Hunting for Mispriced Stocks in Front of Earnings
Thinly traded names, like these on my radar, are often punished without any regard for their individual merits.
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After pockets of carnage in growth stocks on Wednesday, there is some bounce action on Thursday, but it is fairly weak and hard to trust. Small-caps are up 0.75% and the Innovator IBD 50 ETF (FFTY) is up 2.2%. If these gains can hold for a while, it will draw in more buyers who fear that they will miss a turn, but after the poor response to IBM (IBM) and Tesla (TSLA) earnings, there is some nervousness about what will happen next week.
There are quite a few stocks that have pulled back, and I’m making small strategic buys in favorite names such as Flotek Industries (FTK) and Harrow (HROW) , but I believe that the charts need more time to develop, and there will be some better entry points.
I’m looking closely at a few names that have earnings coming up soon. One in particular is Emergent BioSolutions (EBS) , which makes vaccines for rare diseases like anthrax and Ebola.
The company posted a substantial beat last quarter. Emergent is a turnaround, and the EPS beat was driven by cutting operating expenses by 70% last quarter. Estimates for the company the rest of the year look very low given this restructuring, and there isn’t any significant analyst coverage. The chances of a sizable beat look good, and the chart is set up very nicely. The current estimate for 2025 is $1.17, which I think is low, but based on that number, the P/E is only around 8. Earnings are due October 29 after the close.
Another name I’m watching is Mereo BioPharma (MREO), which will have significant data on its lead drug for brittle bone disease in December or early January. The stock has been drifting around for over five months, and I am looking for positive anticipation to build over time. There is an earnings report due in November that is likely to attract some attention to the situation.
I’m focusing on smaller stocks with little analyst coverage because of the greater likelihood that they are being mispriced. These thinly traded stocks are often punished in a poor market when they are sold without any regard for their individual merits. The mispricing can be substantial, but there is always a high level of risk when dealing with these smaller stocks.
At the time of publication, Rev Shark was long FTK, HROW, EBS and MREO.
