Cardiff Oncology (CRDF) is a small oncology company whose shares have been caught in the biotech selloff through the first six months of 2022. Now, at CRDF’s current trading levels, I see the stock as setup for a compelling risk/reward trade.
In fact, with the right option strategy, you can get your potential entry level down to significantly below the net cash on the company’s balance sheet — in theory getting the rest of the firm’s assets and pipeline for free.
Cardiff trades just over $2.50 a share and has approximate a $120 million market capitalization. This market cap so happens to be the amount of cash and marketable securities on the company’s balance sheet at the first half of this year. Cardiff is burning just over $2 million a month to fund its operating activities and has no long-term debt.
Cardiff was the first company to correctly target Polo-like Kinase 1 or PLK1, a target in several solid tumors, in all of what are known as KRAS-mutated cancers. Mutated KRAS genes that are found in some types of tumors may lead cancer cells to spread. Cardiff’s primary drug candidate is an oral and highly selective PLK1 inhibitor called Onvansertib. PLK1 is overexpressed in several types of cancer, including breast and colorectal. The company is positioning Onvansertib as part of combination therapies to improve outcomes from the current standard of care for cancers with KRAS-mutations.
Cardiff has three mid-stage studies currently underway targeting different indications with different combination partners for Onvansertib. These three indications collectively represent a $10 billion potential market or greater. While the company’s development is still many years away from commercial development, Pfizer (PFE) saw enough promise to make an $15 million equity investment in the firm late last year, when the stock was trading above $6 per. It would not surprise me if a drug giant like Pfizer were to target Cardiff.
Option Strategy
To initiate a position in CRDF via a covered call strategy, put your potential entry point solidly below the cash value of the company.
Using the February $2.50 call strikes, fashion a covered call order with a net debit in the $1.65 to $1.75 a share range (net stock price – option premium). This strategy provides downside protection of over 30% and just north of 45% of potential upside even if the stock does nothing over the six-month option duration.
(Please note that due to factors including low market capitalization and/or insufficient public float, we consider this stock to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.)
Get an email alert each time I write an article for Real Money. Click the “+Follow” next to my byline to this article.
