A Small-Cap Stock Is Offering an Opportunity — And Almost Nobody Is Covering It

We have troubling action on Monday morning. There is one pocket of strength in semiconductors, which are up about 1%, but it is listless other than that.

My biggest concern is the 20+ Year Treasury Bond (TLT), which is trading down to levels last hit in 2004. Given the hope of a less hawkish Fed that we saw develop last week, we have to be concerned that the bond market may know something that equity buyers may not.

I’m reminding myself right now not to be sucked into new buys. I see no reason to trust positive momentum right now. The semiconductor chasing looks a bit desperate to me but it is the best price action out there so it is understandable that it attracts interest.

Waiting for Better Entries

My game plan is to focus on stocks I think have the best fundamentals and wait for pullbacks and support levels to give me lower risk entry points. One big-cap name I have on watch list is Amazon (AMZN). I haven’t bought any yet but am close to an initial buy.

One of my top small-cap plays to watch is Precigen (PGEN), which had an outstanding second-quarter report. Precigen makes Papzimeos, a gene therapy approved a year ago as the first treatment for recurrent respiratory papillomatosis. Human papillomavirus (HPV) causes growths to keep returning in the airway, and until last August the only option was surgery, often repeated for years. The therapy goes after the cause rather than cutting out the growths over and over.

Precigen had one of the best quarters of any company I follow. The stock closed at a 52-week high on August 10 and has given back about 15% since. Nothing in the business changed over those sessions. No warning, no offering, no downgrade, and biotech as a group went up while PGEN went down. That is exactly the sort of setup I look to trade.

Second-quarter revenue came in at $55 million against a consensus near $28 million. The company earned $20.1 million, $0.05 a share diluted, where analysts looked for a small loss. Management had guided to cash-flow breakeven by year end and arrived at GAAP profitability roughly two quarters early. The chief financial officer pointed out on the call that turning profitable before the first anniversary of an FDA approval does not happen often.

Management declined to put a number on third-quarter revenue. What they did commit to is a gross margin settling into the high eighties or low nineties once pre-launch inventory clears, and insurance coverage that now reaches essentially every covered life in the country.

Almost Nobody Covers It

Four sell-side firms follow a company with a $2 billion market capitalization. H.C. Wainwright raised its price target to $18 from $14 the day after the report and named it a top pick for the second half. The other three have not updated their models since.

I am watching for something out of JPMorgan, which has sat at neutral since last August on concerns about capital needs and dilution. Precigen has since funded its own launch and posted a profit.

On the earnings call the JPMorgan analyst spent all three of his questions on demand, the pipeline, and billing codes. He did not ask about cash.

Why It Pulled Back

A legacy holder has been selling. Merck KGaA, through its Ares Trading arm, filed on August 7 showing its stake in Precigen had dropped below 5% of the shares outstanding. The stock closed at its high that day and has declined every session since.

Crossing below 5% ends the disclosure requirement, so the rest of that position, roughly 9% of the float, can be sold from here without anyone seeing it. I read that as mechanical repositioning by a holder unwinding a stake it has carried for years, not a statement about value.

There have been insider sales, but they are 10b5-1 transactions, scheduled in advance under a plan rather than decided in the moment. The CFO sold in June and again in July, both before the quarter was reported. The chief operating officer exercised options struck at $2.33 and sold about $450,000 worth in early August. The CEO still holds more than four million shares. Nobody sold on discretion into the high.

The Competitor and the October Date

Inovio Pharmaceuticals (INO) is the only competitor close to market, with an FDA decision due October 30 on INO-3107, a DNA-based immunotherapy for the same disease.

Inovio had a good week. It cleared two of the last procedural hurdles before a decision, said the agency did not revisit an earlier question about its approval pathway, and has about $55 million and a contract sales force lined up. Jefferies upgraded the stock to buy on August 13 and took its target to $3 from $1.80. Precigen fell more than 5% that session.

I think the market is overestimating the near-term impact. Approval is not enough to launch a product. Precigen was approved last August and waited eight months, until April 1, for its permanent billing code. Hospitals told the company they had been holding back for that code and only started coming on board in the second quarter. An Inovio approval on October 30 puts that product on a miscellaneous code through most of next year, while Precigen bills under a permanent one at institutions already trained on the workflow.

Then there is the depth of the data. Precigen reports 83% of patients in ongoing complete response beyond three years, some past four years with no surgery at all. Inovio’s published follow-up covers 28 patients and shows half with no surgeries in the second year.

Different trials, so it is not a fair comparison, but what an ear, nose and throat surgeon is buying is no more surgery, and Precigen is delivering that. Inovio also has to raise money again before it can put a sales force in the field.

What I Am Doing

I bought some PGEN on Friday and have plenty of room to add. I plan to do that on weakness rather than strength, and I am carrying two things in mind while I wait.

The October 30 decision on INO-3107 can move this either way, and the legacy holder may keep dumping stock. Either one could knock the shares down. Given the second-quarter numbers and the head start on billing and coverage, drops of that kind are where I want to be adding rather than trimming.

The stock sits about 15% off its high with support near $6. Under that, the 50-day simple moving average comes in near $5.50. Those are the areas I am looking at. As usual, I am not going to chase strength at the open on Monday.

At the time of publication, Rev Shark was long PGEN.