Amid the Biotech Madness, I Spotted an Opening in a Promising Small-Cap
Hedge funds dumped genomics plays like this one last week … but it was just as it announced a new AstraZeneca-linked deal.
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With the bond market closed today, equity action is slow and mixed. Breadth is negative again at about 41% positive, and we already have 240 names on the new-low list. The Roundhill Magnificent Seven ETF (MAGS), banks and oil are leading, but chips and the Invesco QQQ Trust (QQQ) are lagging.
The market appears confused as investors struggle with both macroeconomic woes and the stealth bear market that is hidden by the indexes. As I’ve been writing, at some point the gap between the two tiers of the market will close, and therein lie some promising trades. We just don’t know how and when that will occur.
I’m looking for new ideas, but I’m not rushing to put capital to work. I am, however, trying to get a toehold in a few things that look promising. The unusual action in biotechnology recently is creating some possibilities, but there still seems to be some liquidation taking place there, and there isn’t enough consolidation in most names to attract my attention.
One biotechnology stock that I researched this weekend is SOPHiA Genetics (SOPH). It sold off last week along with most of the genomics group, but it also announced good news while it was happening. SOPHiA sells software that hospitals and labs use to turn raw DNA sequencing data into results a doctor can act on. It works with any sequencing machine, and the company is paid each time a patient’s sample is analyzed.
Why It Sold
Like a number of other biotechnology names, SOPHiA was sold for reasons that had nothing to do with the company. Hedge funds that specialize in health care have been cutting both their longs and their shorts to reduce risk. That process is called degrossing, and on the long side it means selling whatever has worked. SOPHiA had gained close to 50% since its August report, which made it a source of funds.
What Changed
On Thursday, in the middle of that selling, SOPHiA and Myriad Genetics (MYGN) announced a collaboration tied to AstraZeneca (AZN). Myriad has built a score that flags a DNA-repair defect in prostate tumors. This is the kind of marker drug companies use to match patients to targeted cancer drugs. SOPHiA will build a version that hospitals can run in their own labs, which carries the test to the more than 1,000 institutions on its network. No financial terms were given, and this kind of project pays later, if a drug is approved with the test attached. It follows an August agreement to develop two such tests with AstraZeneca.
What Wall Street Thinks
All five analysts who cover the stock rate it a buy. After the August report, in which revenue grew 27% and U.S. volume grew 60%, H.C. Wainwright raised its target to $14 from $12, and BTIG went to $9 from $8. The company also raised its full-year revenue forecast to $94 million to $96 million.
The stock trades near $7.40, about six times this year’s expected sales. SOPHiA still loses money, so that valuation depends on continued revenue growth. It raised $57.5 million in June and had about $108 million in cash at the end of the second quarter, which takes financing off the list of near-term worries.
The Chart and the Plan
The stock ran after the August report, gave back part of that move last week and has held since, with technical support in the $6.75 to $7 area.
The next test is the third-quarter report, expected in early November. I’m in no rush. Fund-driven selling can run longer than it should, and I’d rather build a position in pieces as long as that support holds.
At the time of publication, DePorre was long SOPH.
