The market continues to behave at the start of the fourth quarter much as it has through most of 2017. Major indices seem to be hitting all-time highs incrementally and consistently despite the circus that Washington, D.C., and the media have become. I am happy to see the rally broaden in recent months to include the small-cap part of the market, which had been lagging its larger brethren throughout 2017.
There are some good reasons behind the year-long rally. Global growth is at its best levels in years and Europe is seeing some its strongest readings since financial crisis. Chinese demand is solid, and earnings growth should clock in above 10% in 2017 for the first time in many years. Regulations from the previous administration are also being rolled back, which is helpful to many industries. However, I continue to believe the market is at least fairly valued at current levels if not slightly overvalued. I am not as sanguine about equities as most investors appear to be at the moment.
I believe chances of significant tax reform seem to be lessening by the day. If that effort fails, I could see at least a hiccup in the overall market. I am maintaining a cash level of slightly more than 20% within my own portfolio, as I have for months. In addition, I am selling some out-of-the-money calls against some core positions such as Las Vegas Sands Corp. (LVS) that have had nice runs in 2017, seem to be topping out and appear pretty close to fully valued at the moment.
I am using these additional funds to add to stakes in some one-offs that I think are undervalued, especially in the small-cap biotech and biopharma space. One of these is Eagle Pharmaceuticals Inc. (EGRX) , which has fallen from $90 to around $53 over the few months.
Eagle Pharmaceuticals sports a roughly $800 million market capitalization after its recent decline. Over the next three years, Eagle should receive $600 million to $800 million in royalties and sales milestones from its drug Bendeka, which is marketed and distributed in the United States by Teva Pharmaceutical Industries Ltd. (TEVA) . The company also just licensed this drug's Japanese rights to another industry concern, and that will be another eventual revenue stream. Eagle is profitable and has a strong balance sheet and other products in its pipeline that the market seems to be placing little to no value on at its current trading levels.
I also have added to core stakes in many small biotech and biopharma concerns I have profiled on these pages; these companies have catalysts over the next six months that should buoy their undervalued shares. The names include Aratana Therapeutics Inc. (PETX) , which should see its sale trajectory ramp up markedly in 2018, and Progenics Pharmaceuticals Inc. (PGNX) , which should have its compound Azedra approved in the first half of next year.
(This commentary originally appeared Friday on Real Money Pro. Click here to learn about this dynamic market information service for active traders.)