Two Stocks I'm Playing to Stay a Step Ahead in a Shaky Market
Here's why I'm adding these small-cap names to my portfolio amid extreme valuations.
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Even the most jaded investor has to admit by now that this market is amazingly resilient. A "no confidence" vote upcoming for the government in France. China cutting off exports of gallium and germanium to the U.S. in response to the nation’s latest restrictions on the Chinese semiconductor industry. An unexpected martial law declared in South Korea. No problem to any of the news. The headlines registered barely a blip in trading action on Tuesday.
While my view remains that the overall market is trading at extreme valuations using many historical metrics, there is no doubting the "Big Mo" is with the bulls right now as it has been throughout 2024. So, I continue to put new money to work within my portfolio, despite my trepidation around equity markets as a whole. I am employing covered-call orders with options whose strike prices are slightly under the current trading level of my targeted stocks. This at least gives these new holdings some significant downside risk mitigation, which helps me wade into this overbought market with a degree of confidence.
For example, in the very brief dip down in trading action on Tuesday, I initiated small starter positions in two new holdings. The first was LifeMD, Inc. LFMD. This is a name I have executed a couple of successful covered-call trades in over the past several years. The stock started the year valued at approximately two-times forward revenues; after a steep decline this year, the equity is being valued at a bit over one-time expected fiscal 2025 revenues. Growth at this telehealth company is being powered by its GLP-1 weight management offerings.
The company delivered nearly 40% year-over-year revenue growth in the third quarter, and the stock has acted much better since its third quarter earnings beat in early November. LifeMD has a solid balance sheet and is marching toward being consistently profitable. The company has produced positive cash flow for four straight quarters now. There might also be some opportunity in restructuring or spinning off its unperforming software-as-a-service document business. Regardless, the shares seem too cheap at just over six bucks each.
I also started a small holding in Summit Therapeutics SMMT. This clinical stage biotech’s main asset is a candidate called ivonescimab, a novel anti-tumor treatment. The compound outperformed blockbuster Keytruda in efficacy within some trial results this summer. That news briefly pushed the stock past the $30 a share threshold. Most of those gains have now dissipated, however, and the equity now trades in the high teens again. In early October, ivonescimab did garner Fast Track designation as part of a combination therapy for the treatment of advanced lung cancer from the Food and Drug Administration. The company also smartly used the spike in the shares to raise additional capital via a secondary offering.
Recent analyst firm price targets on SMMT range from the low $30s to the mid $40s. The options are lucrative and have decent liquidity. I elected to buy the recent dip in SMMT with covered calls using an April strike price. Key trial data results are due out in mid-2025. I figure nothing major should move the stock in either direction until that event. If the stock stays flat or moves a bit lower, my covered call holdings will expire in the money. If the equity moves below my strike price, I can always roll the position and pick up another lucrative option premium for my trouble.
These types of trades are how I am staying nimble and picking my spots in an overbought market.
At the time of publication, Jensen was long LFMD and SMMT.
