2 "Strong Buy" Stocks Under $10 With Strong Growth Prospects

The key to profitable investing is building a profile that combines powerful potential with an  economical point of entry. It’s a strategy that will frequently suggest a closer look at Read More... The post 2 "Strong Buy" Stocks Under $10 With Strong Growth Prospects appeared first on TipRanks Financial Blog.

2 "Strong Buy" Stocks Under $10 With Strong Growth Prospects

The key to profitable investing is building a profile that combines powerful potential with an  economical point of entry. It’s a strategy that will frequently suggest a closer look at stocks in the micro- and small-cap size range, companies with valuations less than $2 billion. These smaller firms frequently feature share prices below $10, and triple-digit upsides to sweeten the pot.

Using TipRanks' database, we've found two stocks that fit a profile: Strong Buy small-cap stocks – valued under $500 million – that are trading below $10. Not to mention substantial upside potential is on the table. Let's take a closer look.

Spruce Biosciences (SPRB)

We’ll start with Spruce Biosciences, a small-cap biopharmaceutical company that has taken a specific focus for its developmental program. That focus is the treatment of rare endocrine disorder that have ‘significant unmet need’ – industry speak for ‘no current effective treatments.’ Spruce is working on the development and commercialization of tildacerfont, a potential treatment for congenital adrenal hyperplasia (CAH) in both adults and children, and for polycystic ovary syndrome (PCOS).

Tildacerfont is used in treating diseases characterized by excessive production of adrenocorticotropic hormone (ACTH), by binding to CRF1 receptor in the pituitary gland. The drug limits the production of adrenal androgens.

In June of this year, the company announced results from two Phase 2 clinical trials of tildacerfont in adult CAH. The results showed that tildacerfont was safe and well-tolerated – and better, that it pushed key hormone biomarkers toward normal levels in the baseline disease control group. In that group, levels of ACTH and A4 normalized in 60% and 40% of patients respectively. These results, from the Phase 2 trials, tend to support the ongoing late-stage trials of tildacerfont, CAHmelia-203 and CAHmelia-204.

Spruce entered the public trading markets last October, when the company closed out its IPO. The event was considered successful, as the company sold all 6.9 million shares offered – including the fully exercised underwriters’ options – at or above the initial price of $15 each. Share price, however, is down 45% in the months since.

Even though the share price is down, it was the initial positive data on tildacerfont that caught the attention of H.C. Wainwright analyst Raghuram Selvaraju. The analyst wrote in detail of tildacerfont’s potential – and noted the long-term profits possible in the company’s target market.

“Spruce is seeking to position tildacerfont in both treatment of CAH patients with poor disease control—for whom glucocorticoid (GC) agents are not working well—and CAH patients with good disease control, in whom GC agents are effective but for whom reduction in reliance on such drugs is highly desirable. We believe that tildacerfont could facilitate achievement of normalized steroid hormone levels in patients with poor disease control, while decreasing the levels of GCs that need to be administered in those with good disease control. As such, therefore, we consider tildacerfont capable of addressing a broad market opportunity within the CAH indication. This arena alone constitutes a $3B-a-year market opportunity,” Selvaraju opined.

In line with these comments, the analyst rates Spruce shares a Buy along with a $30 price target. Investors stand to take home about 220% gain, should the target be met over the next 12 months. (To watch Selvaraju’s track record, )

It appears the rest of the Street sees plenty of upside, too. Based on Buys only – 4, in fact – the analyst community rates SPRB a Strong Buy. The average price target hits $29.50, and implies potential upside of ~216% over the coming months. (See SPRB stock analysis on TipRanks)

Magenta Therapeutics (MGTA)

The second name we’ll look at is Magenta Therapeutics, a clinical-stage biopharma company focused on stem cell research. Stem cells are the natural precursors to every specialized cell in the body – and the transplantation processes that Magenta is working on aims to harness stem cells and use their unique developmental properties to kick-start the patients’ own physiological systems into regenerating and repairing disease-affected areas. Magenta is working on modes of harvesting, conditioning, and mobilizing stem cells for the treatment of autoimmune disorders, genetic diseases, and hematologic cancers.

The company has two key products in the pipeline. First, MGTA-145 is designed to work in the stem cell mobilization and collection step. The drug candidate is currently undergoing two Phase 2 clinical trials. One is testing its efficacy in the stem cell treatment process for hematological cancer multiple myeloma. This is being conducted in combination with the existing drug plerixafor, and preliminary results from the 25-patient study are expected in 2H21.

