Cassava Sciences (NASDAQ:SAVA) announced on July 21 that it would present two new clinical datasets in the upcoming Denver Alzheimer’s conference. The most important of these two will be on July 29 at 11 am ET, when the company releases its nine-month dataset results for its Alzheimer’s drug, Simufilam. Expect to see SAVA stock take off when those numbers come out.
That is my conclusion after reviewing the latest research on the stock as well as what is clearly visible now in the options market.
There are several recent articles which help investors value the stock. Moreover, the options market is now placing huge premiums on both the call and put side, implying that something really big will happen to SAVA stock as a result of the conference.
Valuing Cassava Sciences Stock
Probably the best single, easy-to-understand piece on SAVA stock is the July 20 article by Seeking Alpha, “Cassava Sciences Is on the Brink of Making Medical History.” In addition to describing the uniqueness of Cassava Sciences’ drug, the article makes several noteworthy attempts to value SAVA stock. Anyone interested in the stock should carefully review the author’s well-put-together valuations.
For example, at the end of the article the author has a discounted present value analysis of the company’s future cash flows. It shows that SAVA stock is worth $700 per share, or 5.67 times the present price of $123.38. Using a 15% discount rate, he puts the market value at $29.6 billion, vs. its present market value of $4.957 billion.
My view of this is that a 15% is way too high. For example, I have redone the analysis using a 10% discount rate and came up with a value of $902.14 per share, or 29% higher. Using the 10% discount factors to bring the future cash flows to present value results in a total of $25.4 billion. In addition, I added in the author’s terminal value calculation of $12.2 billion and $282 million in present cash. The total valuation is therefore as high as $37.889 billion, or $902.14 per share.
In other words, with just a small change in the discount factor that the market could use for the stock, its value goes from being 5.68 times today’s price to 7.3 times.
And that is not all. The author also presents a very well put together analysis. He shows show that the stock’s value, at 4.1 times peak sales, is between $1,324 and $1,662. Keep in mind that these valuations are based on a low 1.4% market share of 51 million Alzheimer’s patients worldwide. I highly suspect that this market share is way too low and in fact the number of patients will be significantly higher than this.
Therefore, the author’s valuation for SAVA stock could be significantly lower than where it ultimately ends up.
What The Options Market Is Saying About SAVA Stock
Right now, call options for SAVA stock at a strike price of $150 (Aug 20) cost $15 to $15.90 per contract. And this strike price is already 20% higher than today’s price. In other words, the break-even to buy the contract is between $165 and $165.90 per SAVA share. That is 33.3% to 34% over today’s price. To say the least, that is the definition of ebullience. In other words, the option premiums are worth 12.85% of the stock price (i.e., $15.90/ $123.78), on the ask side.
These call buyers expect the price of SAVA stock to be well over $165 by Aug. 20. They are placing a huge bet on the prospect that the news coming out of the Denver conference will be so positive that the stock will likely move to $200 or higher.
By the way, the put options are also trading with huge premiums. The $100 puts for Aug 20 cost $12.40. This put is already 20% below today’s price. To make money, the stock has to fall below $87.40. This premium costs 10% of the stock price (i.e., $12.40/ $123.78).
This means investors expect to see fireworks. In this situation, it makes no sense to sell your shares ahead of time. Perhaps put on a stop-loss if you are worried that it could fall. I have seen this kind of development before. Based on that, SAVA stock is likely to pop upon the release of the data.
On the date of publication, Mark R. Hake did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.