When it comes to investing in biotech stocks, I take a different philosophy than in any other sector. In other sectors, I make targeted large investments in the stocks in the space that seem to have the best combination of prospects and valuation. Due to the complexity of the biotech business, that strategy does not translate into an actionable strategy. Even hedge funds with PhDs in biochemistry on staff get these stocks wrong as much as they get them right. It is next to impossible to consistently predict how these types of compounds will do in clinical testing and much more knowledgeable experts than me have tried and failed to do so.
My strategy in the biotech sector is to take a shotgun approach. I look for stocks that have what appears to be promising compounds, have seen insider buying (probably a better tell about company's prospects than analyst commentary) and have a solid balance sheet as well. I take much small positions in a myriad of equities in the sector. I expect to lose money on two out of every three investments while hoping I hit a five or ten bagger every now and again to make the strategy profitable over time. Here are two biotechs trading at around $2 a share that meet these criteria.
Nanosphere, Inc. (NSPH) develops and markets molecular diagnostics platform, the Verigene System that enables genomic and protein testing on a single platform.
4 reasons NSPH is a solid, if highly speculative play at $2 a share:
- Canaccord Genuity just initiated the shares as a "Buy" and slapped a $5 a share price target on the stock. The analyst firm states "We believe NSPH is poised to capture a meaningful stake of the $5B molecular diagnostics industry"
- The other four analysts that cover the stock have price targets in the range of $3 to $4 a share on the stock, all significant higher than the current price level.
- Insiders have been frequent buyers of the shares since last May and the company has seen solid net insider buying over that time. It also has approximately 30% of its currently market capitalization represented by net cash on the balance sheet.
- Analysts expect revenues to more than double for both FY2013 and FY2014. Given its small market cap (around $80mm after net cash) and rapidly growing sales, the company could be an acquisition target for a larger player in the space.
Corcept Therapeutics Incorporated (CORT) develops drugs for the treatment of severe metabolic and psychiatric disorders. It focuses on disorders that are associated with a steroid hormone called cortisol.
4 reasons CORT is a good speculative play at under $2 a share:
- The seven analysts that cover the stock have a median price target $3.30 a share on CORT, double its current price. The price targets range from $1.50 to $7 a share.
- Since November, insiders have bought over 500,000 shares which is a good vote of confidence in the company's prospects.
- In February the FDA approve Korlym (mifepristone) 300 mg Tablets as a once-daily oral medication for a very specific conditions found in some Cushing's Syndrome patients. 2013 will be a big year for the company as analysts expect revenues to increase better than 400% over 2012's sales levels.
- The company has over $60mm in net cash (around 40% of market capitalization) on the books and good for two years of operating costs at the current burn rate.