Small-cap companies (that is, companies that are worth between $300 million and $2 billion) can be a risky investment, as smaller companies tend to have lower stock prices and thus are more volatile than their larger counterparts. But small-caps can also be incredibly attractive to investors looking to strike big with little money. Small-caps are cheap buys, and because of their size they have room for exponential growth. Stockholders who get in “on the ground floor” of the right small-cap can reap huge profits.
As far as the stock sectors go, small-cap healthcare stocks are riskier still, as they’re (sometimes) built on the lofty promises of a single product. And if something bad happens to that product (like say, an FDA rejection or major recall)… well, hope you didn’t throw in your life savings. But at the same time, if that company’s one product does live up to potential and becomes a blockbuster, the rewards can be absolutely fantastic.
There are currently 174 actively trading small-cap healthcare stocks. But which of them are actually worth investing in, and which are duds?
To find out, an investor could go and examine the product(s) the 174 companies are churning out, or the details of the services they provide to find the good buys. Or, an investor can start by just looking for healthcare companies that can answer yes to the following three questions:
1) Are the company’s current and quick ratios both over one?
A healthcare company with a current ratio over one means they are currently not leveraged over what they could pay today, if they had to. Products sometimes take years of testing, and healthcare in general is a risky sector fraught with product recalls and high failure rates. A safety net of cash and assets can help a healthcare company weather misfires of the period until they can become profitable.
2) Is the internal ownership rate of the company 40 percent or higher?
High levels of internal ownership imply that the owners believe in the product. When internal ownership is over 40 percent it shows that the people within the company are invested, figuratively and literally, in the financial well-being of the company.
3) Does the company not pay a dividend yield?
It’s usually not wise for healthcare companies to pay stockholders a dividend on money they could be reinvesting, especially early in a company’s run.
Of the 174 companies on the market, there are four healthcare sector companies that can answer “yes” to all those questions.
So what are these companies, and what should investors know about them?
China Cord Blood Corporation (CO)
Equities previously covered China Cord Blood in another healthcare stocks spotlight on July 26, and they’re the only company on both lists. It’s worth noting that in those six weeks since Equities first highlighted China Cord Blood’s strong fundamentals, the company has gained 14.3 percent in value.
China Cord Blood specializes in umbilical cord blood storage. Cord blood is lauded for its high stem cell content, and storing cord blood amounts to an (expensive) insurance policy for newborn children. After a baby is born, parents can opt to use businesses like China Cord Blood to store the stem-cell rich blood. If the child has an illness later in life in which stem cells would be useful, they can turn to their cord blood which is matched up to them perfectly.
China Cord is at $3.86 a share, for a 47.7 percent gain on the year.
Prothena Corporation plc (PRTA)
This biotech develops therapies that treat neurodegenerative diseases, and they have found much success as of late in this area of biotech research. The company has three major developments in the pipeline, and sports zero debt. The company has proven popular with investors – perhaps too popular, as Zacks warned back in August that the stock might be overbought.
Prothena is at $19.71 a share, and sports a whopping 168.89 percent gain on the year.
Regulus Therapeutics (RGLS)
This company specializes in microRNA therapies, which modulate te function of non-coding RNAs that regulate most genes in a genome. The company was formed as a partnership between Isis Pharmaceuticals (ISIS) and Alnylam Pharmaceuticals ($ALYN) to explore this experimental form of gene therapy, which they claim could potentially treat inflammatory disease, fibrosis, and metabolic disease.On July 23 Regulus offered 5.175 million shares of common stock at $9.50 a share, which eventually raised $49.2 million for the company.
Following the offering, the company’s stock briefly spiked as high as $12.89 a share before falling back down.
Regulus is at $9.49 a share, up 50.63 percent on the year.
USANA Health Services Inc. (USNA)
USANA is a multi-level marketing company that specializes in supplying nutritional and skin-care products via an “associate” distribution model. The company distributes its products via non-employees working off commission, a model similar that to that used by the controversial company Herbalife Ltd. (HLF) . This model rewards the highest performers the most at the expense of the lowest performing associates, with almost three-quarters of otal commissions earned by the top 2 percent of associates. USANA, like Herbalife, is thus often referred to as being a pyramid scheme.
Pyramid scheme or not, the company is currently skyrocketing. USANA is up 134.44 percent on the year to hit $77.20 a share.