Small-cap stocks have gotten off to a blistering start in 2019. In fact, small-cap equities, on balance, have been outperforming their mid- and large-cap peers during the first two months of the year by a wide margin.
Armed with this insight, we asked three of our Motley Fool contributors which top small-cap stocks have their attention right now. They named AcelRx Pharmaceuticals (NASDAQ: ACRX), Realogy Holdings (NYSE: RLGY), and Regenxbio Inc. (NASDAQ: RGNX). Read on to find out why.
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An underappreciated opportunity
George Budwell (AcelRx Pharmaceuticals): Shares of small-cap biopharma AcelRx Pharmaceuticals have gained an eye-catching 58% since the start of the year. While that type of stately gain is highly unusual for such a short time frame, this tiny drugmaker actually appears poised to surge even higher -- perhaps making it a great addition to any growth-oriented portfolio right now.
What's the backstory? AcelRx's stock is marching higher in response to the official launch of its sublingual opioid, Dsuvia. The big deal is that Dsuvia is staring down a target market estimated at a whopping 91 million Americans. Although this next-generation opioid does have a number of hurdles to overcome from a commercial standpoint, this sizable market could eventually transform Dsuvia into a blockbuster product (a drug with sales topping $1 billion per year). Putting this commercial opportunity into perspective, AcelRx's market cap stands at a mere $279 million at the moment.
Why is this small-cap biotech worth buying at these levels? The market clearly expects Dsuvia's commercial launch to get off to a slow start based on AcelRx's present valuation. But this anemic ramp-up may actually represent a great entry point for patient investors. The long and short of it is that Dsuvia should eventually gain market acceptance due to the fact that it fills a clearly established medical need in the acute-care setting, which bodes well for the company's long-term prospects. In effect, this small-cap biotech stock could possibly double -- or even triple -- in value within the next few years.
People are still buying and selling houses
Chuck Saletta (Realogy Holdings): Companies' stocks are generally valued based on the market's expectations for their future cash-generating abilities. As a result, when a company misses earnings and indicates it is shifting its capital allocation structure to a more conservative approach, its shares tend to drop.
Such was the case with real-estate agency and relocation company Realogy, the company behind Cartus relocation and the Coldwell Banker, Century 21 Real Estate, and ERA Real Estate agencies. Not only did it miss expectations for the most recent quarter, but in its conference call, it warned of an uncertain housing market and indicated it was focusing on paying down debt. Its shares fell just over 20% on the day it made that announcement, and they continued to fall the next day as well.
Yet it's that decline that makes Realogy a company with a fairly low market capitalization that's worthy of your consideration. That market sold its shares off -- rightly so -- on the bad news, but those shares are now trading at what looks like a reasonable value based on its prospects. After the plummet, Realogy's shares can be purchased for less than eight times the company's anticipated earnings.
Even after all of that bad news, analysts are expecting the company's earnings power to grow over the next several years. If that growth materializes, people buying in the face of the recent sell-off could very well look back in a few years and realize they picked up a legitimate bargain.
A revolutionary approach to fighting genetic diseases
Todd Campbell (Regenxbio Inc.): Small-cap stocks are risky, but the reward associated with them can be big, and that's particularly true of small-cap biotech stocks. Regenxbio is one tiny biotech on my radar right now because of news that could cause its shares to head higher in 2019.
The company makes viral vectors used by drug developers to deliver gene therapies to their target. Specifically, they have a proprietary portfolio of adeno associated viral vectors drug developers can use to develop new therapies addressing the over 6,000 diseases caused by genetic mutation.
Gene therapy's ability to correct the production of key proteins missing or over-produced because of mutation is potentially game-changing. And it's not some future technology -- gene therapies are already available, and more are on the way.
For instance, Novartis is seeking FDA approval for zolgensma (formerly AVXS-101), a gene therapy targeting spinal muscular atrophy (SMA), a multibillion-dollar indication. An FDA decision is expected in August. If approved, it will be the first gene therapy using Regenxbio's AAVs to secure an OK. Novartis will benefit most from AVXS-101's launch, but Regenxbio could collect up to $80 million in sales milestones. Additionally, it will pocket single-digit to double-digit royalties on zolgensma's sales.
Regenxbio has its own internal drug development program under way as well. Perhaps its most intriguing internal candidate is RGX-314, a potential one-and-done treatment for wet age-related macular degeneration (wet AMD). Wet AMD is a common cause of vision loss in seniors, and billions of dollars are spent on anti-VEGF drugs Eylea and Lucentis every year to combat it. Because current treatments can require four to 12 injections in the eye annually, and wet AMD is becoming common because of aging baby boomers, a single-dose treatment could be a huge advance. Regenxbio expects to update investors on RGX-314's early-stage studies later this year, so investors might want to buy this small-cap stock now.
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Chuck Saletta has no position in any of the stocks mentioned. George Budwell has no position in any of the stocks mentioned. Todd Campbell has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.