Hopes for an economic soft landing resurfaced after last week’s better-than-expected retail sales, consumer inflation, and producer price data helped ease concerns about an economic slowdown that had been triggered by weak employment figures earlier in the month. The positive data has strengthened the case for investors to reengage in successful strategies from this year, ranging from investing in Big Tech stocks to a more recent focus on small- and mid-cap names that gained momentum in July.
Notably, Roth MKM’s Chief Market Technician JC O’Hara recently highlighted a list of small-cap value stocks that appear particularly bullish, especially under a scenario where the broader economic narrative “shifts back to soft landing.”
Within this category, three names stand out as particularly promising: Kiniksa Pharmaceuticals (KNSA), Ligand Pharmaceuticals (LGND), and Service Corporation International (SCI). These companies not only have a consensus “Strong Buy” rating from analysts, but also offer solid upside to their mean price targets, making them compelling additions to any portfolio looking to capitalize on a soft landing scenario.
Let’s take a closer look at these stocks.
1. Kiniksa Pharmaceuticals
Valued at $1.84 billion, Kiniksa Pharmaceuticals (KNSA) is a commercial-stage biopharmaceutical company dedicated to the discovery, acquisition, development, and commercialization of therapeutic medicines designed to treat patients suffering from debilitating diseases that have significant unmet medical needs.
Shares of Kiniksa Pharmaceuticals have rallied 48.2% on a year-to-date basis, outperforming the Vanguard Small-Cap Value Index Fund ETF’s (VBR) gain of 6.7% over the same time frame.
On July 23, Kiniksa Pharmaceuticals shares soared nearly 23% after the company reported strong Q2 results and raised its full-year net sales guidance for ARCALYST, which is an interleukin-1α and interleukin-1β cytokine trap. The company’s total revenue grew 52.0% year-over-year to $108.63 million, beating the Wall Street consensus by $17.36 million. The significant rise in total revenue was primarily attributed to ARCALYST’s net product revenue, which surged 90% year-over-year and 31% sequentially to $103.4 million. This growth was bolstered by robust performance across key commercial drivers, such as rising prescriber adoption, strong physician and patient satisfaction, and over 90% payer approval of completed cases. Notably, KNSA has been generating product revenue from ARCALYST sales since April 2021.
In the second quarter, all demand metrics for ARCALYST continued their positive trends. The total number of prescribers since launch rose from 2,000 in Q1 to 2,300 in Q2. Importantly, these prescribers are increasingly recognizing the importance of treating the underlying disease for the full duration. As a result, the average duration of therapy extended from 23 months at the end of 2023 to approximately 26 months at the end of Q2. In addition, market penetration rose from 9% in Q4 2023 to 11% at the end of Q2, based on management’s estimate of 14,000 recurrent pericarditis patients.
Kiniksa reported a net loss of $3.9 million in the second quarter, compared to a net income of $15 million in the same quarter of the previous year, which included a noncash tax benefit from the treatment of deferred tax assets. EPS stood at -$0.06 for the quarter. Kiniksa maintained a strong financial position, holding $218.8 million in cash, cash equivalents, and short-term investments while carrying no debt on its balance sheet as of June 30.
Following the robust performance in Q2, Kiniksa raised its full-year net sales forecast for Arcalyst to the range of $405-415 million. This represents a $30 million increase from the midpoint previously provided during the Q1 earnings call, which was $370-390 million, and an upward revision from the initial $360-380 million range projected at the beginning of the year.
On the back of solid Q2 results, Wells Fargo analyst Eva Fortea Verdejo raised the firm’s price target on Kiniksa to $35 from $34, and kept an “Overweight” rating.
Analysts tracking Kiniksa anticipate the company’s net loss to narrow year-over-year to $0.06 per share in fiscal 2024. Additionally, they predict a 55.87% year-over-year surge in KNSA's revenue to $421.26 million in fiscal 2024.
In terms of valuation, the stock presently trades at 4.40 times forward sales, higher than the sector median of 3.70x. Nonetheless, the company’s superb current and projected sales growth rates more than warrant this premium.
