|(Mike Burnick, associate editor of Martin’s Ultimate Portfolio and editor of Ultimate Stock Options, is out today. Mandeep Rai, editor of Top Stocks Under $10, is filling in.)|
One of the exciting aspects of editing and selecting stocks for the Top Stocks Under $10 portfolio is discovering new services, products or procedures that can lead little-known companies to new heights and grand valuations.
To be sure, the under-$10 universe is a risky, volatile arena. Some stocks have a reason for being there – they just aren’t very good companies. However, others are there because they have been unfairly hit due to some outside, non-company-specific news. Still others have a large number of outstanding shares, so the share price is naturally going to be lower than those with fewer outstanding shares. Others just haven’t been noticed by the public yet and represent great opportunities to buy on the low.
Acquiring low-priced stocks can bring a multitude of profit opportunities. But it can also bring losses if you invest in shaky companies without doing due diligence. That’s what makes this sector so exciting, especially for someone like me who enjoys nothing better than going over the numbers, product pipelines, internal executive hirings, capital raisings, planned joint ventures and other relevant events related to a particular company.
A recent example is a biotech company by the name of TrovaGene Inc. (TROV). Many investors, including my subscribers, probably had never heard of it. But through my research, I saw potential, and gave my subscribers a buy recommendation on Feb. 6 at a price of below $5. And they were able to sell it this week for over $10.50, more than doubling their investment.
TROV has been working on its non-invasive urine tests that detect and monitor diseases like cancerous tumors, addressing a $5 billion unmet medical need. The company has been around since 1999 and listed on the Nasdaq in 2002, but it hasn’t been able to earn revenue on new products just yet.
However, while I was monitoring the company closely, something grabbed my attention: All of a sudden, it offered more stock to investors in a secondary share offering. It came at an unusual time – its regular cash burn per quarter of $4 million to $5 million would have kept it going for at least another year with the $27 million or so on its balance sheet.
The seemingly unneeded cash, not consistent with its cash burn rate from the cash flow statement, was a clue as to where this company could be headed. Indeed, the company had more than 20 joint collaborations with institutes like the Robert H. Lurie Comprehensive Cancer Center of Northwestern University (Lurie Cancer Center) and the Northwestern Medicine Developmental Therapeutics Institute (NMDTI), something that helped validate its testing technology.
This was a clear signal to me that the company would be entering a new phase on its business cycle, which would mean funding for personnel, facilities and marketing to get the word out. After it raised the money, it also announced it was hiring a seasoned chief commercial officer — someone in charge of scaling, marketing and commercial strategy execution, which was another clue.
The stock had been heading steadily higher, and then when news hit of superior tumor-detection and monitoring results compared with the invasive biopsy alternative, the gains mounted. Additional joint collaborators came to the table to work with TROV, further validating its product.
Now, it’s important to never get complacent, even with a stock that’s done as well as this and which has created such a buzz in the market. That’s why I thought it prudent to take profits after its amazing run-up in price. I’ll keep an eye on developments and determine if there’s a time to get back in.
I’ve mentioned above some of the clues that can help indicate whether a company of this type can head toward its full potential or if it is a candidate for disappointment. This is what I’ve found to be the most important with TROV, at least. Other companies need to be looked at within the context of their business, industry and operating dynamics:
Joint ventures increasing as the company attracts more buzz in its community;
In the context of increased joint ventures, is the company giving hints about an upcoming catalyst – i.e. a need for cash after being operational with the same raised equity and burn cycle for over a decade?
Internal executive hires;
Company test announcements: keeping a close eye – and skeptical mind – on results of internal and external product test results.
I’ve seen some other promising newcomers with other companies that I’ve added to my Top Stocks Under $10 portfolio. But I wanted to share with you the experience I’ve had with TROV to point out some of the things you should keep an eye on when investigating companies promising something new to the marketplace. Not all investors have the time for such comprehensive research, but it can help avoid disappointment.