Micro Caps are often the epitome of boom or bust scenarios. I think it's important to have some speculation in any portfolio but often times people stay away from Micro's as they are usually in the development stage. It's a dangerous game, most of the time, because the outcome is binary: win big or lose big. There is seldom middle ground, so one must choose carefully which stocks they wade into.
With the new year upon us, it's time to reposition the portfolio and look ahead into 2013 and early 2014. My personal strategy is to allocate 5-10% of the total portfolio to micro cap speculation stocks. I've chosen six for this year (no particular order):
1. Pershing Gold (OTCQB:PGLC)
Market Cap: $110 million
Catalyst: New Resource Estimate
Pershing Gold is a development gold miner that has yet to see revenues. The company has some strong backers for being such a small company with billionaire investor Philip Frost being one of the most notable. Stephen Alfers left Franco Nevada to run this company and Coeur d'Alene Mines (CDE) has also made a sizable investment in the early stages of PGLC.
Development stage mining companies generally are extremely speculative, but this one seems different considering the cast of characters involved. Sure, the dreaded "its different this time" phrase is there, but the thesis is strong nonetheless. With an aggressive drill program having taken shape in 2012, PGLC is waiting on a revised estimate of resources. With good news on this front, PGLC will likely gain considerably from here. Alfers has said he expects to be producing gold in 2014.
2. General Moly (GMO)
Market Cap: $345m
Catalyst: Finalizing the Chinese Bank Loan
General Moly will mine and produce Molybdenum, with two mines but only one on the near term horizon. It owns 80% of Mt. Hope (the remaining 20% belongs to POSCO) mine that is expected to have an average annual production rate of 40m pounds of Moly (32m net to GMO). In the most recent presentation, GMO says it expects cash costs to be roughly in the $5-$6 range. This leaves significant profit upside due to the fact that its production is 100% committed for the first 5 years with a floor at $15.
For this reason alone, GMO is a buy. That's a margin at minimum of around $9/lb. Sure it will take a year or two to get costs down to these levels, but even if the company is wrong on costs, and it comes in at $10/lb, it still presents significant profits. The structure of the off-take allows GMO to participate in Molybdenum price appreciation to a certain extent, but the floor being capped at around $15 is what I'm focused on. If the company can execute and come in at $6/lb cash cost, we are looking at a minimum of $288m in gross profit. Not bad for a company with a $345m market cap?
Once the Chinese Bank Loan is finalized, full on construction will begin. This will remove a major risk of not getting financed. The loan should be complete by the end of Q1 in 2013 and it will take roughly 2 years to complete construction. That puts the company into 2015 before seeing revenues. GMO has about $28m in cash, and the bank financing of $665m coupled with equity tranches received from POSCO and Hanglong should be enough capital to get it through to production.
3. Uranium Energy Corp (UEC)
Market Cap: $216m
Catalyst: Recovery in Uranium Prices
UEC is a small cap, debt-free, unleveraged American uranium producer. Despite many doubts over the future of nuclear energy, I am in the camp that countries are not just going to do away with the source of energy. The future of the space is in turmoil after the Japanese disaster, but like anything else, things just take time to come back to equilibrium. I believe in the stability of long-term nuclear energy. UEC may not be an overnight success, but long-term, the fundamentals are in tact. The company is growing production, and operates in the safe confines of the U.S.A.
4. Neuralstem (CUR)
Market Cap: $75m
Catalyst: Q1 2013 results of ALS treatment
I often do not start paying attention to biotechs until sometime in phase II testing, as there are just too many things that can go wrong. But CUR caught my attention and I decided to give it a look. It is targeting the deadly disease ALS, better known as Lou Gherig's disease. Though the company just completed Phase I results with only 18 patients enrolled, the data was extremely positive in one patient who showed not only stabilization of the disease, but improvement, which is unheard of in ALS.
The sample size was small, and only wanted to prove safety, which it did successfully. The treatment showed signs of stabilization in other patients as well. For Phase II trials the company will target patients that are a bit healthier and may have just been diagnosed or in relatively early stages of ALS. The hope is to catch things soon enough and the injection of CUR's stem cells will stabilize this deadly disease.
The last surgery injection was August 2012, which targets sometime in mid- to late Q1 2013 for an update on the trials. The early nature of this one makes me cautious, but I like what I have seen so far and think it warrants a look.
5. Galena Biopharma (GALE)
Market Cap: $106m
Catalyst: Continued Results from Breast Cancer Drug
I have mixed emotions on GALE for the simple fact that data it released this month was overwhelmingly positive, yet the stock went nowhere. Often times, price is truth. Analysts have trotted out with lofty price targets for this name yet investors are not buying at these levels. With that being said, the data was indeed positive and the company is pushing into Phase III trials for a treatment to breast cancer.
The market in breast cancer is vast worldwide, especially in the U.S. There is a lot of debating about the results from GALE, namely from Adam Feuerstein of The Street. It is always important to listen to the other side of the story.
The reason I think GALE will have a solid 2013 is because hype around these results will be excessive leading to the next release. Anytime there is positive Phase II results, the hype around Phase III will certainly be there. This is one of those I would consider selling a significant portion- if not all of the position- leading up to the results as there will likely be a run up in price. There is still plenty of time to make that decision, and because of the secondary it now trades at an attractive entry point.
6. Sarepta Therapeutics (SRPT)
Market Cap: $629m
Catalyst: Possible Accelerated approval of DMD Drug
Sarepta may be the most compelling of this list. Results from Eteplirsen have been overwhelmingly positive. If you haven't heard of this stock and are wondering if the drug works, you can start by reading this article from a mother of two boys with DMD; only one of which is on the drug. Its a real life scenario that speaks to the potential of this drug. SRPT has had a monster year in 2012, and is poised to continue into 2013.
If the FDA grants accelerated approval, the company could begin commercial product ramp sometime in late 2014 or early 2015 which is right around the corner (from an investment standpoint). With no cure currently for DMD the market potential is lucrative. SRPT just did an at the money equity offering that was over subscribed. Most of the time investors want a discount to current prices in this type of deal, they received no such discount in the latest round.
After the secondary, SRPT has almost $150m in cash which will be enough to get it through Phase III and possibly even commercialization. SRPT does not HAVE to find a partner now, the company can take the right deal that comes its way. I am very bullish on SRPT and think this one could be the next big blockbuster drug.