With a proprietary momentum-focused strategy, small-cap expert Kevin Kennedy has seen a number of biotech stocks earn a spot on his buy list. Here, the editor of the Coolcat Report discusses the biotech sector and three small-cap biotech that meet his fundamental and technical criteria.
Steven Halpern: Joining us today is small-cap expert, Kevin Kennedy, editor of the Coolcat Report and its related group of newsletters. How are you doing today, Kevin?
Kevin Kennedy: I’m doing great. It’s always great to talk with you, Steve.
Steven Halpern: Now, you publish three newsletters and they’re focused on stocks and ETFs, and all of them incorporate a proprietary ICE momentum strategy. Could you explain to our listeners this approach?
Kevin Kennedy: Well, basically, I look at market timing, momentum stocks, and money management, what I call the three Ms. I’m looking for, obviously, a strong market. I’m looking for the strongest stocks and sectors in that market and I basically have to have some rules to guide my buying and selling.
Steven Halpern: So, one of the factors you follow is when stocks break out the highs and then they have a correction, could you explain that factor?
Kevin Kennedy: Yeah, you know, again, what I’m looking for, typically, is a stock that maybe has gone downhill for a while, but found bottom, but the trend of the company, you know, the news developments and stuff, all of sudden, you know, kick in and it makes another rally, typically into new high ground. Then I like to look for that first pullback after they’re, you know, just kind of emerging.
Steven Halpern: Now, it appears that lately a lot of biotechs have popped up on your buy lists. What are some of the specific things that you look for when it comes to analyzing a biotech stock?
Kevin Kennedy: Well, you know, I mean, obviously, I’m looking for momentum and it’s pretty hard to find a sector with more momentum than biotech.
The Nasdaq Biotech Index is up more than six-fold since the bottom of the 2008-2009 bear market. You know, up 30% or more every year since 2012, up more than 20% this year even though it’s pulled back a little bit here lately.
Some things that I look for in biotech stocks are a nice story, a good pipeline, strong partners, and, you know, good analyst coverage. So I look for companies with a focus on a big area like cancer or a more specialized but still promising niche.
We also see that the best biotech stocks have a fairly deep pipeline and aren’t, you know, betting it all on one drug, you know, which obviously if it doesn’t pan out can really mean danger.
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I also like to see partnerships with bigger, more established biotech and drug companies, which typically will give the smaller companies milestone payments or possibly collaborate with them in the actual development of the drug, plus they give the company some nice street cred.
Then I also look for positive analyst coverage with nice price targets, ideally, you know, well above where the price of stock is currently trading at.
Steven Halpern: Now, as many investors know, biotech stocks, particularly the smaller ones, often trade on promise or the potential of future products. Does this present any special challenges that you need to look at when you’re assessing the sector?
Kevin Kennedy: Oh sure, you know, most biotech stocks are losing money, so it’s important to compare what they are losing each year with how much they have on hand, so you can make sure they’ll at least survive to get to that promised land that they’re trying to shoot for with their wonder drug.
They should have at least enough cash to last another year at the current burn rate. Obviously more cash is better. You also want to look for stocks which have recently raised a fresh round of funding, because typically what happens is the stock doubles and just as everybody starts to get excited about it, they, you know, announce a secondary offering and that kind of usually takes the stock down a bit.
And then you’d like to see these stock companies show at least a small amount of sales. I mean, if they’re just in the development phase, they may not have that but it’s nice to see some milestone payments or some indication that they’ve got something going for them besides, like you say, a hope and a prayer.
Steven Halpern: Now, turning to some individual stock ideas, you like Corcept Therapeutics (CORT). What’s the attraction here?
Kevin Kennedy: Ah, well, Corcept focuses on disorders that are associated with the steroid hormone called cortisol. What’s interesting here is, it’s a smaller company, but they have one drug called Korlym, which is actually producing revenues.
They’re targeting diseases like Cushing’s Syndrome, triple negative breast cancer. They’re basically trying to use Korlym to treat triple negative breast cancer and they’re expecting some results by the end of the year in a trial they have going there. They’ve got some nice research and development agreements.
They’ve got an analyst target from FBR Capital of 12 bucks. This is a stock that, basically, traded pretty close to or above 7 in June. It’s pulled back since then, but that was pretty much its best level since it came public about ten years ago. They got 35 cents a share in cash.
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They’re actually expected to cut their loss to a penny in the next four years and they expect to reach cash flow breakeven without needing to raise additional funds, so, market cap’s about 500 million, a lot to like in this stock.
Steven Halpern: Now, you also point to Sarepta Therapeutics (SRPT). What’s the story with this firm?
Kevin Kennedy: Sarepta’s a bigger company, about a $1.4 billion dollar market cap. They focus on rare infectious and other diseases. Their lead product candidate is called eteplirsen, which is, it’s in phase three trials for the treatment of individuals with Duchene Muscular Dystrophy, which is a rare, and basically fatal, genetic muscle wasting disease.
They also have a number of other things they’re working on—lupus and other, mostly central nervous system diseases—and so, this stock, again, has had a lot of big moves over the years. Kind of fell back to below $15 last year—and actually hit about $11 in January—but it’s about tripled since there.
What’s really driving this stock is they had a combative CEO, Chris Garabedian, who quit in April and they’ve replaced him, and basically, that’s allowed them to kind of get their trials back on track with the FDA.
It’s important because they’re battling BioMarin Pharmaceutical (BMRN), which has a competing drug to deal with this muscular dystrophy. They got more than $4 a share in cash so they’re doing fine there; you know, a promising stock.
Steven Halpern: Finally, let’s look at Trevena (TRVN). What caught your attention with this situation?
Kevin Kennedy: Trevena is the smallest of the three. Again, they’re focused on central nervous system products. They’ve got a fairly good pipeline.
They’re really focused on developing, basically, pain medications for treatment of moderate to severe and chronic pain, migraine headaches and that type of thing. They also are working on some cardiovascular drugs and treatment of acute heart failure.
Again, this is a stock that made a big move, say from December to March, and then it’s kind of traded sideways since then, building a nice little base.
Again, this is a smaller company, about a $250 million market cap. Annual sales of less than a million and it lost almost $2 a share in the last year, but they’re expected to cut that loss in half in the next four quarters.
They’ve got, you know, more than two and a half dollars per share in cash. They also have a collaboration with Merck (MRK) and a license agreement with Allergan (AGN), so there’s a couple big boys and it's nice to have those guys backing you up.
Steven Halpern: Again, our guest is Kevin Kennedy, of the Coolcat family of newsletters. Thank you for your time today.
Kevin Kennedy: Thanks, Steve. Always a pleasure.
