It’s been a “ho-ho-hopeful” time of year for investors thus far in 2016, but not all stocks received the memo that President-elect Donald Trump green lit the typical Santa Claus rally ahead of schedule.
Small-cap stocks with businesses tied to the biotech industry, for instance, are experiencing Grinch-like behavior. That’s not to say all these forgotten tickers are naughty and won’t rally anytime soon.
The reality is that there are drags that can weigh these small-ca stocks down, from light analyst coverage, trumpeted competition and lengthy, costly drug trials. But that doesn’t mean 2017 will continue to look like purgatory for some companies within this realm.
Despite these challenges, three biotechs of small-cap stock stature which have caught my eye are Anavex Life Sciences Corp. (NASDAQ:AVXL), Organovo Holdings Inc (NASDAQ:ONVO) and Amarin Corporation plc (ADR) (NASDAQ:AMRN).
Each of these small-cap names holds promise on and off the price chart. Each also maintains listed calls and puts, providing us an options-based strategy to mitigate risk and/or power returns in anticipation of a breakout.
Biotech Small-Cap Stock #1: Anavex Life Sciences (AVXL)
The real story for this biotech small-cap stock is its recent announcement the company’s Alzheimer’s drug ANAVEX 2-73 met its primary and secondary endpoints as part of a phase 2a, 12-month long clinical study.
As Trump would say, this is “yuge” for AVXL. Up to this point, no drug manufacturer, big or small, has been able to stabilize the disease. Anavex could be the first. It even has the attention of large-cap Biogen Inc (NASDAQ:BIIB).
There’s still a lot of risk with this small-cap stock, though. According to Anavex, a critical 6/12-month Phase 2/3 trial is expected to include up to 300 mild-to-moderate Alzheimer’s patients. To say the least, 2017 could be a pivotal year for this biotech small-cap stock off the price chart.
On the Anavex price chart, the action for this small-cap is looking attractive. A weekly double-bottom pattern accompanied by a volume spike off the bottom is nice to see. At the same time, it’s more important to realize binary price risk could mean “bank or tank” for investors in the blink of an eye with this small-cap stock.
Reviewing the AVXL options board, liquidity is far from great, but the April $2.50/$7.50 bull call spread for up to $1.65 is attractive.
For $1.65 or less, and with AVXL stock at $4.23, the trader enters a limited-risk position with less than 40% the risk of stock and a slightly below market breakeven of $4.15. If shares power higher before April expiration, above $7.50, this bull can bank $3.35 for a return in excess of 200%.
Biotech Small-Cap Stock #2: Organovo Holding (ONVO)
On Monday the company presented preclinical data showing the survival and sustained functionality of its 3-D bio-printed human liver tissue when implanted into animal models. It’s a big deal as the market for this type transplant could be upward of billions in potential revenue.
Having said that, “preclinical” should be stressed. The endgame, if there is to be one, is still several years out from being commercially ready. In the meanwhile, Organovo’s ability to expand its ExVive human kidney and liver tissue services may prove vital to the company’s own health.
Looking at ONVO’s weekly price chart and 2016 has been a year in which shares of the small-cap stock appear to have turned the corner. Following a massive two-year long downtrend, ONVO managed to break through resistance back in April and looks to be in the early stages of developing a new uptrend.
Not wholly reflected on this chart, but Monday’s bullish thrust of nearly 12% sent ONVO well above a bearish gap from October and looks to confirm the weekly chart’s pivot low. ONVO faces a bit of resistance from $3.75 to $4.00, but if the small-cap stock can push through, it should be clear sailing to $5.00 to $5.50 by early in 2017.
Reviewing Organovo’s options, I like approaching this with the Feb $4 call for 35 cents or better. For less than 10% the risk of ONVO stock a bullish trader can position for a breakout above resistance. At the same time, by using this slightly out-of-the-money call the trader can capture a good chunk of the anticipated move higher with controlled leverage which magnifies the return compared to owning shares of this small-cap stock.
Biotech Small-Cap Stock #3: Amarin (AMRN)
AMRN stock has a market cap of around $850 million. With a forward price-to-sales ratio of around 5, this small-cap already enjoys fairly decent revenues and a multiple that’s far from outlandish.
The real whale Amarin is waiting to catch however is proving Vascepa can improve cardiovascular outcomes for individuals with unhealthy triglyceride levels. This confirmation rests on a continuing “Reduce-It” study.
Full results of the study aren’t expected until 2018, but a solid interim analysis in mid-2017 could find investors moving in ahead of the final data verdict. The fact is the high-triglyceride market commanded $40 billion in sales at its peak — and Amarin’s Vascepa could become the 800 lb. whale.
Looking at this small-cap stock’s weekly chart and it appears investors are already starting to move back into AMRN and position for a positive outcome.
Shares of Amarin have been consolidating the past couple months in a bullish ascending triangle pattern while testing a key pivot high from 2015. The price action looks healthy enough to anticipate a breakout at hand as AMRN enters 2017.
Checking the AMRN options board, liquidity is a bit prohibitive for spreads, but a long call purchase followed up by a call sale looks approachable.
One call which looks attractive is the March $3.50 call. With shares at $3.22, the call is priced for 45 to 50 cents. It’s a bit pricey, but if this small-cap stock starts to move aggressively higher the trader has great upside potential and all the while, maintains limited risk in the event Amarin fails to break out.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT