Two Small-Cap Biotechs to Watch

 | Nov 22, 2013 | 12:00 PM EST
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I will profile a couple of small, speculative biotech stocks in today's "small cap Friday" column. The biotech sector is the most volatile in the market. Positive trial results can send a stock soaring and a Food and Drug Administration approval that is declined can crater a stock instantly within this space. The sector is not for the investor that wants to avoid volatility within their portfolio.

It is for this reason I employ something I call "Shotgun Investing". I spread my bets around by taking smaller positions in more stocks that I do in any other sector. One must accept that this part of your portfolio will have frequent blowups, which should in time be made up by the occasional five-and-ten bagger.

Here a couple of attractive, but speculative biotech plays that this fit this investing strategy.

Athersys, Inc. (ATHX) is a clinical stage biopharmaceutical company with a number of potential catalysts in its portfolio. Its most advanced programs are in the area of regenerative medicine using its stem cell therapy, MultiStem, for the treatment of ischemic stroke.

This small biotech stock has seen recent insider buying. Insiders have been frequent and incremental net buyers all through 2013. The phase II stroke trial for its MultiStem® therapy for ischemic stroke should show results in the second quarter of 2014. In addition to insiders, the three analysts that cover the stock have positive views on the company's potential. They have price targets of $4, $6 and $7 a share on this speculative equity, which is currently going for $2 a share.

The company has a small market capitalization of less than $120 million, of which approximately $20 million is in net cash. Athersys has several phase II trials currently ongoing, including one using MultiStem for Inflammatory Bowel Disease. It is associated with Pfizer (PFE) in this trial.

Dynavax Technologies (DVAX) is a clinical-stage biopharmaceutical company that discovers and develops novel products to prevent and treat infectious and inflammatory diseases. The stock of this small biotech has collapsed over the last year as the FDA is requiring more trial results before it will approve its Hepislav hepatitis B vaccine. From a high of $4.50 a share in the summer of 2012, the shares declined all the way down to a $1 a share. In recent weeks, the equity has slowly started to recover.

Most of the rebound has been triggered by recent, more encouraging phase III trial results for Hepislav. Several insiders also purchased new shares at the end of October. The company has over $75 million in net cash on its balance sheet. I consider it a good speculative bet to eventually gain FDA approval. The stock also appears to established technical support just under current levels.

Both of these companies are highly speculative because they will live and die with the trial results of their promising compounds. For an investor willing to embrace "Shotgun Investing" within the biotech space, they make worthy additions to aggressive portfolios.



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