A couple of weeks ago, when the minutes of the last Federal Open Market Committee meeting were released, investors were treated to the Fed rhetoric we are all accustomed to. Yet investors got another surprise. The Fed, perhaps for the first time in history, actually offered investment advice. Fed Chair Janet Yellen commented that small-cap and biotech stocks had gotten overvalued.
So guess what happened. Small-caps and biotechs sold off. So guess what you should consider doing as an investor. Look for ideas as a result of the selloff. My own very humble opinion is that the Fed is designed to manage monetary policy and not necessarily speculate on the state of investments. I'm not suggesting the assessment was wrong -- small-caps and biotechs have been red-hot areas. But because the Fed has the unique power of truly moving markets with every word it releases, it must choose those words carefully.
As a result of those comments, names such as Kindred Biosciences (KIN), a biotech that specializes in therapies for animals, sold off a bit and now sits at $15.30. I've written a few times about why this biotech is a different animal from the rest (no pun intended). Kindred is exclusively focused on pet drugs, which cost less to fund through the development process, have a shorter trial period and have a lower FDA hurdle than drugs for humans. Kindred has a healthy pipeline and expects to have products out to market next year. The stock went public at $8.75, raced to $27 and has fallen back, valuing the company at $300 million. With a couple of drug approvals, Kindred could be a billion-dollar company in a few years.
Orion Energy Systems (OESX) is a specialty lighting company trading at $4.33, for a market cap of $94 million. The balance sheet is clean with over $10 million in net cash. Orion focuses on light-emitting diodes, an efficient lighting technology that has the potential to grow in the coming years. The lighting market is experiencing a transition. A new management team was brought in 2012, and it has focused on cost-cutting and sales growth.
Orion's state-of-the-art facility is currently operating at 20% capacity. That means the company will incur very low fixed investment costs to expand production when demand grows. LEDs have historically been expensive, despite their long life and superior lighting quality. But that perception is changing as production costs decline and more segments gravitate to the benefits of LED lighting. LED growth catalysts include improving costs, superior light quality and reduced maintenance cost by the end user.
If the Fed wants to lower equity prices for investors, I welcome that development with open arms. Price is what determines future return, and the lower the entry point, the better.
