Hidden Gems: Unveiling the 5 Stocks on Hedge Funds’ Radar

2. Avid Bioservices, Inc. (NASDAQ:CDMO)

2024 Performance: 26.92%

Number of hedge fund holdings in Q4:21

Avid Bioservices, Inc. (NASDAQ:CDMO), incorporated in 1981, is a contract development and manufacturing organization. The company operates in an industry that is considered recession-resistant and has a consistent customer base, making it an attractive investment opportunity. Avid Bioservices, Inc. (NASDAQ:CDMO), faced a decline in recent quarters as mentioned in Laughing Water Capital’s Q4 2023 letter, due to short-term headwinds. However, increased demand, capacity expansion, and Avid Bioservices’ specialization continue to attract investors. Please go through Avid Bioservices, Inc. (NASDAQ:CDMO) Q2 2024 Earnings Call Transcript for a better understanding of management’s views on Avid Bioservices, Inc. (NASDAQ:CDMO).

Laughing Water Capital stated the following regarding Avid Bioservices, Inc. (NASDAQ:CDMO) in its first quarter 2024 investor letter:

“As you know, a large portion of our portfolio is invested in Contract Drug Manufacturing Organizations (CDMOs) tied to biologic, or large molecule, pharmaceuticals; specifically, we own shares in Lifecore Biomedical (LFCR), a CDMO focused on fill-finish work for injectable drugs, and Avid Bioservices, Inc. (NASDAQ:CDMO), which is focused on disposable drug substance manufacturing. I am attracted to these investments because at scale, late stage and commercial business is relatively recession resistant (customers do not stop funding drugs that are close to approval, and patients do not stop taking their prescriptions during economic downturns), customers are extremely sticky (moving to a new manufacturer requires an FDA review), the industry is set to benefit from tremendous tailwinds (more than half of the drugs currently in development are large molecule, large molecules are underpenetrated globally), and historically competition has been rational (capacity is rarely built on spec – rather, CDMOs add capacity when their customers ask them to).

Further, while at present both LFCR and CDMO are not generating much cash and thus “screen” poorly, both have available capacity at a time when capacity is scarce, and should benefit from tremendous operating leverage over the next few years as this new capacity is filled up. Importantly, industry dynamics as well as increasing amounts of detail on their respective pipelines suggest that for both companies filling their capacity is very much a “when” rather than an “if.” The thesis for both names is thus that we are just a few years away from large amounts of relatively sticky free cash flow, that should deserve a high multiple…” (Click here to read the full text)