Small cap stocks are often held to a different standard compared to larger companies. We typically look at this class with a glass half empty approach, yet when one begins to rise we are quick to jump on board in hopes of quick and large returns. For the most part, these are speculative investments in companies that are not profitable and have limited amounts of cash, factors that must be considered. This brings me to my point: Are these factors being considered with small cap stocks that are currently trading higher, or are these stocks just a one-day/month pop? Therefore, I am looking at three such companies that each have a different long-term outlook, despite similar trading patterns.
Twin Disc, Incorporated (TWIN)
Here's a company that has increased its valuation by almost 35% in the last three months, 10% on Tuesday's trading session. It has begun to trade higher after signs of improved fundamentals, and on Tuesday the signs were confirmed when the company announced Q2 earnings that beat expectations. For the quarter, Twin Disc had revenue of $72.3 million (13% loss y/y) and EPS of $0.29, both were large beats over the consensus.
Twin Disc trades with a market capitalization of $234 million after a near 50% one-year loss in valuation. The company has lost some of its business over the last year, but continues to pay a consistent dividend of 1.93%; which is pretty good for a small-cap company. This is a company that also had $10 million in operating cash flow for its quarter, and finished the year with more than $20 million in cash; also good for a small cap company. Therefore, just looking at its quarter and considering what has caused its stock to fall in the last year and rise over the last few months, I conclude that all risks are priced into the stock and that it's priced attractively for a long-term investment.
Corcept Therapeutics (CORT)
Corcept Therapeutics has traded higher by 30% in the last month, including almost 10% on Tuesday. It's a $200 million company with an approved drug called Korlym for the treatment of Cushing's syndrome. But much like Twin Disc, the company has lost almost half of its valuation in the last year following an unsuccessful launch of the drug. It had all the indications of a successful product, being the only drug on the market to treat the disease and having an Orphan status which provides seven years of exclusivity. However, for some reason, the company has been unable to profit on these factors.
The basis of an investment decision in Corcept is whether or not sales will begin to rise, or if Korlym will become a good drug but a bad selling product. I do find it hopeful that the company does have a large pipeline, but unfavorable that it posted a net loss of more than $8 million last quarter. Looking into the future, I believe that Corcept's positives might outweigh its negatives. The company has over $100 million in cash, which gives it flexibility to develop its pipeline while marketing Korlym. In addition, it's still trading with a large yearly loss, which means that all risks could be properly priced into its stock. Therefore, investors must determine if they believe in the company's pipeline, because with $100 million there is little risk. I would not dive head first into this stock, however a small position might be rewarding.
Cell Therapeutics (CTIC)
Cell Therapeutics' Pixuvri, or Pixantrone, has kept its stock alive and company operational for the last five years. The stock has lost more than 75% of its value in the last year, but has managed to gain 22% over the last month, including 9% on Tuesday. As far as I can see, there was no news to spark the movement, in fact, there was no real news to spark its 24% jump back on January 8. But ever-so-often, this is a stock that tends to jump on a technical rally or some new-found hope for its cancer fighting drug.
Despite countless rounds of financing and failed meetings with the FDA, Cell Therapeutics continues to sport a market cap of $140 million. In its last quarter it lost $15 million and currently has just $14 million on its balance sheet (according to Yahoo! Finance). Yes, Cell Therapeutics jumped on Tuesday, and yes, some are optimistic of Pixuvri's chances of success in the EU or in Canada, but this is a company that has been plagued with too much disappointment. The problem isn't data, but the company has failed to meet the requirements of the FDA and I don't think it will ever see an FDA approval. Therefore, if biotech valuations are determined upon the speculation and the ultimate success of a product(s) then I think Cell Therapeutics is a stock to avoid.
I have provided three stocks, all three traded with big gains on Tuesday with higher than usual volume and have outperformed the market in the last month. Most likely, there are many investors who are now entertaining one of these three stocks, and in this article I have laid out my beliefs: One to buy, one to watch, and one to avoid. But now, you must make the call if any appear attractive, perform your own research, and see if any could continue to trade higher throughout the remainder of this year, and beyond.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in TWIN over the next 72 hours.