Big Investment Bank’s Initiation Shows Why I’m Optimistic Amid Market Chaos
Wall Street firms don't often cover biotech stocks in the single digits.
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The market is shaking off tariff worries on Thursday as it digests the ultimate consequences on the auto industry. There will be a new round of tariffs hitting next week, so it is very likely that we will continue to have very elevated volatility.
It will take a while to work through the impact of the Trump tariffs, especially since we don't even know yet what the ultimate policies will be or how long they will last. It looks like we have a bit of a relief rally developing now that some of the uncertainty about what Trump will do has been lifted, but it is hard to trust.
Despite all the tariffs and economic chaos, I'm extremely optimistic about the trading opportunities that are developing. This sort of market action creates high levels of volatility that push stocks around without any regard for their individual merits. The action is mainly macro-driven, which means that it is driven by the indexes and index ETFs. If a stock is in an ETF, it moves based on the ETF and not its own fundamentals.
This action creates many mispriced stocks, and therein lies the opportunity. If you can spot a stock that is mispriced and then wait for confirmation in the technical action, it can lead to extremely powerful trades.
One name that I'm looking at right now is Mereo BioPharm MREO. Mereo has two key drugs. The first is setrusumab, which is used to treat a rare genetic disorder commonly known as brittle bone disease. Early results have been very strong, and compelling data is expected around mid-year. The second drug is alvelestat, which is used to treat rare lung diseases. Mereo is actively seeking a partner for this drug.
Like many small biotech stocks, Mereo has been struggling, but what caught my eye was that on Thursday morning, JPMorgan JPM initiated coverage of the stock with an overweight rating and a $7 price target.
Big investment banking firms like JPMorgan don't often cover stocks in the single digits, which makes me wonder if they are engaged in finding a partner for Mereo. The analyst states: "The company's current valuation creates an attractive entry point ahead of the setrusumab data readouts in osteogenesis imperfecta." The analyst has "strong conviction of success" for the second interim analysis, which is expected in mid-2025, or the final analysis in Q4. With positive data for setrusumab, the shares have the potential to go to the mid-single digits share range, contends JPMorgan.
Despite these positive prospects, the stock has been trading at a multi-year low because small biotechs are out of favor.
This is just one example of how this chaotic market is creating opportunity. The more volatile that it is and the more chaos due to Trump policies, the more opportunities we will find if we do the work.
At the time of publication, Rev Shark was long MREO.
