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The Coronavirus Pandemic: Opportunities in Smallcaps

As economic and market fallout from coronavirus intensified this week, so has the sense of urgency felt by many investors. Several days saw selling that can only be described as panicked, as circuit breakers on U.S. stock exchanges were tripped up on two occasions.

Another area this has been felt with is the medical stocks that are being bid up. Companies that could potentially provide vaccines have fallen out of favor on the realization that developing vaccines takes time. 

Drug treatment companies have benefited on the premise that these treatments are quicker to find and easier to manufacture at scale. As these drug treatments enter the market, it then buys time for biotechnology companies to develop vaccines – a vital factor given the potential for COVID-19 mutations.

Diagnostics companies, which can also supply short-term solutions to certain coronavirus concerns, have also benefited.

Finally, companies in certain ancillary industries can be expected to benefit. Stocks like Zoom Video Communications (ZM) and K12 (LRN) have rallied from the “work/school-from-home” trend. There are other secular trends that may emerge from this crisis.

For investors willing to look at small caps, there are opportunities to take advantage of all three areas.

First, drug treatments.

Pharma Stocks – The No-Brainer Hedge

Active microcaps which are developing drugs to cure the coronavirus are easily the best bet in an environment where the Dow Jones is in red double-digits for most days because these stocks have the genuine potential to make it big. Some of the companies which, we believe, could have an immense upside potential in the current environment are as follows:

  1. NanoViricides, Inc. (NYSE American:NNVC) – NanoViricides is among the few names that have actually started working on developing a drug that can treat the Wuhan coronavirus. CEO Dr. Anil Diwan had earlier worked on research associated with the Middle-East Respiratory Syndrome (MERS), another type of coronavirus. Dr. Diwan believes that with some governmental support, as well as support from international agencies, they could progress rapidly on this front. The company claimed to have already identified some candidate ligands in their chemical library which could be used in the treatment of the Wuhan coronavirus. These broad-spectrum virus-binding ligands are expected to attack the coronavirus at the same points that the virus uses to bind to its cognate cellular receptor, namely ACE-2 (angiotensin converting enzyme type 2), using molecular modeling based on known SARS-CoV and ACE2 interactions. NanoViricides intends to perform initial testing of these drug candidates for safety and effectiveness in cell culture studies in its own BSL-2 virology laboratory at its Shelton campus, using low-threat coronavirus strains that have been normally circulating in human population. The management is working on developing necessary collaborations in China to take the program further assuming that an effective drug candidate is identified soon. NanoViricides intends to solicit interest and financing from government agencies in order to accelerate its work on the coronaviruses and novel pathogens. This is the reason why the stock zoomed up from levels close to $3 to over $17 in such a short period of time. Interestingly, the stock is now close to $7 levels and is still valued cheaply given the huge research potential and existing products in development such as its topical cream for shingles.
  1. AIM ImmunoTech (NYSE American:AIM) – This is an immuno-pharma company that focuses on the research and development of therapeutics to treat multiple types of cancers and immune-deficiency disorders in the United States. The company’s core product range includes the Alferon N Injection, an injectable formulation of natural alpha interferon to treat a category of genital warts, a sexually transmitted disease, and Ampligen for the treatment of chronic fatigue syndrome (CFS), Hepatitis B, HIV, and cancer patients with renal cell carcinoma, malignant melanoma, non-small cell lung, ovarian, breast, colorectal, urothelial, prostate, and pancreatic cancer. The company has seen its stock almost triple in value after the management announced that the National Institute of Infectious Diseases (NIID) in Japan will begin testing AIM’s drug Ampligen as a potential treatment for COVID-19. The experimental program will be conducted at both the NIID and the University of Tokyo and the testing and research are being conducted by Hideki Hasegawa, MD, PhD, Director of the NIID’s Influenza Virus Research Center, and Director of the World Health Organization (WHO) Collaborating Centre for Reference and Research on Influenza, Tokyo and Takeshi Ichinohe, PhD, Department of Pathology at the NIID, Department of Biological Science and Technology, Tokyo University of Science. This is exceptional news not just with respect to finding a cure for COVID-19 but also for investors who bought the stock in order to encourage research against various cancers and viral diseases.

