Why the time is right for these three unloved small cap stocks, says fourth-generation money manager

Critical information for the U.S. trading day

Investors will be wading through knee-deep earnings for Thursday, as jitters over possible election interference rattle markets.

Our call of the day comes from a New Orleans-based fourth-generation money manager. Sandy Villere, portfolio manager with Villere & Co., says his great-great-grandfather St. Denis, who started the firm in 1911 and kept it going through the Great Depression, had a timely saying: “Don’t love a stock because it won’t love you back.”

Taking that to heart, the younger Villere avoids the technology superstars that investors appear enamored with, in favor of overlooked smaller and midcap companies, which he maintains “have a higher margin of safety.”

Also, “history doesn’t repeat but it rhymes. Look back to 1998, 1999, 2000, then 2001 to 2003 did well for names that were not the darlings.”

Among his stock picks are Ligand Pharmaceuticals LGND, 2.00% — a “cheap and safe way to play biotech,” he says. Its technologies help pharmaceutical companies discover and develop treatments. Ligand’s big “tailwind” is Captisol, a drug delivery tech being sold to Gilead GILD, -0.35% for its remdesivir COVID-19 treatment, he says.

With over 120 partners and 200 programs and all of that royalty revenue, Ligand has operating margins “north of 60%,” says Villere. He forecasts earnings per shares of $7.64 in 2021, which will see it trade at 12.7 times earnings, a “huge disconnect in valuation.”

EHealth EHTH, 2.82% is another pick. The owner of eHealth.com has seen shares drop 40% from highs this year due to some retention issues, but the company is about helping seniors buy Medicare insurance. Some “10,500 [people] every day turn 65 and are eligible,” he notes. Villere thinks the stock will climb from a current $82 to $150.

The last pick, Caesars Entertainment CZR, 1.09%, is “not for the faint at heart,” Villere admits. But in a recent Zoom chat with Chief Executive Tom Reeg, he learned the company has saved $150 million just by axing 52 different casino buffets. “It doesn’t even bring in the clientele they want, it’s just one of those things casinos always had,” says Villere.

Even if Nevada falls under more pandemic restrictions, Caesars should do OK and the city seems busier, said the manager. “These guys are going to be more profitable than before because their margins will keep growing due to incredible cost controls.”

The markets

Stock futures YM00, -0.08% ES00, -0.07% NQ00, -0.45% are under modest pressure, and European stocks SXXP, -0.17% are also struggling. Bitcoin prices BTCUSD, 0.50% are up, hovering under $13,000. Here’s why they have been soaring lately.

The buzz

Weekly jobless claims finally dipped below 800,000. Existing home sales and leading economic indicators are still to come. Meanwhile, your mobile phone is providing the post-pandemic economy’s most closely watched indicator.

Tesla TSLA, 1.40% shares are up 5% after the electric-car maker reported its “best quarter” ever. But, as some note, Tesla didn’t manage that by selling its cars for a profit. One analyst has already upgraded those shares.

Chipotle CMG, -6.11% shares are down, even as the Mexican-food chain posted strong results.

Shares of chemical group Dow DOW, -0.62%, telecommunications group AT&T and drinks giant Coca-Cola KO, 1.71% and appliance maker Whirlpool WHR, 2.01% are still to come. After the close, chip maker Intel INTC, -0.09% and toy maker Mattel MAT, 1.85% will report.

The U.S. has accused Iran of involvement in threatening emails to Democratic-registered voters in battleground states, and that Russia also obtained voter registration data.

After nearly a decade as a private company, security-software group McAfee begins trading on the Nasdaq on Thursday.

And the last presidential debate before the Nov. 3 election is tonight.

The chart

The Market Ear blog has been sniffing out possible “canaries in the coalmines” among the stock market’s COVID-19 pandemic winners. Videoconferencing company Zoom ZM, 0.51% and at-home gym equipment maker Peloton PTON, 0.45%, for example.

The blog also highlights a chart of the Roundhill Sports Betting & iGaming ETF BETZ, -0.33% versus the Invesco QQQ ETF QQQ, -0.28%, which tracks the Nasdaq-100 index NDX, -0.29%.

THE MARKET EAR/REFINITIV

“Betting has been hotter than tech…Betting ETF, BETZ, has outperformed the QQQ since inception of the BETZ, but note the recent pullback,” notes the blog. “You probably do not trade this sector, but watch it closely…”

Random reads

Former New York mayor Rudy Giuliani defends a compromising appearance in a “Borat” sequel.

Songwriter Paul McCartney’s new lockdown album is about “freedom and love.”

This article was originally posted by MarketWatch.