5 Biotech Penny Stocks Smart Money Is Piling On

Apart from technology, if there ever was a sector that short sellers were afraid to touch for fear of being squeezed out vehemently, it has to be biotech. The remarkable rally that the sector saw in the years following the financial crisis caused even the most bearish of bears to change their thesis on it and increase their long exposure towards the sector. However, all of that changed last year. Once the biotech party fizzled out in mid-2015, investors fled the sector in droves, causing many noteworthy names in the biotech space to fall to unprecedented levels.

Now, as most seasoned investors know, the best time to invest in a sector or a stock is when the crowd has become fearful of investing in it. So, it isn’t a surprise that now that the dust has settled, the smart money is once again finding biotech stocks attractive given their depressed valuations. Taking that into account, in this article, we’re going to discuss five stocks from the biotech space which are currently trading below $1 and which became increasingly popular among the smart money investors that we track heading into the second-half of 2016.

We believe that imitating hedge funds and other large institutional investors can be helpful in identifying stocks capable of outperforming the broader market. Through extensive research that covered portfolios of several hundred large investors between 1999 and 2012, we determined that following the small-cap stocks that large money managers are collectively bullish on, can generate monthly returns nearly 1.0 percentage points above the market (see the details).

everything possible/Shutterstock.com

#5 Navidea Biopharmaceuticals Inc (NYSEMKT:NAVB)

– Hedge Funds With Long Positions (as of June 30): 7

– Value of Hedge Funds’ Holdings (as of June 30): $1.40 Million

Let’s start with Navidea Biopharmaceuticals Inc (NYSEMKT:NAVB), which was held by seven funds in our system on June 30, up by one quarter-over-quarter, though the aggregate value of their holdings in it fell by more than 90% during the second quarter. Shares of the troubled biopharmaceutical company have been extremely volatile this year, as it’s faced litigation from its erstwhile creditor CRG over non-payment of $50 million in loans it received last year. Nevertheless, the company’s stock skyrocketed at the beginning of last month after it announced that it sold the North American rights of its product Lymphoseek to Cardinal Health for up to $310 million ($80 million upfront and up to $230 million in sales-based milestones), which is more than enough to pay off the debt it has taken from CRG, as well as other costs associated with the litigation. Despite those gains, Navidea Biopharmaceuticals Inc (NYSEMKT:NAVB)’s stock is still trading down by 12.24% in 2016.

#4 CTI BioPharma Corp (NASDAQ:CTIC)

– Hedge Funds With Long Positions (as of June 30): 9

– Value of Hedge Funds’ Holdings (as of June 30): $16.75 Million

CTI BioPharma Corp (NASDAQ:CTIC) was also held by one more fund that we track on June 30 than on March 31, though the aggregate value of their holdings in it plummeted by $8.19 million during the quarter. Had we compiled this list before February, CTI BioPharma Corp (NASDAQ:CTIC) wouldn’t have featured on it, as it never traded below the $1 mark before that period. However, the humongous decline that the stock suffered in February after the FDA shut down the clinical trials of the company’s lead product candidate pacritinib, caused CTI BioPharma to become a penny stock. In the last few months, the stock has fallen further, trading below the $0.50 level, and is currently down by almost 67% in 2016. Nonetheless, several hedge funds still see value in the stock, as they have more money invested in it than any other stock on this list. At the end of August, analysts at Piper Jaffray reiterated their ‘Neutral’ rating and $0.75 price target on the stock.

On the next page we’ll delve into the three biotech penny stocks that hedge funds like the most.

#3 Peregrine Pharmaceuticals (NASDAQ:PPHM)

– Hedge Funds With Long Positions (as of June 30): 10

– Value of Hedge Funds’ Holdings (as of June 30): $1.53 Million

Peregrine Pharmaceuticals (NASDAQ:PPHM) is another stock which took a huge beating in February, and as a result, is trading down by more than 69% year-to-date. The slump in the stock came in late-February after the company revealed that its lead product candidate, Bavituximab, failed a Phase 3 clinical trial in patients suffering from non-squamous non-small cell lung cancer. Nevertheless, the popularity of Peregrine Pharmaceuticals (NASDAQ:PPHM) among the hedge funds in our database saw a notable increase during the second quarter, as ownership of the stock doubled and the aggregate value of their holdings in it jumped by 119.3%. On September 9, the company reported its fiscal year 2017 first quarter results, declaring a loss of $0.04 per share on revenue of $5.61 million, compared to a loss of $0.09 per share on revenue of $9.52 million for the same quarter of last year.

#2 XOMA Corp (NASDAQ:XOMA)

– Hedge Funds With Long Positions (as of June 30): 10

– Value of Hedge Funds’ Holdings (as of June 30): $3.22 Million

Moving on, the number of hedge funds that we track that were long XOMA Corp (NASDAQ:XOMA) increased by four during the second quarter, though the aggregate value of their holdings in it fell by 34.5% during that time. Hedge funds that initiated a stake in the company during the second quarter included billionaire Jim Simons‘ Renaissance Technologies and Gavin Saitowitz and Cisco J. Del Valle’s Springbok Capital. XOMA Corp (NASDAQ:XOMA)’s stock has lost a significant amount of its value in 2016, being down by almost 80%, though its status as a penny stock changed a few days ago when the company executed a 1-for-20 reverse stock split to lift its stock back above the $1.00 mark to comply with Nasdaq’s listing standards. For its second quarter, the California-based development-stage biotechnology company reported a loss of $0.13 per share on revenue of $0.44 million, missing analysts’ expectations of an EPS loss of $0.12 on revenue of $0.90 million.

#1 AVEO Pharmaceuticals, Inc. (NASDAQ:AVEO)

– Hedge Funds With Long Positions (as of June 30): 10

– Value of Hedge Funds’ Holdings (as of June 30): $9.12 Million

AVEO Pharmaceuticals, Inc. (NASDAQ:AVEO) was the most popular biotech penny stock at the end of the first-half of 2016 among the hedge funds that we track, with more money invested in it than the other two stocks with the same number of hedge fund shareholders. The number of funds long the stock increased by four during the second quarter, with the aggregate value of their holdings in it increasing by 38%. AVEO Pharmaceuticals, Inc. (NASDAQ:AVEO)’s stock is down by 41.27% year-to-date, and by almost 96% over the last five years. In May, the company revealed that it has raised $17 million through a private placement of 17.64 million units at $0.95 per unit. Each unit consisted of one share of common stock along with a five-year warrant to purchase one share of common stock at $1.00. The company intends to use the proceeds from the private placement to fund the U.S. Phase 3 study of its lead product candidate, tivozanib, and for general corporate purposes. On September 9, analysts at FBR & Co reiterated their ‘Buy’ rating on the stock.

Disclosure: None