An Undervalued Stock Story

A few times a year, I will let you, the Wealth Daily reader, know when I see an investment/trade opportunity that looks really good. Coming into 2016, one of my top predictions for the year was that “just about every gold mining stock will double in price.”

Then, on February 3, I gave you the heads up that gold stocks were about to make that big move higher. I included two gold investments in that article: Seabridge Gold (NYSE: SA) and a closed-end fund that was paying a huge 24% dividend, the GAMCO Global Gold, Natural Resources & Income Trust (NYSE: GGN). 

Seabridge was $6.13 at the time and is now trading around $15. The GAMCO fund was $4.30 and is now trading for $6.24 (plus you would’ve gotten $0.14 in dividends, with another $0.07 on the way). 

Most recently, on March 30, I told you about a small biotech stock that looked poised to make a big move higher. Here’s an excerpt from that article:

The company is Relypsa (NASDAQ: RLYP). On Monday of this week, my Real Income Trader subscribers were buying shares of Relypsa between $12.90 and $13 a share. 

There’s always a point where a company’s valuation has taken into account whatever negative news is plaguing the stock.

In Relypsa’s case, I think that happened Monday. Yes, the company has to raise money to market its newly approved drug, Veltassa. Right now, Relypsa has ~$250 million in cash, and it needs $275–$300 million to market Veltassa in 2016.

So, yes, it needs to raise money. But full-year 2016 revenue is expected to reach around $40 million. And sales are projected to hit $650 million in 2020 — just three and a half years from now. It seems to me that Relypsa may only have to raise cash once to get Veltassa going, and that’s a very good thing…

Right now, Relypsa is valued at $600 million. Nearly half of that is cash. And in a few years, revenue will be more than the current market capitalization. Biotechs simply do not trade at 1X revenue. For instance, Gilead (NASDAQ: GILD) trades at nearly 4X revenue. BioMarin (NASDAQ: BMRN) trades at 14X revenue.

It is not unreasonable at all to think that Relypsa can trade at 4X or 5X revenue down the road. At 4X revenue, Relypsa would be $2.5 billion company in 2020, with a stock price around $56 a share…

So bottom line: If Relypsa can even get close to sales projections for Veltassa, it will be much, much higher than it is today.

Relypsa closed at $13.44 a share that day. And it traded as low as $12.80 on April 1.

That Was Fast 

Finding undervalued stocks that have the potential to move a lot higher is one thing. You can analyze revenue growth, get a feel for the potential market the company is targeting, determine how well management is executing the plan… and when all these things line up, you can proceed with confidence. 

That’s the way it was with Relypsa. We have a few hundred thousand Wealth Daily readers, and so I can’t just throw any old stock out there. I have to be pretty confident that I have my ducks in a row to put out my analysis to such a large audience. I was highly confident that Relypsa would be a big winner at some point…

And that gets to the other issue: timing. Getting the timing for such a big move on a stock right is very difficult. In fact, you have to accept the fact that you can’t do it perfectly. The very best investors rarely buy a stock at its absolute bottom. And it is not at all uncommon for a future winner to first go lower in price right after you buy it. These are just the simple facts of investing. 

It’s even more precarious when you’re entering a sector that’s been selling off sharply, like biotech has for the last eight months. You know there is fundamental value. But what you don’t know is when investor sentiment will change — when they will recognize the value, stop selling, and start buying. Sentiment can stay negative for a long time…

So I wasn’t thrilled that Relypsa dropped from $13.44 to $12.80 in the days after I alerted you to the stock. But again, I was confident in my analysis on Relypsa. And I am also very familiar with the phrase “chance favors the prepared mind.”

Any time you get the timing nearly perfect, there is an element of luck. Because again, investors can be very fickle, and you can’t be sure that sentiment is changing from negative to positive. But your chances of getting lucky are much higher when you’ve done solid research.

And that’s exactly how it’s played out with Relypsa…

68% One-Day Gain

On April 7 (which happens to be my son’s birthday), Relypsa opened at $14.40. And yes, I was pretty pleased that the stock was doing well since I recommended it to you. But I was in no way expecting what was about to happen…

At 12:35 p.m. Eastern, Reuters news service published an article that Relypsa had hired an investment bank to help it sort through the slew of buyout offers it was getting. Fifteen minutes later, the stock was over $21 a share. It finished trading that day at $24.32.

Relypsa had launched 68% in just a few hours…

I’ll tell you straight out: There is no trading system on the planet that can give you consistent, one-day 68% gains for a stock. This big move on this particular day was luck, pure and simple. 

But the fact that I had just recommended the stock wasn’t luck at all. Like I said, I’d been watching the stock for months. I knew there was value and big potential for Relypsa’s drug sales. So it’s not at all surprising that I wasn’t the only one who knew this. 

Ultimately, from the day I recommended Relypsa at $13.44 to the closing price of $24.32 on April 7, the stock jumped 80%. I sure hope you caught some of that move.

But if you didn’t, I’ll tell you this: the stock’s not done. I can’t tell you the exact timing, but any buyout offer for Relypsa will be in the $30s or maybe even the $40s. 

Until next time,

Until next time,

Briton Ryle

@BritonRyle on Twitter

The Wealth Advisory on Youtube

The Wealth Advisory on Facebook

A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.