By David Sterman
After posting a very rapid and strong upward move, stocks tend to do one of two things: Either surge even higher, or fall victim to profit-taking. They rarely stay put.
That's why it's profitable to continually pore over recent strong gainers, and assess which stocks have further upside and which ones look ripe to short. I took a look at the recent top small-cap gainers that reside in the Russell 2000 Index (eliminating stocks that still sport a market value below $100 million).
Here's what I found:
|Company (Ticker)||One-month gain||Current price||52-week range||Market Cap. |
|Clinical Data (CLDA)||61.6%||$26.7||$27.5/$10.9||$804|
|Hughes Communications (HUGH)||53.5%||$62.1||$64.0/21.2||$1,350|
|Online Resources (ORCC)||43.6%||$6.7||$6.8/3.6||$207|
|Universal American Fin. (UAM)||36.3%||$20.7||$20.8/$13.1||$1,560|
One of the hottest stocks of January isn't even done yet. You may have missed a 70% gain on Monday, but analysts think this stock has another 40% to 50% upside. Clinical Data just received Food & Drug Administration approval for its drug, Vilazodone, which treats depression. Many thought that approval would be overwhelmingly likely and strongly predicted that the FDA would deliver a thumbs-up, but the news still seemed to catch investors off guard.
Why aren't shares done rallying? Because Viladozone has proven to be especially effective, especially for patients who are unresponsive to other medications. It's a $10 billion market, and Clinical Data may garner 5% to 10% of the market down the road. Analysts at Griffin Securities peg peak annual sales at $750 million.
But this isn't a one-trick pony. Clinical Data appears to have a fairly impressive drug pipeline, led by Stedivaze, a compound that helps to highlight symptoms of heart disease during cardiac-stress tests. Phase III tests are now underway, and Stedivaze could hit the market by 2015, with potential peak annual sales of around $450 million.
That's why analysts think Clinical Data, which is now worth around $800 million, could eventually be valued in the $1.0-1.5 billion range. Indeed, the company must now look awfully tempting to the major drug companies that are struggling to fill their pipelines.
Investors have likely missed the boat on this one. The satellite operator has been reported as seeking a buyer, which pushed shares from $40 to $60 fairly quickly. What will it fetch? That's anyone's guess. Press reports have been vague.
Not only may upside be capped at this point, but shares would likely fall back if a deal doesn't materialize. That's why it pays to monitor this stock. Impatient momentum investors may lose interest and exit the stock, pushing it back down to a better entry point, perhaps below $55. That may never happen, but would be the only reason to chase this hot stock.
This small biotech is pursuing a wide range of clinical trials with partner Roche Holdings (OTCQX:RHHBY). Shares have risen 50% in the past month, perhaps on the back of a particularly bullish financial commentator writing in the blogosphere. Early stage biotech plays are too risky for me and are best left to experts that track the sector, so I'll take a pass.
This company helps telecom and financial firms develop payment-processing systems. As is the case with Hughes Communications, it is apparently up for sale. Shares spiked more than 30% on Monday after the company announced it has been receiving overtures from potential suitors. Analysts at D.A. Davidson suspect that "preliminary offers would be in the range of $7-$9 and we believe any offer above $9 would be accepted." Shares recently traded hands at $6.50, implying modest to robust upside if a deal came to pass.
Online Resources has been rumored to be of interest to suitors many times in the past, but the company has never come out and explicitly acknowledged interest before. Its decision to announce that the fox hunt is on now is likely due to a desire to be sure that all potential suitors know the company is in play. And unlike the case with Hughes noted above, where the failure for a deal to come together soon may cause shares to drift back down, Online Resources more likely can maintain its current share price even if a deal takes a while to materialize, because expectations are likely in place for protracted discussions. The company plans to address the issue in early March when results for the first quarter of 2011 are released, and shares look worth a flier here in light of the limited risk and potentially decent reward.
The reason behind this biotech's 50% spike: I have no idea. Cerus, which has a technology that can kill blood-borne pathogens, appears to possess a fairly large market opportunity. The next step in the company's development is to try and secure European regulatory approval for blood processing. (Right now it is only approved to process blood platelets.)
This was a $70 stock a decade ago, though it eventually fell below $1 before a recent rebound to above $3. Sales for Cerus peaked at $30 million in 2006, and the company has never generated a profit. The company has continually needed to sell more shares to prop up the balance sheet.
Even if Cerus is able to get the regulatory nod in Europe, it's a fairly competitive market. Right now, many European countries use a compound known as "methylene blue" to de-activate blood pathogens. But Cerus' approach has been viewed by some as technologically superior. This is certainly a stock worthy of further research, but it's hard to peg any sort of potential target price from my cursory view.
Clinical Data looks set for a solid 2011 as more investors become aware of the potential for its slate of drugs. If you see analysts pick up coverage, that's because their employers likely smell a banking deal coming. Buyout or not, these shares look headed well higher.
Online Resources and Cerus may be worth small investments. The first could deliver a good-sized gain in a fairly short time frame. Cerus looks like it has blockbuster potential, but it also comes with a high degree of risk, especially since the balance sheet will soon be ready for another dilutive capital injection.