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Ishan Majumdar
Ishan Majumdar
Articles (133)  | Author's Website |

The Coronavirus Pandemic Has Revealed Some Micro-Cap Opportunities

With the Dow Jones and the S&P 500 plummeting as a result of the coronavirus pandemic, a number of interesting micro-cap stocks have emerged as interesting bets

As economic and market fallout from the coronavirus outbreak intensified this week, so has the sense of urgency felt by many investors. Several days saw selling that can only be described as panicked, as circuit breakers on U.S. stock exchanges were tripped up on two several occasions.

Investors looking to hedge their bets and minimize losses are turning to pharma and biotech stocks, but there is a catch here. Many anti-viral pharmaceutical companies working on vaccines for the coronavirus are not really gaining much steam owing to the long-term duration for a vaccine to develop. The three subsectors which appear relatively more promising are diagnostics, biotech companies working on research related to a Covid-19 drug and protective gear. There are a number of promising micro-caps within each of these subsectors, so it is important to pick out the ones that appear to be the most promising.

Diagnostics – The first and the most important step

One of the biggest causes of death in the case of the Covid-19 virus is the delayed diagnosis andd in providing the relevant medication to counter the symptoms. Rapid diagnostic solutions are critical, so some interesting micro-cap players are looking to capitalize on this aspect.

Co-Diagnostics

Co-Diagnostics Inc. (NASDAQ:CODX) has been one of the most rapidly gaining stocks after the outbreak of the virus.

As per the chart above, the stock has gained 933% in the past three months, and this just appears to be the beginning. Co-Diagnostics is working toward providing diagnostic solutions which help in determining whether a patient is suffering from the coronavirus or not so the demand for its service is bound to be huge. The Utah-based molecular diagnostics company’s core business is to manufacture and sell reagents used for diagnostic tests that function via the detection and analysis of nucleic acid molecules. It also intends to sell diagnostic equipment from other manufacturers as self-contained lab systems such as the one for COVID-19. The company certainly appears to be a promising micro-cap hedge.

Hologic

Hologic Inc. (NASDAQ:HOLX) is actually a small-cap player involved in producing the coronavirus testing kits. The company recently announced the U.S. Department of Health and Human Services will contribute a large sum to speed up the development of a coronavirus diagnostic test. The development of the test is expected to be completed in the coming weeks, which would allow the U.S. Food & Drug Administration to consider allowing labs to use the test under the Emergency Use Authorization, according to the health department. While the stock has been losing value over the past three months, it could gain momentum soon if the company manages to finish developing its tests.

Drug development-oriented pharma companies – a natural hedge

Drug treatment companies are obviously the most natural hedge investors would turn to when attempting to counter a market crash. Now there are a number of interesting micro-caps working on Covid-19 treatments, but some of them appear to be more promising than others.

AIM ImmunoTech 

AIM ImmunoTech (AIM) is focusing on developing therapeutics to treat different types of cancers and immune-deficiency disorders in the U.S. The company’s core product range includes the Alferon N Injection, an injectable formulation of natural alpha interferon to treat a category of genital warts and Ampligen for the treatment of chronic fatigue syndrome (CFS), Hepatitis B, HIV and cancer patients with renal cell carcinoma, malignant melanoma, non-small cell lung, ovarian, breast, colorectal, urothelial, prostate and pancreatic cancer.

The company has seen its stock almost quintuple in value after management announced that the National Institute of Infectious Diseases in Japan will begin testing its drug Ampligen as a potential treatment for Covid-19. The experimental program will be conducted by Hideki Hasegawa, the director of the NIID's Influenza Virus Research Center, and other key World Health Organization personnel. This is exceptional news, not just with respect to finding a cure for Covid-19, but also for investors who bought the stock in order to encourage research against various cancers and viral diseases.

NanoViricides

NanoViricides Inc. (NNVC) is among the few players that have actually started working on the development of a drug that can treat the virus-affected patients. Dr. Anil Diwan, CEO, has prior experience of working on research associated with the Middle-East Respiratory Syndrome (MERS), which is from the same family as the Covid-19 virus. The company claims to have identified some candidate ligands in their chemical library, which could be used in the treatment of the Wuhan coronavirus. These broad-spectrum, virus-binding ligands are expected to attack the virus at the same points that it uses to bind to its cognate cellular receptor using molecular modeling based on known SARS-CoV and ACE2 interactions.