Diagnostics

Two companies in the diagnostics field deserving attention:

  1. Co-Diagnostics (NASDAQ:CODX) – While NanoViricides and AIM are actively researching a drug on the COVID-19, Co-Diagnostics is providing diagnostic solutions which help in determining rapidly whether a patient is suffering from the virus or not. The Utah-based molecular diagnostics company’s core business is to manufacture and sell reagents used for diagnostic tests that function via the detection and analysis of nucleic acid molecules. It also intends to sell diagnostic equipment from other manufacturers as self-contained lab systems such as the one for COVID-19. The stock has multiplied more than four times since the coronavirus outbreak and there continues to be further upside potential.
  2. Hologic (NASDAQ: HOLX) Coronavirus testing kits are trending amongst institutional investors, traders and on various chat boards. The company announced yesterday that the U.S. Department of Health and Human Services would contribute $699,000 to speed up Hologic’s development of a coronavirus diagnostic test. Development of the test is expected to be completed in the coming weeks, which would allow the U.S. Food & Drug Administration to consider allowing labs to use the test under the Emergency Use Authorization, according to the health department.  

Safety & Protective Gear/ Equipment – The Less Obvious Yet Effective Investment Sector

This is the other sector with a huge upside that can act as a natural hedge against the falling markets. The panic situation all over the world has led to people rushing to buy surgical masks and small-time mask producers are minting money as a result of this panic, prompting giants like Google (NASDAQ:GOOG) (NASDAQ:GOOGL) and Facebook (NASDAQ:FB) to ban advertisements pertaining to these masks. However, the fact remains the protective gear in public and on the job for more safety have become critical. Some of the highly promising companies which cater to this space are as follows:

  1. Toughbuilt Industries (NASDAQ: TBLT) – ToughBuilt is an innovator in the safety and home improvement space largely catering to construction workers. Its core product range includes gloves, kneepads, tool pouches, tool rigs, tool belts and accessories, tools bags, totes, office organizers, laptop bags, cell phone and tablet covers, sawhorses, miter saws, table saws, and roller stands. With the spread of the COVID-19, worker safety on construction sites is bound to gain much more importance. This will certainly provide a boost to a company like Toughbuilt, which released more 70 new SKUs in the last quarter. The company has a fantastic distribution network through online as well as offline channels. Key partners include Lowe’s (NYSE:LOW), Home Depot (NYSE:HD), Walmart (NYSE:WMT), Amazon (NASDAQ:AMZN), Menards, Leroy Merlin (Europe), Sodimac (Latin America), Kincrome, and Bunnings Warehouse (UK, Australia, and New Zealand). Its core industry of home improvement is highly resilient to the coronavirus situation so with the growing distribution network and the high demand for its products.
  2. Lakeland Industries, Inc. (NASDAQ: LAKE) – This small cap is a well-known name within the protective clothing space for workers and public health officials that expose themselves to COVID-19 patients. The company offers limited use/disposable protective clothing, such as coveralls, laboratory coats, shirts, pants, hoods, aprons, sleeves, arm guards, caps, and smocks, high-end chemical protective suits to provide protection from highly concentrated, toxic and lethal chemicals, and biological toxins; and firefighting and heat protective apparel to protect against fire, burns, and excessive heat. Lakeland has historically surged during outbreaks and proved a favored supplier amid the Ebola outbreak. It is already up by more than 50% since the coronavirus outbreak and could continue its run for a while until the situation stabilizes.

The company announced a pair of distribution agreements this week: On March 11 with Distribution America – a hardware store retailers’ cooperative with 15,000 affiliated retail locations in 50 states and international markets – and on March 12 with PRO Group which represents more than $5.25 billion in annual buying power through PRO Hardware, Garden Master, Golden-Link, and FARMMART.

Another company within this space which deserves and honorable mention is Alpha Pro Tech, Ltd. (NYSE: APT) that manufactures masks and protective apparel — goods already in high demand in China. With the increasing spread of the coronavirus, Alpha Protech should be getting bulk orders for its masks which might spike the stock price in the near future.

Key Takeaways

It is easy for investors to get dissuaded from putting their money in stocks given the day-after-day fall in the global indices but the challenge is to find the right opportunities to recoup their losses and perhaps, even make a profit from the whole coronavirus situation. Research-oriented biotech companies like NanoViricides and safety-oriented companies like Toughbuilt are not only showing resilience and defying the falling market trends but also have promising business models and very convincing growth stories. Overall, these companies appear to be among the few promising investment opportunities in these tough times that can genuinely create good value for investors.

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