Kiniksa Pharmaceuticals stock has a unanimous “Strong Buy” rating from the six analysts covering it. The mean target price for KNSA stock is $32.67, which is about 25.6% above Friday’s closing price.
2. Ligand Pharmaceuticals
With a market capitalization of about $1.9 billion, Ligand Pharmaceuticals (LGND) is a biopharmaceutical company that supports the clinical development of high-value medicines through financial backing and licensing its technologies. Its business model is designed to create value for shareholders by developing a diversified portfolio of biopharmaceutical revenue streams, supported by an efficient and low-cost corporate structure.
Ligand Pharmaceuticals stock has climbed 43.1% on a year-to-date basis, easily crushing VBR’s gains during the same time frame.
On Aug. 12, Benchmark analyst Robert Wasserman raised the firm’s price target on Ligand to $110 from $95, and kept a “Buy” rating.
On July 30, RBC Capital initiated coverage of Ligand Pharmaceuticals with an “Outperform” rating and a $130 price target. The analyst told investors in a research note that the company stands out as a “highly differentiated” drug royalty aggregator, offering technology and capital to the biopharma industry. The firm stated that Ligand’s shares are poised to re-rate higher as it meets its growth targets, with additional upside potential from upcoming investment-related catalysts “which occur with regular cadence.”
On July 8, Ligand Pharmaceuticals announced it had reached a definitive agreement to purchase APEIRON Biologics AG for $100 million in cash. APEIRON holds royalty rights to QARZIBA (dinutuximab beta), a treatment for high-risk neuroblastoma. “The addition of QARZIBA to our commercial royalty portfolio further supports our growth strategy to invest in high-value medicines that deliver significant clinical value and generate predictable and long-term revenue streams for our investors,” said Todd Davis, CEO of Ligand.
Ligand Pharmaceuticals reported its financial results for the second quarter of fiscal 2024 on Aug. 6. Its total revenue climbed 57.2% year-over-year to $41.5 million, primarily fueled by an increase in royalty revenue and milestone payments received following the approval of several key programs. Royalties amounted to $23.2 million in Q2, up from $20.9 million in the same quarter of 2023, mainly due to increased sales of Travere Therapeutics’ FILSPARI and Amgen's KYPROLIS.
Also, Captisol sales for the second quarter reached $7.5 million, up from $5.2 million in the corresponding period of 2023, a change attributed to the timing of customer orders. Finally, contract revenue and other income was $10.9 million, up from $0.2 million in the same quarter of 2023. This significant increase was primarily fueled by milestone payments: $5.8 million from the FDA approval of Ohtuvayre, $2.0 million from the FDA approval of CAPVAXIVE, and $2.3 million from the conditional marketing approval of FILSPARI by the European Commission. As a result, the company’s top line topped the consensus by $7.24 million.
Ligand’s royalty portfolio now comprises 12 major commercial-stage products, many of which are marketed by leading global pharmaceutical firms. This marks a doubling of key marketed products in the portfolio since the start of 2023, highlighting the business development team’s capabilities and the successful execution of a corporate strategy focused on operational expenditure-light investments. Management said that the operating leverage gain from the lean corporate cost structure is expected to result in adjusted EPS of greater than $10 per share in 2028. LGND also has a portfolio of over 90 active pipeline programs that are in various stages of development.
The company’s core adjusted net income from continuing operations stood at $11.7 million in the second quarter, or $0.66 per diluted share, which fell short of consensus estimates by $0.40. Ligand ended the quarter with nearly $230 million in cash and investments, and its deployable capital exceeded $350 million, including the $125 million available under its credit facility with Citibank.
Ligand reaffirmed its 2024 financial guidance given on July 8. Management expects total revenue to range between $140 million and $157 million. Core adjusted earnings per diluted share are anticipated to be between approximately $5.00 and $5.50. Notably, this guidance does not include the $60 million realized gain from short-term investments related to the sale of Viking Therapeutics (VKTX) stock.
