Cassava Sciences (NASDAQ:SAVA) announced on July 21 that it would present two new clinical datasets at the upcoming Denver Alzheimer’s conference. The more important of the two will be on July 29 at 11 a.m. ET, when the company will release the nine-month dataset results for its Alzheimer’s drug, Simufilam. Expect SAVA stocks to rise when those numbers come out.
That is my conclusion after reviewing the latest research on the stock and what is now clearly visible in the options market.
There are several recent articles that help investors value the stock. In addition, the options market is now placing huge premiums on both the call and put sides, implying that something very big will happen to SAVA stock as a result of the conference.
Valuing Cassava Sciences Shares
Probably the best single, easy-to-understand piece on SAVA stock is the July 20th article of Search alpha, “Cassava Sciences About to write medical history.” In addition to describing the uniqueness of Cassava Sciences’ drug, the article makes several noteworthy attempts to value SAVA stock. Anyone interested in the stock should carefully read the author’s well-curated ratings.
For example, at the end of the article, the author has a discounted present value analysis of the company’s future cash flows. It shows SAVA shares are worth $700 per share, or 5.67 times the current price of $123.38. Using a 15% discount rate, he estimates the market value at $29.6 billion, against the current market value of $4.957 billion.
In my opinion 15% is way too high. For example, I re-ran the analysis using a 10% discount rate and came to a value of $902.14 per share, or 29% higher. Using the 10% discount factors to bring the future cash flows to present value results in a total of $25.4 billion. In addition, in the author’s terminal value calculation, I added $1.2 billion and $282 million in cash. The total valuation is therefore as high as $37.889 billion, or $902.14 per share.
In other words, with just a small change in the discount factor that the market could use for the stock, its value goes from 5.68 times its current price to 7.3 times.
And that’s not all. The author also gives a very well put together analysis. He shows that the stock’s value, at 4.1 times peak sales, is between $1,324 and $1,662. Please note that these valuations are based on a low 1.4% market share of 51 million Alzheimer’s patients worldwide. I strongly suspect that this market share is way too low and in fact the number of patients will be significantly higher than this.
Therefore, the author’s valuation for SAVA stock can be significantly lower than where it ends up.
What the options market says about SAVA stocks?
Currently, call options for SAVA stock at a strike price of $150 (August 20) cost $15 to $15.90 per contract. And this strike price is already 20% higher than today’s price. In other words, the break even to buy the contract is between $165 and $165.90 per SAVA share. That’s 33.3% to 34% from the current price. That is the definition of exuberance to say the least. In other words, the option premiums are worth 12.85% of the stock price (ie $15.90/$123.78), on the demand side.
These call buyers expect the price of SAVA stock to be well above $165 by August 20. They are betting hugely on the prospect that the news coming out of the Denver conference will be so positive that the stock is likely to move towards $200 or higher.
By the way, the put options are also traded at huge premiums. The $100 puts for August 20 cost $12.40. This put is already 20% below today’s price. To make money, the stock must fall below $87.40. This premium costs 10% of the stock price (i.e. $12.40 / $123.78).
This means that investors expect fireworks. In this situation, there is no point in selling your shares in advance. Maybe set up a stop-loss if you’re worried it might fall. I’ve seen this kind of development before. Based on that, SAVA stock is likely to pop up when the data is released.
At the date of publication, Mark R. Hake had no position in any of the securities mentioned in the article. The opinions expressed in this article are those of the author, subject to the InvestorPlace.com Publication Guidelines.
Mark Hake writes about personal finances mrhake.medium.com and runs the Total net realizable value guide that you can watch here.
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