This article is excerpted from Tom Yeung’s Moonshot Investor newsletter. To make sure you don’t miss any of Tom’s potential 100x picks, subscribe to his mailing list here.
A Recession Is Now “Inevitable”
On Thursday, the Commerce Department reported that U.S. GDP had shrunk 1.4% from the prior year.
“There are two realistic scenarios for how the coming months play out. Both end with recession,” noted Lisa Beilfuss of the Barron’s Advisor editorial team. “Either the Fed sufficiently fights inflation or it doesn’t, the latter resulting in the stagflationary combination of high prices and slow growth that inevitably leads to a worse recession.”
In other words, the S&P 500’s 12-year bull market seems to have left without paying the check. Investors now find themselves stuck with the tab.
In some respects, America’s stock market bender ended long ago. Cathie Wood’s ARKK Invest (NYSEARCA:ARKK) peaked in early 2021; it has since lost two-thirds of its value.
But in other areas, the party still rages on. According to the latest data from S&P CoreLogic, home prices jumped nearly 20% in February. And in energy, North American oil rig counts are still ticking up.
Some corporate executives are belatedly joining the festivities. Over the past week, insiders have snapped up $354 million of shares, according to data from Finviz — around five times the usual haul. And one group of companies have seen particularly high interest:
The Biotech Bonanza of 2022?
Last month, I noted how biotech stocks are a rare species:
They’re high-growth stocks that tend to hold value in downturns.
That’s because drugs in development are also tradable assets. If share prices drop too low, activist investors could theoretically buy the entire company and sell the drug candidates for immediate profit. Many biotechs also maintain sizable cash positions to fund clinical trials.
These qualities have long helped biotechs navigate recessions. In 2008, biotech stocks dropped by less than half of the S&P 500. And the four firms I mentioned in April have only collectively fallen by 14%, despite heavy losses from Greenwich Life Sciences (NASDAQ:GLSI).
- Longeveron (NASDAQ:LGVN). +5%
- Entera Bio (NASDAQ:ENTX). -2%
- Tracon (NASDAQ:TCON). -20%
- Greenwich Lifesciences. -38%
By comparison, ARKK Invest has fallen by 22% over the same period.
The Downsides of Biotech
Of course, biotechs aren’t perfect. Value stocks will generally outperform when interest rates rise. “Low-duration” stocks with near-term profits are discounted by less than “high-duration” stocks with further-out gains. Going back to my April picks, Greenwich’s stock dropped 38% despite positive phase-2 results.
And most biotech companies eventually stumble. Only 20% of drug candidates ever make it to approval, according to the NIH. Investors need specialized knowledge of drug pipelines to avoid picking up too many duds.
Nevertheless, April’s massive drawdowns have created no-brainer opportunities for some enterprising executives. And if you’ve followed my Insider Track strategy, you’ll know that when certain insiders are buying, it’s time to look closer.
Last Thursday, BioCardia (NASDAQ:BCDA) CEO Peter Altman added another 5,000 shares to his already sizable stake in the company.
The purchase was particularly telling. BioCardia has published virtually no negative news since shares reached $5 last June, suggesting that macroeconomic forces are the primary culprit behind the stock’s fall to $1.50.
Recession fears have even overshadowed positive news. In February, the firm announced their CardiAMP system had received Breakthrough Device Designation from the FDA. The program selects high-potential systems for expedited development and has a strong track record in bringing products to market.
Plus, BioCardia has multiple shots on goal. Its CardIAMP cell therapy has two phase-3 trials underway, one with a primary completion date due later this year. Another four trials round out the firm’s pipeline.
This biotech Moonshot remains a risky bet; its tiny $27 million market capitalization could vanish overnight if pivotal trials fail and the company has a history of leaving investors disappointed. Shares peaked in 2017 at $100 before a drawn-out legal battle with Boston Scientific sent shares sliding to $1.50.
But BioCardia could be a bet worth taking. The company’s $10 million in net assets mean that investors are receiving the entire company for around $17 million. And its “breakthrough” designation implicitly raises its probability of success. If you’re looking to invest a small stake, BioCardia is an increasingly attractive bet in a sea of recessionary fears.
Sharps Technology (STSS)
For most intents and purposes, Sharps Technology (NASDAQ:STSS) bears all the signs of a busted IPO. Its $4.25 IPO price barely lasted beyond the opening bell; shares have since fallen to $1.22.
