The Risk-to-Reward Proposition for Sorrento Has Gone Bad

In mid-September, Sorrento Therapeutics (NASDAQ:SRNE) was trading below $7. I reasoned that the risk-to-reward proposition favored investors. In the past month, SRNE stock has gained over 70%. And to my eyes, that has moved the risk-reward from “interesting” to “stay away.”

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If you happen to be one of the aggressive investors who bought stock below $7 and rode it up to the current price above $11, I don’t think you should press your luck.

If I were you, I’d take profits. Here’s why.

Sorrento Goes All-In on Covid

An investors’ biggest strength is knowing what he or she is or isn’t. 

For example, I know that I’m not very technologically savvy. That also applies to biotechnology. I can stumble my way through scientific papers, but like a language student who understands what someone’s saying in their language of study, but can’t read or write just yet, I’m at a serious disadvantage to some of my InvestorPlace colleagues. 

One of those colleagues who seems to turn scientific gobbledygook into actionable insights is Josh Enomoto. He recently discussed Sorrento’s pros and cons based on the fact it’s gone all-in on a Covid-19 vaccine.

Josh divided the vaccine race into three segments: Solution Type, One or Two Doses, and Distribution. To be a successful candidate, a company’s vaccine will likely have to satisfy two or more segments. 

My colleague points out that only the solution type works in Sorrento’s favor of the three segments.

“For Sorrento’s vaccine, the company is running a targeted virus vaccine, featuring a recombinant fusion protein of the SARS-CoV-2 spike protein. According to the Washington Post, this is a subunit vaccine, where fragments (subunits) of the SARS-CoV-2 proteins are injected into the body to induce a process for antibody production,” Enomoto wrote on Oct. 7. 

“Right from the start, this is a positive for SRNE stock. Unlike other vaccine types, some of which are experimental, subunits have a track record of success. As the Post mentioned, the hepatitis B vaccine was developed through the subunit process.”

Like Novavax (NASDAQ:NVAX), which is much farther along in the process, Sorrento has a two-dose vaccine. That puts it behind Johnson & Johnson (NYSE:JNJ) and others with a one-dose vaccine.

At the end of the day, my colleague is skeptical about the company’s hard pivot from oncology to Covid-19. It could work, but it still has a long way to go and a lot of issues to overcome. 

It’s hard to argue with that. 

The Bottom Line on SRNE Stock

When I last wrote about Sorrento in September, it was trading around 31 times sales. Since its runup, it’s now valued at over 57 times sales.  

In September, when Sorrento was much cheaper than it is now, InvestorPlace’s Tom Taulli wondered if it was “worth the speculation” despite the fact it’s got so many Covid candidates in its pipeline.

“[O]f these candidates, the one that is likely to have the most impact in the short-term is COVI-TRACK,” Taulli wrote on Sep. 18. 

“While there are various other diagnostic tests – such as from Abbott (NYSE:ABT) – Sorrento’s does have some advantages. The kit is quick, which can get results in about eight minutes, and is based on a person’s saliva. In fact, such a test could be a game-changer and be essential for many companies to better operate.”

Sorrento’s COVI-TRACK saliva test led Dawson James analyst Jason Colbert to give it a $21 target price.

Yes, as a speculative bet, there’s still a great deal of potential. However, the risk-to-reward proposition that I spoke of in September has definitely flipped from good to bad. 

Sorrento’s share price hit a 52-week high of $19.39 in August. It then fell back below $7 in mid-September when I recommended it for speculative investors. Now that it’s in double digits, I don’t see the risk-to-reward proposition working in your favor.

Barring new information that puts Sorrento’s journey into a clearer view, I believe that Sorrento isn’t worth the risk at this point unless you can afford to lose your entire investment. 

If it falls back into single digits, my viewpoint could change. Until then, I wouldn’t touch it. 

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.  

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