If you’re a seasoned investor or just starting out, you might have heard of insider buying when it comes to a stock.
Insider buying is when a company’s executives or major shareholders buy more of the company. And it can predict success in a stock.
Today, I’m going to show you a small-cap biotech stock that’s getting bought up by insiders, one that’s poised for a breakout.
Six analysts gave this stock an average 478% growth target over the next 12 months.
I’m not as bullish as those guys, but my 72% target is still good reason to pay attention to this stock.
The reason is simple: Who knows more about the company’s future than the CEO? Who knows more about the company’s balance sheet than the CFO? And who has more at stake with their own money than the Directors, Chief Scientists and Technicians, and large shareholders?
This is different from “insider trading,” which is illegal. Insider buying is a regulated practice of company executives, officials, advisors, or anyone with “skin in the game” purchasing the stock and publicly disclosing their position.
One of the top sectors to watch when it comes to filings is the biotech sector. Disclosed buying by officials could signal positive developments in the future for an industry so reliant on drug trials, regulatory actions, and product pipeline, and expansion into markets. The combination of executive insider buying has produced big gains in this space.
This company is conducting trials for a drug that could take on a $2.34 billion market. Insiders buying this aggressively could mean they are confident the drug works and will be a major breakthrough in the industry.
Plus, they have an even bigger opportunity on the horizon, making this one of the best biotech stocks trading right now.
Tap into the Upside of This Biotech Stock
In early September, I watched as company insiders – directors and up – tapped into a small biotech company called Aldeyra Therapeutics Inc. (NASDAQ: ALDX). At the time, shares traded at roughly $5.75. By the end of November, they climbed to nearly $8. That jump represented a more than 39% gain in just a matter of weeks.
Looking back, it made sense that the firm’s insiders were buying the stock. It recently reported positive data from a clinical study for treatment of allergic conjunctivitis. The company’s program addressed an eye allergy that involves allergens like mold, pollen, dust mites, and other triggers.
While the insiders didn’t sell their stock after that 39% gain, a lot of investors in the market did take their profits off the table. Given that this is a more speculative biotech company, we’re going to see some volatility in the price.
That sell-off led to a quick decline in the stock. And – once again – insiders scooped up additional shares on the cheap just this week. President and CEO Todd Brady snapped up a six-figure sum of ALDX stock, soaking up shares at $5.09 per share.
When an insider pumps that level of his or her own cash into a stock, I pay attention.
So, we want to dig into the biotech stock and see if there are positive catalysts on the horizon. And in the case of ALDX, there are many reasons to be bullish in the year ahead.
This company’s allergic conjunctivitis studies are generating the most buzz because it falls into the firm’s single-largest opportunity. In the next five years, that market could top $2.34 billion, according to Market Research Future (MRFR).
The company also is conducting a phase 2B study for patients with dry eye disease, a condition that leaves patients without enough moisture and tears for the cornea.
The trial consists of 300 patients, and should the drug succeed, it could provide ALDX with another massive opportunity. The dry eye disease market represents a $7.78 billion market within the next decade. Part of this program includes a phase 3 study that will complete within the next few weeks. It will then start a new series of studies, meaning that final results may come at the end of next year.
Given the company’s success and progress, it appears that this stock is highly undervalued, and insiders are scooping up shares at a discount. Heading into 2020, they are not the only individuals who anticipate a huge pop for the stock.
Where ALDX Stock Goes from Here
It’s also important to pay attention to what Wall Street analysts are saying about a biotech stock before you buy it. Naturally, most analysts are bullish on the prospects of a company because they want to be the analyst who called a several hundred percent gain on a stock.
That is why you traditionally see the most bullish cases laid out for some of these small biotech stocks as they capture the highest upside possible after a clinical breakthrough (or in some cases a takeover of the company).
Among six analysts covering ALDX, the average price target is $33.50, a figure that represents 478% upside over the next year. I am willing to be a bit more conservative than this.
I don’t assume that every trial will succeed. And I don’t expect that every drug will generate buzz among buyers. But I will combine the expectations of the insiders buying the stock with the potential catalysts for a quick, short-term pop that brings investors a big gain in a short period of time. Over the next 12 months, I can see extreme optimism pushing shares as high as $10, which would represent a 72% gain from today’s levels. Anything more than that is just greater profit.
— Garrett Baldwin
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Source: Money Morning