Ticker Reports for September 20th
Analysts Predict 85% Upside for Wave Life Sciences After Rate Cut
The Federal Reserve rate cuts have sent the market up, but some stocks are rising more than others. That includes small pharmaceutical companies like Wave Life Sciences (NASDAQ: WVE), whose shares rose 9% the day after the central bank reduced rates by 50 basis points.
However, rate cuts are not the only reason for excitement around the company. The average of recent Wall Street analyst price targets signals an 85% upside potential in the stock. I’ll analyze the progress Wave Life Sciences has made in its treatment, its financial situation, and what to watch for next.
Wave May Have an “Industry-Leading” DMD Treatment
Wave currently has four drugs in development, but I’ll focus on WVE-N531. This drug aims to treat Duchenne Muscular Dystrophy (DMD), a condition that mostly affects young boys. The drug is currently in Phase 2 Food and Drug Administration (FDA) trials.
DMD is characterized by low levels of dystrophin production. One of the main ways to increase dystrophin production is through “exon skipping." These drugs help the body skip over malfunctioning parts of the genetic code (exons) that cause low dystrophin levels. By skipping over these exons, the body should produce more dystrophin. Wave’s drug specifically aims to skip over exon 53.
In the company's preclinical trials, the drug achieved exon skipping levels of 53%. The firm says this percentage is "industry-leading." Although the company does not cite how much dystrophin production increased, exon skipping correlates with it. So, it is possible that dystrophin production could be industry-leading as well.
From a business perspective, one issue with this treatment is that the market is very small. Different people are affected by different exons malfunctioning. Since WVE-N531 is being researched specifically to skip exon 53, it is currently only aimed at treating 8% to 10% of DMD patients. In the United States and Europe, that is only around 2,300 people. Still, this could result in significant revenue.
According to the firm, exon-skipping treatments brought in $1 billion industry-wide in 2023. Those affected by exon 53 make up around a quarter of the total when looking at the five largest exon patient groups. So, it’s conceivable that there may be a current market of around $250 million for the drug. The DMD market is expected to continue growing considerably; however, estimates are wide-ranging, from 10% to 39% per year.
Wave’s Financials Show Positives and Negatives
Over the past several years, Wave Life Sciences hasn’t been a good investment at all. The stock has provided a cumulative total return of just 5% in three years. As with many small firms in the pharma industry, Wave currently has no approved medications. However, the company has been able to generate some significant revenue.
Wave has generated at least $12 million in revenue in each of the last six quarters. This revenue mainly comes from “collaborations” with large pharmaceutical companies. Takeda (NYSE: TAK) and GSK (NYSE: GSK) have collaborated with Wave. Although Wave isn’t generating much revenue, anything helps when the company is spending $30 million to $40 million a quarter on research and development.
The company currently has $154 million in cash and equivalents on its balance sheet. That may last a little over a year, considering the company has burned through $130 million in cash from operations over the last twelve months. It will need to issue more stock soon, which will dilute shareholders.
Good News Around WVE-N531 and What to Watch For
The company recently received good news regarding the drug. The FDA granted the drug the Rare Pediatric Disease Designation. This means that if the drug is approved, the company will receive a Priority Review Voucher (PRV). The PRV allows the company to speed up the review of a future drug by four months. However, PRVs can also be sold to other companies.
Recent data shows that PRVs are now selling for an average of $100 million. Thus, selling the PRV could bring in significant revenue if WVE-N531 is approved. Alternatively, it could use the PRV itself to speed up the review of its own future treatments.
I’ll be watching Waves' upcoming results for WVE-N531, which they plan to release in Q3. The results will include data on changes in dystrophin levels. Seeing the number come in above the 5.7% to 5.9% increase of the already approved treatment Viltepso could add significant validity to the Wave Life Sciences bull case.
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FedEx Stock Dips: Another Reason to Fear Recession Is Near
FedEx Corporation (NYSE: FDX) is a solid business, but its latest results give another reason to fear that a recession is near. The company underperformed in all metrics, contracting versus an expectation to grow and reducing guidance in what may be the first of several reductions this year. The FedEx news sent ripples of fear through the entire transportation sector, driving share prices for competitors like United Parcel Service (NYSE: UPS) and J.B. Hunt Transportation Services (NASDAQ: JBHT) down.