The second Phase 2 trial for MGTA-145 is a collaboration with the National Marrow Donor Program, and is examining MGTA-145’s use for patients with acute myeloid leukemia (AML), acute lymphocytic leukemia, and myelodysplastic syndromes (MDS). As with the study above, this is being conducted in combination with plerixafor and initial data are expected in the second half of this year.

Also in 2H21, Magenta will initiate a Phase 2 study of MGTA-145 in the treatment of sickle cell disease.

The company's second drug candidate, MGTA-117, has been in the news lately – and not for good reasons. On Wednesday, Magenta announced a clinical hold on the investigational new drug (IND) application for MGTA-117. As a reminder, the IND was filed to initiate a Phase 1/2 trial of MGTA-117 in acute myeloid leukemia (AML) and myelodysplastic syndrome (MDS). The FDA is now requesting a bioassay to help inform dose escalation during the company's initial study in patients with hematologic malignancies. The company does not believe this bioassay is a significant technical hurdle but now anticipates starting the Phase 1/2 study in 4Q21, a roughly one quarter delay.

Covering MGTA for B. Riley, analyst Kalpit Patel believes the company's fundamentals remain intact.

"While the clinical hold serves as a minor setback in terms of development timelines, we are encouraged that the hiccup is unrelated to any toxicology or manufacturing issues. Our fundamental thesis that ‘117 could increase the proportion of patients eligible to receive transplants and gene therapies remains unchanged," Patel noted.

The analyst added, "In terms of next catalysts, a final clinical update of MGTA-145 for autologous stem cell mobilization in multiple myeloma is expected in 2H21. In addition, initial mobilization clinical data for the allogeneic study in leukemia are also slated to readout in 2H21. Based on promising early mobilization data, we estimate results from the allogeneic study to at least match the efficacy unveiled in the autologous setting."

These comments back up Patel's Buy rating on the stock, and his $19 price target implies a robust upside potential of 155% for the year ahead. (To watch Patel's track record, )

There is evidence that Wall Street’s biotech analysts agree with Nealon here; the stock has a unanimous Strong Buy consensus rating, based on 5 positive reviews. The shares are currently trading for $7.44; their average price target of $19.20 indicates room for ~158% growth on the path ahead. (See MGTA stock analysis on TipRanks)

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.

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Investing inside a corporation: what you need to know

A Certified Financial Planner helps a retired couple understand the investing options available, as well as complications, for Canadians who invest inside a corporation. The post Investing inside a corporation: what you need to know appeared first on MoneySense.

Investing inside a corporation: what you need to know

A MoneySense reader writes:

We have $550,000 to invest in our corporation and need something tax-efficient. Although we’re retired, we don’t need this money for the foreseeable future, so we’re investing for the long term. We’re considering either DIY investing following one of the Couch Potato-model portfolios or using a robo-advisor. As a third alternative, we’re also wondering if we should just buy Canadian bank stocks. Can you help?

FPAC responds:

Congratulations on your successful retirement! At a stage when most people are focussed on decumulation, you’re asking about establishing an approach for long-term, tax-efficient investing inside your corporation. Let’s walk through these important considerations:

Investment decisions: robo-advisor or DIY—and ETFs or bank stocks?

A robo-advisor is a great choice for automated, tax-efficient and low-cost investing. A robo-advisor will be able to set you up with a portfolio of low-cost, widely diversified . Regular rebalancing, quarterly reporting and ease of use will make this option attractive if you are looking for a hands-off approach. Most of the leading robo-advisor platforms in Canada will help you set up a corporate account. 

If you’re comfortable being a little bit more hands-on, you might consider implementing a multi-ETF model portfolio. This approach will require you to open an account at a brokerage and do some regular investment maintenance, including allocating cash, reinvesting dividends and

Alternatively, you could also consider implementing an asset-allocation ETF solution. These “all-in-one” ETFs are available in different stock/bond allocations to suit your risk preferences, and they are globally diversified. 

You mention tax-efficiency being important to you. Broad index-based ETFs track an underlying market index. The stocks and bonds in these indices do not change often, so there isn’t a lot of buying and selling of stocks—also known as “turnover”—happening inside of your ETFs. A portfolio with low turnover will not stir up a lot of unwanted capital gains in years that you don’t want to take money out of your accounts, and less turnover means less tax payable year-to-year, leaving more of your money working for you. All in all, tax efficiency is a huge benefit of an index fund ETF approach to investing, especially if you’re investing inside of a corporation. 

