ONE HEADLINE + + +

Artificial Intelligence that Matters

Finally, a sliver of hope for biotech!

Per Axios:

That’s right. We’re not talking about practice Mr. Iverson. We’re talking about cures. All thanks to artificial intelligence.

This is precisely the development we needed to snap biotech out of its deep freeze.

In case you pulled a Rip Van Winkle, the sector’s been all but left for dead by for the better part of a decade.

Don’t believe me?

Pull up the chart for the the benchmark $XBI ( ▲ 1.4% ) and you’ll see outside the Covid-driven panic boom, then bust, biotech’s returned essentially nothing for buy-and-hold investors.

But I’m convinced now could be the ideal time to start loading up on low-risk and cheap leaders in the space that could improve both humanity’s and our bottom lines. (Yes, there is such a thing.)

Let me prove it…

ONE CHART + + +

Non-Stop Innovation

During last week’s episode of The Big Skinny Show (see here), I highlighted the steady pace of biotech innovation, based on patent filing activity.

Come recession, pandemic or bear market, it’s continued unabated, as you can see above.

Such efforts never go to waste. Sometimes it simply requires patience for the patents to translate into positive clinical data, as shareholders of $CMRX ( ▼ 0.12% ) recently learned.

Shortly after filing “for accelerated FDA approval after seeing responses in a phase 2 trial and partly enrolling a phase 3 study that could deliver interim data in the third quarter,” per Fierce Biotech, $JAZZ ( ▲ 1.89% ) paid a 72% premium to acquire the company.

Year-to-date, the stock’s up nearly 150%, which is the type of short-term blockbuster returns that conjure up fond memories of biotech boom times.

Long-time readers of mine know this feeling all too well.

We endured years of waiting and depressed prices in a company with a cure for Type 1 Diabetes, $PRVB ( ▲ 3.1% ) . Then suddenly the stock turned into a 10-bagger, as $SNY ( ▲ 0.84% ) snapped it up for a cool $2.9 billion (or $25 per share).

Make No Mistake

Of course, for every $CMRX or $PRVB ( ▲ 3.1% ) , there’s a $CUE ( ▲ 0.64% ) .

A biotech with all the promise, potential, patents and compelling clinical data in the world that hasn’t been recognized or rewarded. Yet!

(Disclosure: I still own it).

So make no mistake, sentiment still sucks in the sector. Way worse than it does for the stock market as a whole, which is saying something. Consider:

• Stock Sentiment Sucks: Earlier this week, we learned in the latest Conference Board data, a scary amount of consumers now see stock prices decreasing over the next six months. More specifically, the "bull-bear" spread plunged by a record amount over the last three months to its lowest since November 2022.

• Biotech Sentiment Sucks Even More: Hat tip to @buysidebio for serving up this depressing dose of data: “Here's a plot of every biotech from 5M to 2B market cap with >40M in cash plotted by 1 Year Return & Enterprise Value. Look where the dots are concentrated…” I’ll spare you the horrifying picture (click the link above at your own peril). A disproportionate amount of biotechs now trade at or below cash balances (i.e. negative enterprise values) after suffering negative declines of 50% - 90% in the last year. Ouch!

Against this backdrop, why am I suddenly so optimistic?

Biotech’s Undeniably Cheap

Right now, roughly 25% of all publicly traded biotechs (120 out of 500) are trading for less than cash, according to Seeking Alpha data.

That means they’re worth more dead than alive, which is utter stupidity. Cash has an undeniable present value. A dollar is worth a dollar.

Except in biotech right now.

The last time I saw such extreme disconnects was coming out of the 2008 financial crisis.

Back then it wasn’t just biotechs trading for less than cash. Countless revenue generating small caps suffered the same.

But let’s keep our focus on biotech…

Back then, the industry rag, Nature Biotechnology published a piece in a nod to the Charles Dickens’ A Tale of Two Cities aptly titled, “The worst of times, the best of times.”

Like a magazine cover predicting a nasty bear market, the article almost perfectly marked a bottom before biotech went on a 441% tear over the next six years.

Take a look:

ONE INVESTMENT INSIGHT + + +

The Big Skinny...

While some might be reluctant to treat extreme sentiment readings as contrarian buying signals, it’s hard to ignore extreme cash disconnects.

In other words, we’re witnessing a historic opportunity to identify undervalued, literally life-changing biotechs right now.

The even better news? Thanks to artificial intelligence, I predict that the timeline from patent to proof of concept to profits is being compressed. Dramatically.

Per The Wall Street Journal

Forget trying to find a way invest in Oxford scientists, though. We can benefit from the same acceleration by investing in companies like $GANX ( ▲ 0.79% ) , whose CEO joined The Big Skinny Show last week (see replay here).

The company’s drug discovery platform, Magellan, operates in the same manner and already identified a compelling drug candidate to treat Parkinson’s disease, which is in the clinic as we speak. This same drug could also treat Alzheimer’s.

(Disclosure: I own shares and have been adding to my position recently).

Or if you prefer to focus simply on undervalued biotechs trading below cash with “Strong Buy” ratings, Seeking Alpha complied a list of 20 micro- and small-cap opportunities (see here).

I’m debating whether to spend the time researching each one to cherry-pick one or two of the most promising ones versus buying 100 shares of each in the entire basket à la Sir John Templeton.

Rest assured, I’ll let you know what I decide so we can hopefully profit from a long overdue biotech rebound.

Don’t stop believin’… and don’t forget to tune into today’s episode of The Big Skinny Show at 2pm ET right here.

– Lou