The takeaway is that the calendar Q3 earnings reporting season will be disappointing, and there is also an economic concern. FedEx and other shipping giants are leading indicators of the economy, but FedEx didn’t grow this quarter. Upcoming data may reflect the weakness, which won’t benefit the broader stock market.
Shifting Habits Offset FedEx Quality Improvements
FedEx had a strong quarter financially, generating revenue and profits sufficient to sustain operations and the capital return program. However, $21.16 billion in net revenue is down 40 basis points compared to last year and is 140 basis points shy of the consensus, with margin contraction impacting the bottom line.
The revenue weakness is attributed to a mix shift, with consumers turning away from higher-cost, higher-margin priority shipping to lower-cost, lower-margin options. Both operating segments contributed to the weakness, and there was one less day in the quarter. Even so, when adjusted for the day, results are still shy of consensus and come with weak and potentially optimistic guidance.
Margin news is mixed. The company reports further progress in its DRIVE initiative and improving structural quality. However, the consumer shift also impacted the margins, which contracted compared to last, amplified by increased wage expenses. Operating margin is down 180 bps GAAP and 170 bps adjusted, leaving net income down by 23% and adjusted EPS by 20%. The adjusted EPS is aided by share repurchases, which were accelerated this year. The company bought back $1 billion in Q1, impacting EPS by $0.03, and is forecasting another $1.5 billion in buybacks by year’s end.
Guidance is not OK but could be better. Revenue and earnings are sufficient to sustain operational and balance sheet quality, with revenue expected to grow by year’s end but reflecting reduced demand and the Q1 consumer shift. The takeaway is that the revenue target was reduced to low single digits from mid-single digits, and the earnings narrowed at the high end, and both are likely optimistic. There is little expectation for economic headwinds to improve in CQ3 and CQ4, and it will be several quarters before the FOMC’s rate cuts have an impact.
Analysts Cap Gains in FedEx Stock, Expect Downward Pressure in Q4
The analysts are unsatisfied with FedEx’s results and are reducing their price targets following the release. MarketBeat tracks over a dozen revisions within the first day of the report, including numerous price target reductions and several downgrades. Their activity has the consensus target moving lower and capping upside potential at the high end of a trading range. However, the negativity is offset by a single increased target, and a consensus is that the stock is still a buy likely to return to the top of the range, assuming subsequent reports are more favorable.
FedEx’s price action confirms resistance at the top of the trading range. The market fell 15% after the report, showing strong resistance to higher prices at that level, and is likely to continue lower over the coming weeks. The best target for firm support is near the $235 level, which may be reached soon. The risk is that market sentiment will continue to sour and FDX stock will fall out of its range and move to the $200 level or lower. The opportunity for investors is to put this stock on a watchlist and wait for it to bottom. That will come in alignment with a brightening economic outlook.
Wall Street Legend Issues September Stock Warning
September is the most volatile month of the year for stocks.
And after the brutal tech selloff, one Wall Street veteran, who served more than 50 years alongside the likes of Paul Tudor Jones and George Soros, just announced:
"This is only the beginning."
The Half-Penny Revolution: Will SEC's Reform Benefit Investors?
The US Securities and Exchange Commission (SEC) has embarked on a significant overhaul of the US equity market structure, with a key component being reducing the minimum tick size from one penny to half a penny. This move, expected to take effect in November 2025, promises to reshape the way stocks are priced and traded, potentially impacting investors' bottom line. While the SEC anticipates the change will usher in a new era of efficiency and lower trading costs, industry experts are divided on the full scope of its impact.
The tick size represents the minimum price increment at which a stock can be bought or sold. In the current system, the tick size is one penny, meaning that a stock priced at $10.00 can only be bought or sold in increments of one penny. This constraint creates a potential barrier to efficient pricing, particularly for relatively inexpensive stocks like penny stocks, whose bid-ask spreads are narrower than a penny.
