It is nice to be back into trading mode after a nice four day vacation in the Windy City. One thing I noticed during my time off (If trading via mobile apps can be called off-time) is that the small cap space is starting to be on fire again.
After a ~10% correction early in March, the small cap sector appears to have bottomed and has been the overall market leader over the past week. That outperformance has continued to open the trading week today as the Russell 2000 is easily the best performing large index at midday Monday.
Within the small cap space, it is hard to not notice that the small cap biotechs are rallying hard after being decimated during the recent sell-off in the small cap space. Many of these stocks lost 25% to 50% or more in that two month decline, but seem to be rapidly recovering some of these losses.
Given sentiment on this space is improving it appears a good time to talk about a couple of attractive small cap biotech plays I added to during the pullback. Both are on the move but still are far under the consensus price target analysts have on their shares.
XOMA Corporation (NASDAQ:XOMA) focuses on antibody research and has built a portfolio of innovative therapeutic antibodies, both in late-stage clinical development and in preclinical research. This small biotech has a market capitalization of just over $500 million.
The shares got past $9 a share earlier in the year before the carnage in the small biotech sector brought the equity down to less than $4 a share in May. The stock has been on the rise since then and is approaching $5 a share again. This is still substantially below the $9 median price target the eight analysts that cover the company have on the stock. These price targets range from $7 to $14 a share.
The company has more than $90 million in cash on the balance sheet and has deep pocketed partners for the majority of its product pipeline for which it also receives milestone payments. The company's lead product is Gevokizumab which is in late trials for treatment of a variety of indications including acute, non-infectious inflammation of the iris and other vascular structures of the eye in patients with Behcet's uvelitis.
Synergy Pharmaceuticals (NASDAQ:SGYP) is a small biopharmaceutical company that focuses on the development of drugs to treat gastrointestinal disorders and diseases. The company's two leading products are Plecanatide (SP-304) and SP-333. Both of these target gastronomical disorders and are in Phase II trials.
The stock has had a similar trajectory to that of Xoma Corporation. The shares touched $6.50 a share just before the big biotech sell-off and bottomed just above $3.50 a share recently before climbing back up to approximately $4.50 a share.
At these levels, the shares are still less than half the over $9 a share median price target the six analysts that cover the company currently have on the equity. Encouragingly several insiders made small purchases as the stock declined. Also comforting is the company has some $70 million in net cash on its balance sheet which is approximately 15% of its market capitalization.
As with most small biotechs in the market neither of these companies have significant recurring revenues yet both are posting losses. However, they have interesting products in the pipeline, a good amount of cash on their balance sheets and strong analyst support. SPECULATIVE BUYS
NOTE: When it comes to the small biotech space I believe it is prudent to practice what I call "Shotgun Investing." This area has more volatility than just about any other sector in the market. Therefore, I buy much smaller stakes across a greater amount of stocks to mitigate some of the risk and volatility from allocating funds to this space. The fact is there are going to be "blowups" within your small biotech portfolio more than any other sector. This will be made up for hopefully by the occasional five or ten bagger these investments can return when things go right. Just look at the buyout of Idenix Pharmaceuticals (NASDAQ:IDIX) by Merck (NYSE:MRK) today as an example of the lucrative returns an investor can achieve when things go right in this space.
Disclosure: I am long SGYP, XOMA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.