The market has started to wake up over the last few trading sessions that the acrimony in Washington could roil equities significantly.
I posted several times in Columnist Conversations in September that I believed investors were too sanguine about the approaching debt limit and budget talks. This is likely to continue for at least a few weeks more.
Both sides are entrenched and have deeply-divided views of what services and at what costs government should provide. Both parties also are talking past each other to their base and to the media to try to frame their case. Little energy is currently being spent actually talking and negotiating with each other.
October could be a very rocky month and it might take a significant market convulsion to make both parties act like adults and make some compromises. Until that time, I am wary of the market. I also am keeping a much higher level of cash on hand in my portfolio than usual as I think it is highly likely the market will provide some lower entry points in the near future.
I am underweighting consumer discretionary stocks as the childishness going on in D.C. could really start to undermine consumer confidence if these impasses continue much longer. I am also avoiding anything connected to the homebuilding industry as the stocks in those sectors took major hits during the debt limit snafu in 2011.
The positions I am taking right now are either small ones or via some option spreads to keep my risks small. I am tending to look more at smaller-cap stocks that should be less affected by any extended shutdown compared with their bigger brethren.
I would not want to invest in my small restaurant chain with locations in D.C. and other sites located near government centers with a high amount of furloughed government employees. I also would avoid any firms with significant revenue from government contracts. That being said, there are myriad small-caps that look like they will skate past any of the latest political nonsense just fine.
Curis (CRIS) is the type of small biotech stock that should be completely unaffected by the current political situation. It is a small $380 million market capitalization play. The company has a capsule based treatment for basal cell carcinoma and another promising protein inhibitor in early trials.
It reminds me a bit of Omeros Corporation (OMER) which I highlighted in some Columnist Conversations in late August at under $6 a share and which is now over $11 a share. Like Omeros, it has a promising product on the market that is gaining traction, another possible significant compound in early trials. It is getting some notice from analysts as well. CRIS currently trades at just over $4.60 a share.
Chardan Capital initiated the shares as a "Buy" on Monday and put an initial $6 price target on the stock. Chardan's analyst stated that the company could receive $230 million in royalties annually from its basal cell treatment "Erivedge", based on peak worldwide sales once the product achieves global rollout. Obviously, this would be very significant for this small concern.
Robert W. Baird then followed up on Wednesday initiating the shares as "Outperform" with a $7 price target. The company should post small losses for both this fiscal year and FY2014. However, Curis recently stated that it should end this year with around $50 million of cash on hand. This should be more than enough to get the company into its profitable future.
I took a small position in the shares Wednesday (both equity and bull call spreads) as it is just the type of small, speculative play that is immune from the current posturing going on in Washington.