Benjamin Graham advocated buying stocks trading at a deep discount to cash, or net asset value. With the market trading near all-time highs today, there are few stocks left that would excite Graham or conform to his criteria.
That being said, there is still one sector with a handful of attractive net-nets: biotech.
The biotech sector is interesting because, rather than investments, the stocks are essentially lottery tickets. Trading below cash with net cash on the balance sheet but the prospect of significant treatment breakthrough, which would send shares skyrocketing, makes these stocks low-risk (as defined by the permanent loss of capital), high-reward opportunities.
According to my screen, there are 16 biotech/health care stocks currently trading at a net-net to working capital ratio of less than one. Four of the cheapest are presented below (with a market value of $50 million or more).
Finding opportunities
Endocyte Inc. (ECYT, Financial) is trading at a net-net working capital ratio of 0.5. Based on the most recently available figures, the company has a market value of $59.2 million and an enterprise value of $-59.2 million. At the end of the second quarter, the company reported a cash balance of $118.4 million, current assets of $119.3 million and total liabilities of $6 million. The company has no revenue and is still posting losses.
Endocyte is engaged in developing therapies for the treatment of cancer and inflammatory diseases with a host of treatments under development. It is collaborating with Seattle Children's Research Institute to help advance the development of its SMDC platform, which is helping develop precision therapies for other cancer-cell receptors and diseases.
Falling on bad news
Otonomy Inc. (OTIC, Financial) is trading at a net-net working capital ratio of 0.7. Based on the most recently available figures, the company has a market value of $98.5 million and an enterprise value of $-52 million. At the end of the second quarter, the company reported a cash balance of $150.5 million, current assets of $155.3 million and total liabilities of $11.6 million. Unlike Endocyte, Otonomy is making money and analysts expect the company to report $9.5 million in sales for 2018. The company focuses on the development and commercialization of therapeutics for diseases and disorders of the ear.
Unfortunately, the company recently announced its drug to treat Ménière's disease, a chronic disorder of the inner ear, missed the main goal in a late-stage study, which is a setback for the business, but there are other treatments in development. A review is underway to prioritize the development of its pipeline, which includes multiple clinical and preclinical stage assets.
Cancer developments
Sierra Oncology Inc. (SRRA, Financial) is trading at a net-net working capital ratio of 0.7. Based on the most recently available figures, the company has a market value of $81.5 million and an enterprise value of $-35 million.
At the end of the second quarter, the company reported a cash balance of $117 million, current assets of $118 million and total liabilities of $5.5 million. Sierra is a cancer treatment company and is currently focused on the development of its CHK1 inhibitor, SRA73. THe results from phase one trials are expected in early 2018.
New technology
Adverum Biotechnologies Inc. (ADVM, Financial) is trading at a net-net working capital ratio of 0.8. Based on the most recently available figures, the company has a market value of $145 million and an enterprise value of $-52.4 million.
At the end of the second quarter, the company reported a cash balance of $199.6 million, current assets of $209 million and total liabilities of $16.4 million. Adverum is a gene therapy company engaged in discovering and developing medicines to patients suffering from chronic or debilitating diseases. The company is progressing with several clinical studies and manufacturing agreements for treatments.
Disclosure: The author owns no stocks mentioned.