You also mentioned bank stocks as an alternative. I can understand the appeal of this approach, as buying stocks of Canada’s large financial institutions has proven to be an effective strategy over the past several years. Unfortunately, the past performance of any investment strategy does not tell us much about its performance in the future. And, in the case of bank stocks, your investment will be very concentrated on a single sector, in a single country. This approach to investing carries risks that can be easily diversified away by using broad, globally diversified index-based ETFs. (In fact, Nobel Prize laureate Harry Markowitz famously called diversification “the only free lunch in investing.”)

Understanding the ins and outs of corporate investing

Investing inside of a corporation can be complicated. A corporation is taxed differently than an individual in Canada. As individuals, we are taxed based on a progressive income tax system, meaning higher amounts of income are taxed at higher rates. In your case, if you are earning (or realizing) a lower income in retirement, your last dollar of income is likely taxed at a lower rate than it was while you were working. When you combine lower tax rates with other benefits that the tax system provides to seniors—such as pension income splitting and age credits—it is possible that you will not be taxed at the high end of the marginal tax table in retirement. 

Passive investment income generated inside a corporation, on the other hand, is taxed at a single flat rate of around 50% in Ontario, or close to the highest marginal tax rate. Passive income tax rates are so high because the Canada Revenue Agency (CRA) doesn’t want us to have an unfair tax advantage by investing our portfolios inside corporations.

Given these high rates, you may wonder if you should simply take the money out of your holding company and invest it personally, especially if your average personal tax rate is lower than 50%. While investing personally may result in lower taxation on a year-to-year basis, you would incur a significant personal tax bill to get the money out of the company now, which means that there would be less money to invest and grow. 

Fortunately, in Canada we have a concept called “tax integration,” which helps ensure individuals are taxed similarly whether they receive income personally or through a corporation. 

Without knowing the particulars of your situation, let’s assume for the moment that it makes sense to leave your investment funds inside your corporation. The Income Tax Act provides a few mechanisms to ensure that integration works for you when you are investing and, eventually, taking money from your corporation. These include:

Refundable Dividend Tax on Hand Account (RDTOH)

The RDTOH account is a special notional account which ensures that although investments in the corporation are subject to tax at a high rate, some of that tax is “released” back to the corporation when you pay out dividends to yourself. 

Withholding tax from you at the corporate level initially achieves the goal of eliminating any advantage you might have by growing your investment capital inside the corporation vs. personally. It also creates fairness in that you are not double taxed on that investment income when you take the money from your corporation as a dividend.

Capital Dividend Account (CDA)

In the year that an individual taxpayer earns capital gains as an individual taxpayer, 50% of the capital gain is included in your income, and the other 50% is tax-free. Capital gains earned inside of your corporation are taxed the same way. In your corporation, the non-taxable 50% will be dropped into another notional account called the Capital Dividend Account (CDA). You then have the option to pay out any balances in the CDA to the shareholders of your corporation on a tax-free basis. 

It would not be fair for you to need to pay tax on 50% of capital gains that you earned on your corporate investment account, and then need to pay tax on that amount when you take those funds from your corporate account. Again, this is integration at work. 

Note that Canada has 10 provinces and 3 territories, with different provincial tax regimes in each. These differences mean integration works slightly differently from jurisdiction to jurisdiction. But, overall, it works very well to create tax fairness for owners of investments inside of private corporations, so that if you earn $10,000 corporately and pay out $10,000 personally, you’ll pay the same, or a very similar, tax bill as if you earned the $10,000 personally. 

The importance of getting good guidance

While passive investing in ETFs can be very easy, setting and maintaining your tax strategy can be complicated. Proper tax filing and compliance are crucial when dealing with notional accounts like the RDTOH and CDA accounts. While this article focuses on a few investing and tax considerations, keep in mind that there are also a host of estate planning steps for you to consider while you maintain investments in a holding corporation and possibly plan to pass them on to the next generation. Spending some time working with a good financial planner to help you lay out a strategy that serves you will be a worthwhile investment. A planner can help you make sure your tax, legal and investment objectives all work in harmony with your overall life plan so you can enjoy a prosperous retirement with peace of mind.

This response was provided by FPAC Member Mark Walhout, CFP, CIM, a Financial Advisor with . Mark provides financial planning and evidence-based investment management services to families in Ontario. 

Qualified Advice is written by members of (the Financial Planning Association of Canada), a . Working closely with governments, regulators, financial planners, academia, vendors and the general public, FPAC’s goal is to set standards and principles that will allow financial planning to evolve into a knowledge-based profession which ultimately commands the credibility, public awareness and respect afforded to other advisory professions. 

If you have financial planning questions, FPAC members can help—consult our to find the right fit for you. 


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