Via SeekingAlpha.com

I wanted to give an update to my previous article on BioDelivery Sciences (BDSI), that came out before I realized just how much COVID-19 would affect the whole world and before the broader equity sell-off. I see now as an even better buying opportunity for BDSI than before, and added to my position this week.

This week saw the markets return with a big bounce, but there certainly are parts of the market still at risk. I wouldn’t touch offshore drilling or small shale names at all, as I see COVID-19 and OPEC’s price war over oil pushing off the recovery that was just barely starting to take place. Many of these offshore drillers and small shale plays have loads of debt and need a major recovery in oil prices and much more new exploration within the next 1-3 years, and I just don’t see those things taking place that soon now.

I’m also bearish on restaurants and some travel-related businesses, as I think this pandemic could stretch on for a long time. Many of these businesses are very reliant on large amounts of traffic to hit margins they need to be profitable. While I think many things will start opening back up here in a few weeks or months, COVID-19 will not be eradicated overnight and these businesses could see reduced traffic for many months.

Despite there being industries to avoid with how far the markets have fallen, there are a lot of businesses to be bullish on. Consumer staples and healthcare are two industries that many expect to keep on pumping out products with little disruption during this upcoming recession. As you might expect, the Oil & Gas and Travel sectors have fallen much harder since the start of the year.

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ChartData by YCharts

Unfortunately, during this same time, despite being a small biotech in the healthcare industry, BDSI has fallen just as hard as these at-risk sectors:

ChartData by YCharts

I’ve been trying to figure out why the stock has fallen so hard. For most names that have fallen this much, it is for one of two reasons:

  1. They could experience a liquidity crisis, or people are worried they won’t be able to roll over debt now.
  2. People staying at home is severely detrimental to their business and their cash flows.

As to the first point, it just isn’t a concern at all at the moment. At the end of 2019, the company did have $59 million in debt, but it had $64 million in cash and no near-term maturities on that debt. It also had over double the amount of current assets than it did current liabilities. From the following graph, you’ll see just how well-prepared BDSI is for these sort of market conditions, grabbing available financing when it could over the last few years.

ChartData by YCharts

As to the second point, BDSI did just become profitable in the third quarter of 2019. While the current environment could certainly keep the sales team from traveling and setting up new markets for a while, it will not keep them from selling their products to the customers that are already well-established. Even if the company’s sales regressed some, the most I could see it costing BDSI in 2020 is in the ~$20 million range. However, I think it is much more likely that this is just a blip on the company’s long-term growth and it actually becomes more profitable this year than last. You’ll see that even with recent adjustments to this year’s revenue expectations, BDSI is still looking at ~45% growth over 2019.

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ChartData by YCharts

So my next thought was maybe people think that BDSI is more at risk being a smaller biotech and that all small biotechs have sold off hard, instead of people looking into their actual financial positions. However, I follow a couple other similar-sized companies by market cap that also just hit profitability: Electromed (ELMD) and Catalyst Pharmaceuticals (CPRX). Both of these names haven’t sold off as hard this year, and they bounced back harder. Likewise, the iShares Nasdaq Biotechnology ETF (IBB) did not sell off nearly as hard through this year.

ChartData by YCharts

A lot of the stock market has fallen hard, and it hasn’t perfectly repriced everything yet. I see some names as having bounced back too hard and that will continue to struggle in the coming months. However, some have either fallen too hard in the first place or did not bounce back nearly as much. I see both of these as the case for BDSI.

Conclusion

For many stocks, a large part of the bounceback after recent sell-offs has already happened. For others, there continue to be material risks, and these stocks should be avoided. However, BDSI falls in the sweet spot of a stock with fantastic growth, very low valuation, and having no upcoming liquidity issues, nor do I expect this downturn to affect the company’s sales much. I continue to rate BDSI as a Stong Buy and could easily see the stock hitting the $8-10 range this year or next. As always, everyone should do their own due diligence before purchasing any security.

Disclosure: I am/we are long BDSI, CPRX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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