These Small-Cap Names Offer a Simple Strategy in an Overvalued Market
Here are two names that remain reasonably valued even as the market becomes increasingly overbought.
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If I had one word to describe the market in 2024 it would be "impervious."
Despite economic growth being less than half what it was in the back half of 2023, and with an astounding lack of breadth for most of the year, the major indexes continue to show remarkable resilience and are not too far off their all-time highs. The year is feeling more and more like a repeat of 1968 in many ways. We even have the DNC convention in Chicago once again.
In a span of one week, the candidate for one major party came within an inch of being assassinated and the other major party forced the current POTUS to drop his re-election plan, neither of which was able to generate much more than a blip in volatility.
I executed somewhat significantly out of the money, long-dated (August 2025) bear put spreads in trading on Tuesday against the SPDR S&P 500 ETF Trust SPY. These represent a small percentage of my overall portfolio, but guard the rest of my holdings should the market give us a 20% whoosh down at some point over the next 13 months — a scenario I regard as increasingly likely given the absolute complacency of investors around an overall market that in many ways (P/B, P/S, market-cap-to-GDP ratio, etc.) is more overvalued than even during the euphoria in equities at the end of the internet boom.
This allows me to continue to take covered-call holdings in the few names I am finding that are still reasonably valued in an overbought market. Here, I will discuss two small biotech stocks I have upped my exposure to in recent weeks with this simple option strategy.
Let’s start with Viridian Therapeutics VRDN. This small-cap biopharma name was one of three companies listed last week by Wedbush that would make logical acquisition targets for drug giant Biogen BIIB. Wolfe Research also initiated the shares as a new outperform in June, it should be noted. More importantly, key late-stage trials for VRDN-003, an injectable drug for thyroid eye disease should kick off either next month or September and could be an important catalyst for the stock.
I also added to my stake in Arvinas, Inc. ARVN during the stock’s recent weakness. This is another potential buyout target and made the Wells Fargo M&A target list in late May. Goldman Sachs recently mentioned this equity for the same reason.
This clinical stage biotech company’s focus is on developing treatments using an individual's own natural protein disposal system to degrade and remove disease-causing proteins. The company has several "shots on goal" within its pipeline and two Phase 3 trials ongoing with another scheduled to kick off by the end of 2024. The company also has a substantial collaboration deal with Pfizer PFE, for which the drug giant paid a large upfront fee. Finally, Arvinas has a huge cash hoard that makes up a bit over half of its current market capitalization. This developmental firm has many paths (buyout, trial success, another collaboration deal, etc.) that could trigger a significant rally in the shares.
And those are a couple of developmental concerns I still think have value in what continues to be an overvalued, but currently "impervious," market.
At the time of publication, Jensen was long ARVN, PFE and VRDN, and short SPY.
