I’m Stalking These Small-Caps as Interest Rates Spread Ugliness Across Wall St.
Higher interest rates are smacking the market, but I’m focusing on these opportunities.
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It is ugly out there, and there is no mystery about what is causing it. Bonds are being hit hard as interest rates rise. The U.S. 30-year Treasury yield is hitting 5.177%, the highest level since 2007. The iShares 20+ Year Treasury Bond ETF (TLT) is undercutting recent lows and is also close to 2007 levels.
For a while, investors did a nice job of ignoring higher oil prices and growing inflation pressures, but the dam has broken, and now higher interest rates are driving the market action. Iran, AI, economic growth, and jobs do not matter at this point. When interest rates rise, the discount rate increases, squeezing valuations across the board.
Breadth and the Rate-Sensitive Groups
Overall market breadth is running around 30% early on Tuesday, and there are three times as many new lows as new highs. Small-caps are the most sensitive to interest rates, and that is reflected in the iShares Russell 2000 ETF (IWM), which is down 1.3%. Biotech is another rate-sensitive group due to its demand for capital, and the iShares Biotechnology ETF (IBB) is down about 1% and fast approaching its 200-day simple moving average.
Most notably, the pockets of momentum that have held to support the indexes have dried up. I show only about 15 stocks up more than 10%, and only one of them is priced higher than $11. That stock is Agilysys (AGYS).
Three Names I Am Stalking
I’m watching three small biotechnology names closely: Xeris Biopharma (XERS), Precigen (PGEN), and Harrow (HROW). I plan to build substantial positions in these stocks as the charts develop, but each looks precarious right now as the stocks try to hold support. They all had good earnings reports and are anticipating strong results in the quarters ahead. Harrow even had some insider buying.
The key to stocks like this is to be patient and to build bigger positions incrementally. I will also make some short-term trades as the opportunity arises, which allows me to adjust position size while I wait.
As I write, Xeris Biopharma is at $5.93, Precigen is at $4.05, and Harrow is at $30.82. All three can easily go lower and probably will, but I view that as an opportunity. Let’s track these three names and see how they develop. When we move closer to the next earnings reports in August, I expect them to attract more interest, but a lot will depend on overall market conditions. I am stalking these stocks, because I feel confident about their fundamentals, but good fundamentals do not always drive price action, especially in a market like this.
There are many other names like this out there right now. If you would like to share them in the comment area, I will offer my view.
At the time of publication, DePorre was long XERS, PGEN, HROW