But last Thursday, CEO Robert Hayes made a small $6,000 purchase that should make skeptics take a second look.
Sharps Technology is a startup-stage medical device company producing safety syringes. The company’s patented system sheathes the needle immediately after an injection, and its efficient design helps get extra doses from vials.
The company holds particular promise in areas like cosmetic surgery, where patients require multiple injections. Home-administered insulin for diabetes management is another significant market. And Sharps Technology has become a firm to watch.
In September 2021, the firm hired its current CEO — a former senior director of a pharmaceutical glass company. It was an obvious choice. In his previous role, Mr. Hayes developed and commercialized specialized pharma packaging products. His move to Sharps Technology gives the startup the leadership it needs to commercialize. And a greater investment into vaccines could increase the market for safer needles, at least in the short run.
There are some downsides. STSS remains a zero-revenue company; $13.6 million on the books will primarily go towards purchasing manufacturing facilities. The market for a higher-quality safety syringe is also untested — there’s no guarantee that hospitals or healthcare insurers will consider the safety improvement cost-effective.
Yet Sharps Technology is a compelling bet. Its current market capitalization of $11 million sits below its cash value; the company could repay its $2 million in outstanding notes and still theoretically be worth more. And Covid-19 vaccine shortages have highlighted the value of more efficient syringes in the court of public opinion. Though STSS isn’t a slam dunk winner, Mr. Hayes certainly has reason to buy.
Cyclo Therapeutics (CYTH)
Finally, recent drawdowns have made Cyclo Therapeutics (NASDAQ:CYTH) a stock to watch.
This company is a long shot bet on a potential drug to slow Alzheimer’s disease. By helping the body move cholesterol out of cells, Cyclo’s lead candidate, Trappsol, could theoretically reduce cell damage found in Alzheimer’s patients.
The product is still relatively untested. Unlike medicines dealing with more traditional pathways, Trappsol’s positive Phase 1 results tell us little about its efficacy. We only know that the drug (probably) won’t kill its patient. Only phase-3 results will tell us for sure if the drug has any use.
Still, Cyclo’s rapid drop from $13 to $2.50 makes for a compelling value play. This Moonshot firm has $16.6 million in cash and zero debt. Its $23 million market capitalization now puts its enterprise value at barely $6 million — a rock-bottom valuation for a firm with an orphan drug designation in its pipeline.
Insiders have also been major buyers of the stock. Three executives, including both the CEO and COO, have bought significant stakes in the past several months.
Clear-eyed investors should only give Cyclo Therapeutics a 15-25% chance at any success. But in the off-chance that Trappsol proves useful, the payoff will more than make up for the gamble.
Are We Already in a Recession?
Regular InvestorPlace readers might have noticed a broad change in tone. In November, InvestorPlace analyst Eric Fry began warning about the “Tech Bubble 2.0” before tech firms started to tumble. And Louis Navellier was quick to recommend higher-quality plays in January when Fed Chair Jerome Powell began spooking markets.
Moonshot readers will have likewise noticed a shift in this newsletter. Energy plays — which included Peabody Energy (NYSE:BTU) and Enservco (NYSEAMERICAN:ENSV) in 2021 — now include cheap midstream companies with plenty of downside protection. And I’m mainly ignoring today’s mania over stocks like Redbox (NASDAQ:RDBX) in favor of deep-value plays with better long-term odds.
That’s because we may already be in a recession. Last month, the University of Michigan’s Consumer Sentiment survey showed its lowest reading in over a decade after plunging 26%.
“Falls this sharp are often associated with recessions,” noted the Economist.
That 1.4% GDP shrink in Q1 is also bad news. Recessions are generally marked by a fall in GDP over two consecutive quarters. Look around, and many Main Street folks are starting to feel hopeless.
The negative sentiment will reverse at some point. Stocks eventually become too cheap to pass up, making even high-growth one bargains. But with current attitudes so bearish, it’s hard to envision a quick return to the bull market of 2021. For now, it’s best to play some defense with higher-quality value Moonshots until animal spirits revive.
P.S. Do you want to hear more about cryptocurrencies? Penny stocks? Options? Leave me a note at email@example.com or connect with me on LinkedIn and let me know what you’d like to see.
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On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.