2 Small-Cap Names Ready to Move Higher in Uncertain Market

The biggest news of the month as far as the long-term health of the economy and the markets are concerned dropped this week. It was released with little fanfare and got a muted response from the investing community, which is much more obsessed currently with every reading around inflation and when the central bank will cut the federal funds rate.

The Congressional Budget Office just revised its estimate of the federal government's fiscal 2024 deficit by an additional $400 billion to $1.9 trillion, which is approximately 6.7% of GDP, and within an economic expansion, no less. This comes after a $348 billion shortfall for the month of May alone. Outside of 2020, when COVID-19 had most of the country in lock down mode, it is the largest deficit for the month of May in the nation's history. Federal revenues rose 5% on a year-over-year basis to $324 billion. Unfortunately, Federal outlays rose 23% on a year-over-year basis to $672 billion. The only question at this point is not if, but when the chickens come home to roost.

I am noting this because of the existential threat that this deteriorating trend poses on a longer-term basis and because of the short shrift this gets in the media. In addition, the massive amount of deficit spending will continue to be a huge headwind in bringing down inflation to the Federal Reserve’s 2% official target. Outside of a recession, I don’t think Chairman Powell will be successful on that front and investors will be lucky to get two minor interest rate cuts over the next six months.

However, being that this is a Friday, in this column I will quickly highlight some positive developments around a couple of biopharma names. 

 Let’s start with Mirum Pharmaceuticals MIRM, a biopharma name that I have discussed a few times on these pages over the past year. Interim results from a mid-stage study this week showed that its drug candidate volixibat easily exceeded the efficacy thresholds to treat both primary sclerosing cholangitis and primary biliary cholangitis.

In addition, its product LIVMARLI, which was approved for cholestatic pruritus in late 2021, continues to show solid sales traction. The trial news triggered Stifel Nicolaus to maintain its buy rating on the stock and move its price target from $48 all the way up to $66 a share this week. I expect other analyst firms to follow.

Speaking of analyst firms, Ocular Therapeutix OCUL is seeing some love from Wall Street after its investor presentations last week. TD Cowen upgraded Ocular from a hold to a buy this week and raised its price target from $7 to $11 a share. The analyst there believes one product in the company pipeline could have a $1 billion peak sales potential. Given that the company’s market cap is just under $950 million (of which over $400 million is net cash), that would be a game changer. Four other analyst firms, including Piper Sandler, have reissued buy ratings on the equity over the past week. Price targets proffered range from $14 to $22 a share. After a 10% rally on Thursday, OCUL trades a bit over $6 a share.

Both small-cap names feel like they are ready to move still higher, despite what I see as an uncertain market.

At the time of publication, Jensen was long MIRM and OCUL.