Opportunity can often be found in pullbacks.
As Warren Buffett will tell you, “The best thing that happens to us is when a company gets into temporary trouble… We want to buy them when they’re on the operating table.”
Look at Mirati Therapeutics (MRTX) for example.
MRTX is an oncology company that targets genetic changes in tumor cells that typically result in uncontrolled tumor growth and begin to spread. The company is creating drugs that target specific genetic mutations that cause cancer, such non-small cell lung cancer (NSCLC), as well as genomic tests that identify patients with driver mutations.
After the stock fell from a 2017 high of $6.40 to just $2.70 a share on earnings losses and word of a public offering of 4.35 million shares, not many investors would touch it.
But we did. For one, the stock had a fundamentally strong balance sheet at the time.
In fact the company had $106 million ($4.25 per share) in cash, a book value of $2.42 per share, and no debt. Like most development-stage biotech companies, it had no revenues to speak of. However, it did have a large amount of cash that we believed could fund operations through late 2018.
And two, we were aware that it remained on track to report key study data this year on its NSCLC treatments.
So, we recommended the stock at $3.30 a share in the June 2017 issue of The Cheap Investor.
On September 14, 2017, the stock closed at $4.75. After the market close that day, MRTX released positive news on one of its products. The next day, September 15, 2017, it opened at $9.85, soaring as high as $12.40.
The news that sent the stock skyrocketing on the 15th was positive preliminary data from two ongoing clinical trials of its compound sitravatinib in non-small cell lung cancer at the IASLC 2017 Chicago Multidisciplinary Symposium in Thoracic Oncology.
Initial safety data and efficacy information was presented from the ongoing Phase 2 study of sitravatinib in combination with nivolumab (OPDIVO) as a treatment for NSCLC patients with cancer progression following previous treatment with a checkpoint inhibitor. In both clinical studies, sitravatinib alone and in combination with nivolumab was well tolerated with a manageable safety profile.
"For the majority of NSCLC patients, who progress following checkpoint therapy, there is a need for new therapeutic options," said Charles M. Baum, M.D., Ph.D., President and Chief Executive Officer. "We are evaluating sitravatinib in combination with nivolumab in this checkpoint resistant population and are very encouraged by the responses observed, since responses would not be expected from re-treatment with a checkpoint inhibitor alone."
The news was so good, the stock eventually found its way to $16.50 a share for a potential return of 400% from our June 2017 recommendation – just five months ago.
As shown here, great news can send a stock skyrocketing, especially biotech stocks.
Interesting to note, when it comes to negative news releases, companies will oftentimes release such news after the market closes in hopes the reaction will cool overnight. In short, there’s a hope the news won’t be as damaging to the stock the next morning.
Unfortunately, there’s no hiding such bad news in today’s market.
In the case of MRTX, there was nothing to hide. The news was far too good, resulting in a 400% potential profit in just five months.
Stay tuned for more.
The Cheap Investor is about to unveil its next recommendations with similar potential by month’s end.