Ssaying “I told you so” is one of the sweetest joys of investing, and in fact it is so sweet that an entire discipline of investors has sprung up around the ability to say those four delicious words. Of course, I’m talking about contrarian investors, who try to make a lot of money by betting correctly on beat stocks that everyone else is giving up on.
With that in mind, today I’m going to discuss a pair of contrarian biotech choices. Needless to say, both of these companies are unprofitable and both have experienced recent setbacks. But if you’re willing to bet with long odds on either, you’ll get a great deal for your money. So let’s dive into it.
Few things have gone well for Bluebird Organic (NASDAQ: BLUE) recently, but there is certainly an opposite case to buy its shares today.
Between a temporary suspension of clinical trials with its LentiGlobin gene therapy for sickle cell disease (SCD) early last year, and the announcement this year of a longer-than-expected regulatory review of its gene therapies for beta-thalassemia and cerebral adrenoleukodystrophy (CALD), the stock has lost more than 90% of its value over the past three years.
But for biotechs, cash is king, and Bluebird still has $442 million in the bank, of which only $46 million is restricted. This means that it has unrestricted liquid assets of approximately $396 million, which is less than its market capitalization of approximately $369 million.
Importantly, the company expects to spend less than $400 million in cash this year, and its long-term debt of $152 million makes up the vast majority of its total debt of $181 million.
So his debt is manageable, at least for now. Additionally, it will hopefully launch its beta-thalassemia and CALD therapies in the US later in 2022, assuming it can actually successfully navigate its regulatory issues.
If so, his earnings will skyrocket from his 12-month total of $53.6 million. And it will offer a significant reward to those who had the courage to invest. The risk, even for opposites, is that Bluebird may fumble with its new product launches, requiring fundraising by taking on more debt or issuing new stock.
Over the past 12 months, ophthalmology biotech stocks Kodiak Science (NASDAQ: KOD) are down more than 93%.
More recently, its late-stage clinical trial for a drug to treat neovascular age-related macular degeneration failed to meet the study’s efficacy endpoint. The company is still developing the drug, called KSI-301, for several other indications, one of which will report data from its pivotal clinical trial in the third quarter of this year.
Luckily, it has $731 million in cash, which is well below its market capitalization of around $435 million. Last year, its research and development (R&D) spending was just $217 million. And he barely has $79 million in debt. Therefore, rumors of Kodiak’s demise are quite premature, and it’s ripe for contrarian speculation.
Finally, Kodiak’s valuation looks quite attractive to bargain hunters. Kodiak’s price-to-book (P/BV) ratio is around 0.6, much like Bluebird’s.
When a stock’s multiple to its book value is less than one, it means it is trading at a lower price than the value of the company’s assets. That’s a pretty low valuation – and yet another reason why this stock is a good contrarian pick.
The thing is, there’s no guarantee that any of Kodiak’s three surviving late-stage clinical trials will avoid the same fate of its macular degeneration treatment. Plus, the commercialization of any drug is still years away, so naysayers will have to be prepared to hold onto their stakes for a while.
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Alex Carchidi has no position in the stocks mentioned. The Motley Fool owns and recommends Kodiak Sciences Inc. The Motley Fool recommends Bluebird Bio. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.