NanoViricides intends to perform initial testing of these drug candidates for safety and effectiveness in cell culture studies in its own BSL-2 virology laboratory at its Shelton campus in Connecticut, using low-threat coronavirus strains that have been normally circulating in the human population. Management is working on developing necessary collaborations in China to take the program further, assuming that an effective drug candidate is identified soon. The company intends to solicit interest and financing from government agencies in order to accelerate its work.

The stock has zoomed up from levels close to $3 to over $10 in a short period of time. Interestingly, the stock is now trading close to $7 and is still valued at a reasonable price given the research potential and its pipeline of drugs, which includes a topical cream for shingles that is preparing to begin human trials.

Safety, protective gear and other ancillary industries – hidden gems

The panic situation all over the world has led to people rushing to buy surgical masks, so small-time mask producers are making money as a result of this panic, prompting giants like Alphabet's Google (NASDAQ:GOOG) (NASDAQ:GOOGL) and Facebook (NASDAQ:FB) to ban advertisements for them. However, the fact remains the protective gear in public and on the job for more safety has become critical. Apart from protective gear, there are still some sectors that are relatively more resilient to the coronavirus situation and, therefore, could protect investor capital.

Lakeland Industries

This micro-cap is a well-known name within the protective clothing space for workers and public health officials that expose themselves to Covid-19 patients.Lakeland Industries Inc. (NASDAQ:LAKE)offers limited disposable protective clothing, such as coveralls and laboratory coats, as well as high-end chemical protective suits to combat highly concentrated, toxic and lethal chemicals and biological toxins. It also produces firefighting and heat protective apparel to protect against fire, burns and excessive heat. Lakeland has historically surged during outbreaks and proved to be a favored supplier during the Ebola outbreak.

The stock is already up by 57% since the coronavirus outbreak and could continue its run until the situation stabilizes and while demand for protective clothing remains high.

Toughbuilt Industries

ToughBuilt Industries Inc. (NASDAQ:TBLT) is an innovator in the safety and home improvement space, largely catering to construction workers. Its core product range includes gloves, kneepads, tool pouches, tool rigs, tool belts and accessories, tools bags, totes, office organizers, laptop bags, cell phone and tablet covers, sawhorses, miter saws, table saws, and roller stands. With the spread of the Covid-19, worker safety on construction sites is bound to gain much more importance. This will certainly provide a boost to a company like Toughbuilt, which released more than 70 new stock-keeping units in the last quarter.

The company has a fantastic distribution network through both online and offline channels. Key partners include Lowe’s (NYSE:LOW), Home Depot (NYSE:HD), Walmart (WMT) and Amazon (AMZN), among others. Toughbuilt’s core industry is a mix of safety and home improvement, which are both highly resilient to the coronavirus situation. So with the growing distribution network and the high demand for its products, the stock is bound to prosper.

Another micro-cap within this space that deserves an honorable mention is Alpha Pro Tech Ltd. (APT), which manufactures masks and protective apparel — goods already in high demand in China. With the increasing spread of the coronavirus, the company should be getting bulk orders for its masks, which might spike the stock price in the near future.

Key takeaways

It is easy for investors to get dicouraged from putting their money into stocks given the day-by-day declines in the global indexes, but the challenge is to find the right opportunities to recoup their losses and, perhaps, even make a profit from the whole coronavirus situation. Research-oriented biotech companies, diagnostic stocks and safety-oriented companies are not only showing resilience and defying the falling market trends, but also have promising business models and very convincing growth stories. Obviously, investors need to be risk-averse before investing in these stocks. However, at the end of the day, these companies appear to be among the few high-potential investment opportunities in these tough times that can genuinely create good value for investors.

Disclosure: No positions.

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About the author:

Ishan Majumdar
I am a qualified Chartered Accountant with a Masters in Management (Grande Ecole) from HEC Paris. I run a proprietary boutique financial advisory firm called Baptista Research (www.baptistaresearch.com) specializing in M&A, corporate advisory, equity research and valuation of listed companies.

I have nearly a decade of experience spread across investment banks, financial advisory firms, investment funds and other corporates in many different geographies, such as France, Spain, India and others. I was a part of the LBO Financing team at BNP Paribas where I worked on deals with a combined enterprise value of over $1 billion. I have also worked in mergers and acquisitions with Credit Agricole CIB and corporate strategy with Groupe Danone SA. Over the years, I have developed a strong specialization in corporate valuations, strategy and financial analysis.

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