The Evolution of Tick Size: A Historical Perspective
The US stock market has experienced a gradual transition in tick size throughout its history. Originally, stocks were priced in fractions of a dollar, such as one-eighth of a dollar. In 2000, the market transitioned to decimal-based pricing, which ushered in a reduction in the tick size to one penny. This shift to decimalization was intended to create a more transparent and efficient trading environment. However, the market dynamics have evolved over the years, and the current tick size has become outdated.
The Half-Penny Revolution: Narrowing the Spread
The SEC's decision to allow stock markets to price shares in increments of half a penny is designed to address this issue. The smaller tick size will effectively narrow the bid-ask spread, the difference between the highest price a buyer is willing to pay and the lowest price a seller is willing to accept. This spread narrowing is expected to directly benefit investors by lowering transaction costs. In essence, investors will pay less to buy and sell shares, translating into greater profitability for their trading activities.
The SEC's rationale for this change is rooted in the belief that the current 1¢ tick size is outdated and inhibits market efficiency. SEC officials say around 74% of share volume is quoted at under 1.5 pennies. This means stocks with a bid-ask spread of around 1 cent have no room to fall further. This lack of flexibility in pricing can make it challenging for investors to find the best possible prices and can lead to unnecessary transaction costs.
Who Stands to Gain (or Lose)?
While the SEC's sub-penny tick size reform is poised to affect the broader stock market, certain sectors and types of stocks are likely to experience more significant shifts. The impact will largely hinge on a stock's existing bid-ask spread, trading volume, and price range.
Stocks with narrow bid-ask spreads, often characterized by high liquidity and active trading, will likely see the most pronounced changes. The narrower tick size will enable more precise pricing, potentially lowering investor transaction costs. This could stimulate greater trading activity, making markets more efficient for these securities.
Low-priced stocks, particularly those trading below $1 per share, are also likely to feel the effects of the reform. These stocks tend to have limited trading volume and wider bid-ask spreads, hindering investor participation. The smaller tick size has the potential to narrow these spreads, making low-priced stocks more attractive to investors and boosting their market liquidity.
Stocks with high trading volume, often found in large-cap companies or popular sectors, are also likely to experience greater impact. The increased trading volume provides more opportunities to leverage the smaller tick size, leading to more efficient price discovery and potentially lower costs for investors.
However, stocks with limited trading volume might see less significant changes. These stocks already have wider bid-ask spreads, and the smaller tick size might not have a substantial impact. However, the rule change could still indirectly influence these stocks by increasing overall market efficiency.
Sectors known for high growth potential, such as technology, biotech, and clean energy, could be more significantly impacted. These sectors often experience rapid price fluctuations, making them more sensitive to changes in tick size and price increments. The narrower tick size could improve price efficiency and potentially reduce volatility in these high-growth sectors.
Conversely, stocks with wide bid-ask spreads, typically those with lower liquidity and limited trading activity, may see less significant changes. The existing spread is already wide enough that the smaller increment might not have a substantial impact. Similarly, high-priced stocks, often those with higher valuations and greater investor interest, may see less of an impact. Their trading volume is generally sufficient to make the 1-cent increment a less significant factor in their pricing.
While the SEC's sub-penny tick size reform promises to create a more efficient market, it is essential to monitor how the rule change affects specific stocks and sectors within your portfolio. The impact will be influenced by a variety of factors, including individual stock characteristics, market conditions, and the response of market participants.
Implementation Timeline: A Look Ahead
The new tick size rule is expected to take effect in November 2025, giving market participants ample time to adjust to the changes. This extended implementation timeframe is intended to minimize disruption and allow for a smooth transition. The SEC is also committed to closely monitoring the impact of the rule change and making any necessary adjustments to ensure that the reforms are successful in achieving their intended goals.
The Half-Penny Revolution: A New Era for Investors?
The SEC's sub-penny tick size reform is a significant step towards a more efficient and cost-effective US equity market. While the full impact of the rule change remains to be seen, the potential benefits for investors are significant. Reduced transaction costs, enhanced market liquidity, and greater price transparency could ultimately lead to better returns for investors. However, it is crucial to remain vigilant and closely monitor the implementation and impact of this reform. Only time will tell whether the half-penny revolution will be a resounding success for investors or a missed opportunity.
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