Those who follow me are aware that I like to focus on under-the-radar speculative companies that have significant catalysts to propel their shares higher. For example, Cleantech Solutions (CLNT) has never looked back since I cited the outlook and CEO commentary as significant catalysts for the shares, surging as much as 50% higher from when I first profiled the company. Similarly, Dynatronics (DYNT) raced higher by as much as 40% after I highlighted it as a turnaround story. Sunshine Heart (SSH) was a 30% winner in the weeks following my report. Today, I am focused on another biotech stock that offers an even greater return in an even shorter time horizon: CombiMatrix (CBMX). CombiMatrix has an imminent catalyst that I believe will propel the shares significantly higher, perhaps doubling by month's end.
At the beginning of the year, CombiMatrix provided preliminary annual growth figures which excited investors, sending the shares soaring as high as $6.64. Prenatal tests grew by a stunning 172 percent year over year. In addition, overall billable tests volumes grew 25%. Despite this extraordinary growth, shares have since slowly retreated by more than 1/2 as the fast money has moved on and the news flow has been quiet. This brings us to the catalyst on the immediate horizon that will in all probability launch shares higher. CombiMatrix is scheduled to report results and hold an investor call in late February. I believe the Street has long forgotten this impressive guidance and that investors and traders are not positioned for this event. As a result, I expect shares are poised for a breathtaking rally as this news flow hits the tape.
The Perfect Trade: Right Sector, Right Chart, Right Float
I will go into a little more detail about why purchasing CombiMatrix shares right here and right now sets up so perfectly here. CombiMatrix represents an excellent longer-term investment at these levels, but it is also an ideal setup for traders as well. Despite the growth trajectory shares are trading near all-time lows, at just 1x revenue and just 3x estimated cash, with one of the lowest market capitalizations in the sector. The upside is exponentially greater than the downside at these levels. Small cap speculative bios like CombiMatrix have been attracting immense money flow in this market. Additionally, CBMX is one of the select "go-to" low float stocks for speculative and momentum money. For example, shares surged from under $2 to over $14 late last year following a study published in the NEJM demonstrating the superiority of CombiMatrix's technology. Whenever positive news flow hits the wires, there is a mad rush for shares. I'm expecting shares to test $6 in the near-term, returning the stock to where it was trading early January on the preliminary guidance and representing a 23.6% Fibonacci retracement of the massive December rally.
CombiMatrix currently has among the lowest valuations in the diagnostics sector and one of the smallest market capitalizations in the entire biotech space, despite the recent game-changing events described earlier. To assess a fair valuation, let's examine the closest comparisons in the microcap genetic analysis space, Rosetta Genomics (ROSG) and Genetic Technologies (GENE). CombiMatrix trades at approximately 1x revenue, not even accounting for the vastly accelerating growth expected in the coming quarters. This compares with 10x revenue for GENE and 40x revenue for ROSG. CombiMatrix's net cash per share is comparable to Rosetta Genomics and several multiples higher than GENE's. Both Rosetta Genomics and Genetic Technologies sport market capitalizations of over 41 million dollars. This would equate to over $19 per CombiMatrix share, coincidently where shares were trading just over a year ago, and represents a longer-term target. I'm expecting the speculative fever that launched Novogen (NVGN) shares from $2 to over $10 this past week (on trivial preclinical data) to flow into CombiMatrix in anticipation of, and reaction to, the immediate catalyst discussed above. My near-term objective of $6 is several multiples lower than what the comps imply is fair valuation, and may ultimately prove a conservative target.
As with most speculative biotech stocks, the usual risks apply: capital raising, changes in standard of care, and the like. The possibility exists that the preliminary guidance provided by the company was inaccurate, or that the growth rates will not be sustained. However, I believe the potential reward of buying CombiMatrix here far outweighs these risks.
CombiMatrix represents a unique opportunity for both longer-term investors and catalyst-minded speculators to be richly rewarded. Rarely does everything all align so perfectly for a trade, from the technicals, to the fundamentals, to a major catalyst on the immediate horizon. This combination will be the tinder to spark a massive rally in the shares of CombiMatrix.
Disclosure: I am long CBMX.