital and Iridian Asset Management are large shareholders, but when it comes to heavy-hitting activists, “Carl Icahn sits at the top of the tree.”

And now, Icahn has taken an interest in Enzon. “With an infamous reputation for diving into stocks that he perceives as undervalued and shaking up management teams in order to boost shareholder value, Icahn is one of the best 'business partners' we could have,” Lichtenfeld says.

He admits that some view Icahn as a “troublemaker who doesn't really give a hoot about companies or their employees — just about making money.” Others, he says, see Icahn as an activist, “determined to make businesses better and return value to the very people who are invested in the company.”

That, suggests Lichtenfeld, is what Icahn plans to do with Enzon. “Icahn recently bought an additional 3.1 million Enzon shares, upping his stake to 6.9%. Not only that, he demanded that Enzon executives act to boost shareholder value by spinning off certain assets, or selling the company altogether,” he says.

"Icahn believes Enzon is undervalued, and while his demands might have some Enzon executives quaking in their shoes, we're ecstatic that Icahn has decided to take a more active role,” he says. “The two parties are expected to hold further talks, but we expect Enzon's management to continue to meet the demands of the activist investors and for the stock price to appreciate."

For 25 years, Steven Halpern has conducted an annual survey asking the leading newsletter advisors to select their favorite stocks for the year. His 2008 report features 120 top picks. You may download the report for free by clicking here.