Unfortunately 90% of the small stocks have been deeply entrenched in a typical summer that includes lacklustre trading and boredom. Very positive news attracts good short term buying but average to mediocre news is hit with selling or nothing at all – and heaven forbid your news is negative.
The good part to all this, if you’re fortunate to have cash (and patience), many opportunities exist. One in particular I am reviewing again this week is in the biotech and healthcare industry. The opportunity we “hope” is very close to what we witnessed in Q1 2009 with YM BiosciencesInc. (TSX. T.YM, Stock Forum).
In the winter of 2008/09 you couldn’t give YM away in the $0.30’s and $0.40’s yet their cash balance was significantly higher and the business model itself was deemed worthless by the market. Through the MicroCap.com newsletter we bottom fished that stock for months. By the summer of 2009 the stock had gained almost 500% as it ran to $2.40.
That brings us to what I hope is a similar scenario being overlooked by the market – Medwell Capital. Given how quiet this market is for small stocks, I suspect this is simply flogging a dead horse. However, there is opportunity for those that recognize the upside potential of biotechs and the benefits to buying dramatically discounted cash/investments.
Medwell Capital (TSX: T.MWC, Stock Forum). ($0.28)
https://www.medwellcapital.com/
- Shares outstanding 91 million
- Cash & Short term investments $31.6 million ($0.35/share)
- 30 million shares of SDI.T $12 million ($0.13/share)
- Total debt less receivables $195,000 ($0.002/share)
It is not uncommon to see microcaps (penny stocks) trading at deep discounts right now, but those with large cash positions are still few and far between. And finding those trading below large cash values are even more difficult. Finding a stock discounted so dramatically like Medwell for no specific reason is rare.
If the company was burning through cash like drunken sailors, I could understand it. That is one of our first criteria in identifying growth opportunities. In fact, if we are following a company and the burn rate appears abnormal (because the company is being treated like a retirement project), we drop coverage. This is not the case with Medwell as they are doing an excellent job controlling their burn rate.
So why then is the stock continuing to trade at a gross discount to its liquidation value? This is difficult to identify. Partially because they are not promoters, the biotech sector is weaker than others right now, and many investors have a herd mentality (they only buy or sell when others are doing the same thing). This was very evident with YM Biosciences and countless other companies we have followed this past decade. Following the 2000 tech bust we identified over 40 cash rich techs trading well below cash value that gained several hundred percent each over a period of 12 to 18 months. Simply because the markets returned to normal.
Medwell owns 30 million shares of Spectral Diagnostics (TSX: T.SDI,Stock Forum) ($0.39). www.spectraldx.com
https://clinicaltrials.gov/ct2/show/NCT01046669
This government filing went up recently and reports that Spectral has commenced recruiting for their Septic Shock trials. They will recruit 360 people in the United States and report mortality rates in increments of 28 & 90 days, 6 and 12 months.
The objective is to obtain FDA approval for this Septic Shock treatment that has proven very successful in other countries - currently nothing is available in North America. If approved, the potential market is well in excess of $100 million annually.
CONCLUSION
Medwell financials released this past week look good - quiet - but good. Burn rate remains low with cash and short term investments the same as Q1 near $32 million or $0.35/share. Because this is biotech and healthcare related, we need time - this makes a low burn rate critical. We not only get the cash at a 20% discount but the 30 million shares of Spectral (SDI) they own are then carried for zero cost - these are not factored into the $32 million but are currently worth another $0.13/share to MWC shareholders.
Spectral also issued financials and all is good there. Cash is at $17 million and their business model remains on track. Very few in the investment community follow Spectral and it's very tightly held - but it has huge potential. In the recent quarter they received the McMaster University industry partner of the year award. It was earned for Spectral's contribution to the discovery and development of aptamer technology for the diagnosis and treatment of sepsis.
"... addresses a major unmet need for more than 250,000 patients per year in the United States alone who suffer from severe sepsis and are at high risk of dying."
Our strategy is to play Spectral for zero cost by buying the discounted cash of Medwell. This not only gives us big upside potential on the Spectral trials over the next 6 to 12 months, but exposure to other healthcare plays as Medwell puts the $32 million to work.
Disclosure: Danny Deadlock owns 40,000 shares of Medwell purchased over the past six months.
Current and past reports are archived on our Stockhouse message board at: https://stockhouse.com/Groups/GroupInfo.aspx?g=50540
Danny Deadlock has specialized in microcap and smallcap companies for over 25 years and is a registered member of the Stockhouse community since 1997. You can find his website at www.MicroCap.com - a service which has specialized in TSX and TSX.V penny stocks since 1998. You can also email Danny at microcap@telus.net