Arguably the most controversial on the Street, penny stocks are a hot-button issue. Usually, there isn’t a lot of middle-ground with respect to these tickers priced for less than $5 apiece. Dividing market watchers into two distinct groups, both sides present valid arguments laying out the pros and cons.
Sure, there is reason enough to be skeptical. Often, a cheap stock is cheap for a reason, with the low share price potentially reflecting an underlying problem with the business, whether it be poor fundamentals or unbeatable headwinds.
That said, a bargain price tag isn’t always indicative of a lost cause. For some, better days are on the horizon, and for very little money, investors can control a lot more shares. Therefore, even minor upward movements could result in massive percentage gains, and thus, significant returns.
As the nature of these investments makes it difficult to gauge the strength of their long-term growth prospects, one effective stock selecting strategy is to follow the analysts’ advice. Turning to five-star analyst Leland Gershell from investment firm Oppenheimer, which ranks third on TipRanks’ list of Top Performing Research Firms, we wanted to see if any of his recent picks could lead us towards returns.
Running three penny stocks boasting Gershell’s stamp of approval through TipRanks’ database, we found out that the rest of the Street is also on board. The cherry on top? Each Buy-rated ticker sports over 140% upside potential.
Cerecor Inc. (CERC)
With the goal of making life-changing medicines available to underserved patient populations, Cerecor wants to address the significant unmet needs within neurology, pediatric and orphan diseases. Based on its impressive pipeline, Gershell believes that its $2.73 share price presents a unique buying opportunity.
The analyst points to CERC’s CERC-002 (anti-LIGHT mAb) candidate for respiratory complication management in severe COVID-19 as being a key component of his bullish thesis. At the end of May, Cerecor and its partner, Myriad Genetics, released positive biomarker analyses demonstrating that free levels of the cytokine LIGHT are tied to disease severity and mortality in COVID-19 patients suffering from acute respiratory distress syndrome (ARDS). This is important as roughly 15-20% of COVID-19 patients experience clinically significant pneumonia that most likely results from a hyperimmune response to the virus.
Expounding on the implications of the results, Gershell stated, “While these data represent early results generated from a modestly sized patient population (47 COVID-19 patients compared to 30 healthy controls), they nonetheless motivate investigation of anti-LIGHT monoclonal antibody CERC-002 to mitigate or prevent cytokine storm-induced severe ARDS caused by COVID-19 and to decrease mortality and the need for ventilation. CERC is now advancing CERC-002 for potential use in this setting.”
Adding to the good news, the first look at data from the CDG-FIRST retrospective study in congenital disorders of glycosylation is set to come in the first half of this calendar year. According to Gershell, the results could help accelerate the CERC-800 series’ FDA 505b2 development. Not to mention he tells investors “each approval would yield a (monetizable) Priority Review Voucher to CERC.”
As for the proof-of-concept trial looking at CERC-007 in adult-onset Still’s disease and multiple myeloma is slated to kick off in 4Q20 and 1Q21, respectively, shares could get another boost. In addition, data for CERC-006 in complex lymphatic malformations could be published in the first half of 2021.
Gershell added, “Following recent balance sheet strengthening (stock offerings, sale of AYTU holdings), CERC is on solid footing to support operations as it continues to pursue Millipred sale. We expect shares to outperform as progress across the company’s development portfolio is registered.”
To this end, Gershell rates CERC an Outperform (i.e. Buy) along with a $10 price target. Should this target be met, a twelve-month gain of 266% could be in store. (To watch Gershell’s track record, click here)
Looking at the consensus breakdown, it has been relatively quiet when it comes to other analyst activity. Only one other analyst has reviewed CERC recently, giving it a Hold recommendation. As a result, the consensus rating is a Moderate Buy. (See Cerecor stock analysis on TipRanks)
Soleno Therapeutics (SLNO)
Soleno Therapeutics primarily works on developing and commercializing therapeutics for the treatment of rare diseases, with its lead candidate, DCCR, being evaluated for use in Prader-Willi syndrome in a Phase 3 clinical development program. Currently going for $3.26 apiece, Oppenheimer’s Gershell thinks now is the time to snap up shares.
Gershell doesn’t dispute the fact that some investors expressed concern when Millendo Therapeutics discontinued the livoletide program after the asset’s pivotal failure in Prader-Willi syndrome (PWS), but he argues that this development isn’t necessarily a bad thing.
“While disappointing for the PWS community given the dearth of treatment options, elimination of one of the two other candidates in late-stage development may be seen as a modest positive for SLNO. As both mechanism of action and route of administration differ between livoletide (injectable Ghrelin agonist) and SLNO’s DCCR (oral KATP channel agonist), we do not see negative read-across from ZEPHYR to DESTINY PWS, expected to report top-line results this quarter,” Gershell commented.
The readout of initial results from the placebo-controlled Phase 3 DESTINY PWS trial of DCCR is on track to report top-line results by June 30. “We maintain a favorable outlook heading into this reveal, and expect success to yield significant upside given current levels (~$140 million enterprise value),” Gershell said.
To this end, the analyst rates SLNO an Outperform (i.e. Buy) along with an $11 price target. For perspective, Soleno’s stock closed at $3.26 yesterday, so this implies upside of 223%.
Turning now to the rest of the Street, SLNO has received a total of 2 Buy recommendations, making the consensus rating a Moderate Buy. The $10.50 average price target brings the upside potential to 222%. (See Soleno stock analysis on TipRanks)
Recro Pharma (REPH)
Operating as a Contract Development and Manufacturing Organization (CDMO) business, Recro Pharma boasts capabilities that range from early feasibility and product development solutions to commercial manufacturing. Coming in at $4.95, Oppenheimer believes the selloff that resulted from a recent guidance revision makes the share price look like a steal.
The company slashed its full year 2020 revenue and earnings guidance as a result of the impact from COVID-19 and more market competition facing one of its key products. Speaking to the former, Gershell points out the pandemic led to a reduction of existing commercial business as well as slower timing and decision-making by development customers due to the uncertain financial environment. It also didn’t help that two commercial product lines from two customers were discontinued, causing a $4 million revenue guidance reduction, with the analyst calling for a $7-8 million hit to 2021 revenue. Its staff was also cut by 10% to minimize costs.
Additionally, it was originally thought that re-entering supplier Mylan, which competes with Teva, a 42% contributor to REPH’s total revenue in 2019, would take 30% market share through 2020. However, updated information now indicates Mylan has 50% market share.
Still remaining very much on board, Gershell said, “The degree of yesterday’s update came as a surprise following recent guidance we interpreted as erring toward the conservative, given backlog of new business and continued efforts toward customer base expansion… While recovery may be sluggish as REPH navigates the balance of 2020, an attractive value case is made with shares having corrected to just ~6.4x EV-to-2020 adjusted EBITDA.”
To provide more support for his bullish thesis, Gershell reminds investors that excluding COVID-19-related restrictions, operations are fully functional and the supply chain remains intact and current, with many obligations able to be executed virtually. REPH is also growing its product lineup to include clinical trial materials. The analyst also argues the recent recruitment of a senior business development head should facilitate new business.
All of this prompted Gershell to maintain his bullish call. Having said that, he reduced the price target from $18 to $12. Even with the haircut, the figure still suggests shares could climb 142% higher in the next year.
What does the rest of the Street think about Recro Pharma? One other Buy rating has been issued in the last three months, so the consensus rating is a Moderate Buy. In addition, the $15 average price target implies 203% upside potential. (See Recro stock analysis on TipRanks)
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