UD2MD Series Post 1- The Ugly DucklingWelcome to the first post in a series of posts on the theme of from Ugly Duckling to Market Darling. I am a long term investor in Oncolytics and a regular pumper of the stock on this website. I am not popular with the many of the long term posters on the website with my persistent claim that the stock price does not reflect the value of Oncolytics. In this series, I will opine why Oncolytics is an Ugly Duckling, how the stock price has been managed on the buy side, and the implications. I will use previous posts by myself and others to demonstrate points of interest.
The first post defines the terms Ugly Duckling UD, Market Darling MD and Fallen Angel FA, and seeks consensus that ONC and ONCY can be classified as UD stocks.
How the market views a stock varies from company to company and sector to sector. Periodically some sectors are hot and others are not. There was the High Tech Bubble and a smaller Biotech Bubble. These sectors are not hot today. The hot sectors today are developing countries and Canadian resources. It is easier for a company to be a MD if it is a leader in a hot sector but it is not necessary to be in the hot sector. Similarly, it is easier for a company to be a UD if it is a scorned sector but roses can bloom in a weed garden.
The market is constantly valuing one stock against another stock so that the stock price of one company is relative to the universe of stock prices in the stock markets around the world. Most stocks trade around a market consensus view. Some traders will see opportunities for the stock or think that the price is undervalued and will buy it. Others traders have the opposite view and trades are done. The PE ratio is a measure of how the market values a stock. The PE ratio increases with the better perception of the company. A MD is defined as leader in its sector and its PE ratio is significantly above its peers. The market will pay a premium to own it. A UD is defined as the exact opposite. The stock of a UD is shunned by market. To sell it, the investor has to sell it at a discount.
Many UDs were once MDs. Some thing happened and they fell from grace. These UDs are classified as FAs. Manulife and Shoppers are current examples of FAs. Manulife’s fall was due to past strategic decisions by Management while Shoppers’ fall was due to external factors. These are examples where the market was wrong and changed its perception.
I would not classify Oncolytics as a FA. Its stock was managed down in 2006 by Mellon Bank increasing its holding in Oncolytics from 10% to 20% for one of their clients. The retail investor market was at a disadvantage and did know how to value Oncolytics. It had no earnings so there was no PE ratio benchmark. Oncolytics was a sinkhole development company with periodic news releases. Progress was slow and the glamour of the potential of Reolysin was wearing thin.
Today, I classify Oncolytics as a UD because its market capitalization does not reflect fair or reasonable value. The market cap is less than $500 million. This is markets’ view of the value of Oncolytics and Reolysin? This is a company that has the intellectual property rights to a major advancement in the fight against cancer from conception through manufacturing and delivery. It is close to announcing the completion of phase 1 of their international pivotal trial for head and neck cancers. The Spring Conference season is rapidly approaching where news on other trials will be coming out. An outside endorsement of Reolysin is provided by the US NCI conducting a number of trials on their dime. RBC Capital Markets ranks the stock at Outperform. The analysts modeled the going concern stock price in 2016 at $26.52. They state that their assumptions are conservative and actual results could significantly surpass their expectations. They opine that partnership agreements will be announced by mid 2011. The partnership prediction is not a big stretch based on the pending news pressing discussions forward.
Comments on why the current price is not anticipating where the stock price will be on June 30th would be appreciated. Based on the information that will be coming out over the next 3 months, the stock price will be jumping into the range of $13.22 to $21.22. If the price is above $21.22, I would classify Oncolytics as a MD!