I was out marinating ice cubes last night with a hedge fund manager friend of mine. The conversation quickly turned to recent big rally in the market. While we both believe the rally has been overdone due to the lack of breadth of the rise as well as iffy economic data recently, we both noted the improved sentiment on the biotech sector over the past month.

The sector had dipped a toe into “official” bear market territory back in late September. The recent advance started in the large cap part of that space early in October in front of what turned out to be robust results from large cap biotech names like Gilead Sciences (NASDAQ:GILD) and Amgen (NASDAQ:AMGN). Over the last week or so that advance has broadened to include in the small and mid-cap part of the sector.

This development is welcome and we still both think the biotech sector will outperform the overall market at least through year end and probably at least for the next six months. We started talking about the individual names we like in the biotech space especially among the small and mid-cap plays that have just began to move.

We actually made a parlor game of it involving naming attractive biotech stocks that sold for more than the beer ($7) he was drinking but less than the martini ($12) I was imbibing. Here are two we both turned out to like and own at the moment.

Let’s start with Trevena (NASDAQ:TRVN) that had a big day yesterday rallying almost seven percent Wednesday to broach the $11.00 a share level. The stock is also up almost 70% since being included in the Biotech Forum portfolio on August 15th at $6.50 a share. However, the shares could still have significant further upside.

The main trigger for the rise the stock has had since that August selection occurred late in the month. The company disclosed its main drug candidate for pain that has superior traits to widely-used morphine delivered impressive Phase II trial results and demonstrated a statistically significant reduction in pain over 24 hours compared to placebo in patients with moderate-to-severe pain following abdominoplasty surgery.

Trevena has the multiple shots on goals within its evolving pipeline I like to see before taking a stake in these small promising but speculative concerns. The company’s proprietary platform has helped it quickly identify several drug candidates. A fellow contributor on SeekingAlpha has stated Trevena’s CEO has one of the most enviable positions in the space as he believes Trevena has potentially the most prolific developmental platform within the small cap space.

I may not go that overboard but Trevena does have solid prospects ahead of it. Even with its recent rise, the stock is significantly below the ~$16.00 a share mean price target held on it by the eight analysts that follow the firm. This slightly over $525 million market capitalization company also has over $100 million in net cash on the balance after doing a secondary in mid-September so will not have to come back to the market to raise funds in the foreseeable future as well.

Next up we have Lexicon Pharmaceuticals (NASDAQ:LXRX) which is trading at just over $10.00 a share. On August 3rd the company announced successful Phase 3 results for its lead product candidate, Orphan Drug- and Fast Track-tagged compound (LX1032), in patients with carcinoid syndrome. The equity quickly topped $16.00 a share on the news over the next few weeks, but then gave it all back thanks mainly to the extreme weakness in this sector during August and September.

Despite being slightly above a $1 billion market capitalization, the shares are relatively underfollowed on the Street. I find three analyst firms that have a price target on LXRX, but they are encouraging. Two are at $21.00 a share and the least optimistic one is at $19.00 a share, about 90% above Lexicon’s current price.

Carcinoid syndrome affects approximately 10,000 people in the United States on a yearly basis and involves a set of symptoms caused by carcinoid tumors that grow from endocrine cells. This occurs in around 10% of patients with carcinoid tumors and this condition commonly affects the digestive system such as the organ parts ileum and liver.

The company is also testing a compound called Sotagliflozin. This is an orally-delivered small molecule compound that Lexicon is developing for the treatment of type 1 and type 2 diabetes mellitus. The peak possible market for LX1032 if its NDA is approved once submitted could be up to $1 billion annually from what I have seen. Lexicon has almost $200 million in net cash on the books so it should not be coming back to the equity markets anytime soon.

I offer these selections as food for thought as it feels biotech is in the early innings of a bout of outperformance to the overall market. Finding stocks like Lexicon and Trevena is not as difficult as you might have thought either. I just released a video detailing exactly how I find stocks with huge upside in the biotech sector and you can watch it for free right now.

Click here to watch.