2 Cheap Biopharma Names to Buy Amid Small Caps Rally
These two cheap and small cap biopharma names are firmly in the buy zone.
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Despite a July PPI report that came in much hotter than expected before the bell on Thursday, the overall market held up extremely well overall.
The Dow, S&P 500 and the NASDAQ ended the day roughly flat. The small-cap Russell 2000 fell by 1.24% on the day. However, that was after the small-cap index gained 3% on Tuesday and 1.56% on Wednesday. Hopefully, the overall strength in small caps so far this week is a sign that the rally is finally broadening.
That would be a most welcome development for investors. The Magnificent Seven has driven the lion’s share of the rally in stocks since late 2022. Just 10 mega-caps now account for approximately 40% of the overall market capitalization in U.S. equities. That's a huge concentration by historical standards.
In addition, the small-cap Russell 2000 is trading lower than it was late in 2021. In theory, that leaves plenty of room for small caps to "catch up" somewhat to their larger brethren. Finally, the minute dividend yield from the Russell 2000 is right at the yield on the S&P 500, a historical anomaly. Finally, small caps have less exposure to overseas markets and global supply chains. With corporations bearing the majority of the new tariffs, that could be a significant advantage as companies are, for the moment, bearing the brunt of those higher levies rather than passing those additional costs to their end customers. That could change in the coming months.
In today’s column, I will highlight a couple of small-cap biopharma companies offering compelling valuations that I have added exposure to within my portfolio.
Let’s start with Amphastar Pharmaceuticals, Inc. AMPH, a biopharma name that has finally shown some life over the past week. Early this week, the FDA approved its anemia treatment. The company then entered into a licensing agreement that expanded its pipeline. Finally, Needham upgraded the shares to a "Buy" as the FDA approval reduced regulatory uncertainty, and the new product should boost growth significantly. Even with the rally in the shares this week, the stock trades for under 10-times earnings and is still down some 40% from its highs in late 2024.
I took an initial stake in Catalyst Pharmaceuticals CPRX this week via covered call orders. This biopharma concern is headquartered approximately 60 miles south of me in Coral Gables, Florida. This small-cap stock has three key FDA approved products on the market. The company is solidly profitable and is trading at under 10-times earnings.
Investors seem to be overly obsessing about one of the company’s drugs that has come off patent and is now facing generic competition for the first time. Sales growth from its two more-recently approved drugs will more than make up for that sales decline. Catalyst should see revenue growth in the low- to mid-teens this year. In addition, the company has a large cash hoard of $650 million and no long-term debt. I expect management to use that cash to build out its product portfolio and goose earnings and sales growth as well.
At the time of publication, Jensen was long AMPH and CPRX.