Wall Street forecasts suggest LGND will experience a 17.01% year-over-year increase in revenue to $153.65 million in fiscal 2024, with earnings expected to grow 21.65% year-over-year to $3.54 per share.
In terms of valuation, priced at 18.95 times forward adjusted earnings, the stock trades at a discount compared to the sector median of 21.29x and its own five-year average of 23.65x.
Analysts have a consensus rating of “Strong Buy” on Ligand Pharmaceuticals stock. Out of the five analysts offering recommendations for the stock, four recommend a “Strong Buy,” and the remaining one advises a “Moderate Buy” rating. The average analyst price target of $131.00 indicates a potential upside of about 28% from Friday’s closing price.
3. Service Corporation International
Service Corporation International (SCI), based in Texas, is North America’s largest provider of funeral and cemetery services. The company owns and operates over 1,900 funeral homes and cemeteries across 44 U.S. states, eight Canadian provinces, the District of Columbia, and Puerto Rico. Its market cap currently stands at $11.1 billion.
Shares of Service Corporation International have gained 11.7% on a year-to-date basis, slightly outpacing VBR’s gains over the same period.
On Aug. 7, Service Corp. declared a dividend of $0.30 per share, in line with the previous, payable to its shareholders on Sept. 30. The company holds a 10-year track record of consecutive dividend increases and a 5-year dividend CAGR of 11.01%. Its annualized dividend of $1.20 per share translates to a dividend yield of 1.57%, with the dividend protected by a moderate 34.81% payout ratio.
On June 21, Truist analyst Tobey Sommer raised the firm’s price target on Service Corp. to $84 from $80 and kept a “Buy” rating. The analyst said that a meeting with the company's CFO has reinforced confidence that volume will trend towards annualized growth by the end of 2024, demand from mid-to-high-end consumers remains robust, and the acquisition pipeline is exceptionally strong. Truist also noted that Service Corp.’s margins may see expansion as the growth in cemetery maintenance expenses normalizes to lower levels.
On July 31, Service Corp. reported its Q2 earnings results. Service Corp.’s total revenue remained largely unchanged year-over-year at $1.03 billion, meeting Wall Street's expectations. Consolidated revenue from funeral operations reached $565.8 million in the second quarter, slightly up from $565.4 million in the same period in 2023. This increase was primarily due to a $5.6 million rise in revenue from acquired and newly constructed properties, which was partly offset by a $5.1 million decline in comparable revenue. Consolidated revenue from cemetery operations increased by 4.5% year-over-year to $468.2 million, thanks to an $11.9 million rise in comparable cemetery revenue and an $8.7 million boost from revenue generated by newly constructed and acquired properties.
SCI reported adjusted earnings per share of $0.79, down from $0.83 the previous year, missing analysts’ projections by $0.08. The $0.04 year-over-year decline in EPS was largely due to a projected decrease in services performed, though this was partially offset by higher cemetery profits. Its net cash from operating activities amounted to $196.9 million in Q2, up from $144.1 million in the same quarter of the previous year.
The company invested just over $300 million of capital to expand its business to return value to shareholders during the second quarter.
Service Corp. backed its 2024 outlook. However, management now anticipates that the company’s full-year results will be at the lower end of the adjusted earnings per share guidance range of $3.50 to $3.80, due to the number of funeral services performed during the second quarter falling short of expectations. Adjusted cash flow from operations is expected to range between $900 million and $960 million.
Analysts tracking Service Corp. predict that the company’s earnings per share and revenue will stay roughly unchanged year-over-year in fiscal 2024, at $3.52 and $4.18 billion, respectively.
In terms of valuation, the stock is presently trading at 21.67 times forward earnings, which exceeds the sector median of 15.53x but aligns closely with its own five-year average of 19.89x.
Service Corp. stock has a consensus “Strong Buy” rating. Out of the five analysts covering the stock, four recommend a “Strong Buy” and one gives a “Moderate Buy” rating. The average target price for SCI stock is $83.00, indicating an upside potential of around 8.6% from Friday’s closing price.
