Top 5 Stock Picks of Touk Sinantha’s AltraVue Capital

3. Avid Bioservices, Inc. (NASDAQ:CDMO)

AltraVue Capital: $41,739,000   

Percentage of AltraVue Capital’s Portfolio: 6.13%

Number of Hedge Fund Holders: 17

Avid Bioservices, Inc. (NASDAQ:CDMO) is a clinical-stage biopharmaceutical firm involved in the development of products produced from mammalian cell culture. Touk Sinantha added to her investment in Avid Bioservices, Inc. (NASDAQ:CDMO) by 22% during the previous quarter, and the total value of the fund’s stake in the company amounted to $41.7 million at the end of Q2 2022.

Avid Bioservices, Inc. (NASDAQ:CDMO) performed well in fiscal Q4 2022, reporting revenue of $31.23 million, up 13.11% YoY, beating the market estimate by $2.27 million. The normalized EPS of $0.06 beat the market consensus estimate by $0.04. The management noted that Avid Bioservices, Inc. (NASDAQ:CDMO) remains focused on expansions as they continue to contribute to the company’s topline growth.

Here is what Laughing Water Capital has to say about Avid Bioservices, Inc. (NASDAQ:CDMO) in its Q2 2022 investor letter:

How Cheap is Cheap Enough?

Consider the case of Avid Bioservices (NASDAQ:CDMO), a large molecule, small batch Contract Drug Manufacturing Organization that will be familiar to all but our newest partners, as we owned shares from 1H 2018 until all but exiting our position in the low $30s in Q4 of 2021. Since that time, shares have declined precipitously as the company is both a “growth” stock and in the S&P Biotech ETF (XBI), which has declined ~36% YTD to quarter end. However, in my view Avid Bio is a baby with the bathwater, and we once again made Avid Bioservices a large position during the quarter.

First, unlike most “growth” stocks, Avid Bioservices is not a “disruptor.” You don’t have to make any blind assumptions about total addressable market (TAM), customer acquisition costs (CAC), or churn. There is very little risk of “garbage in, garbage out” when modeling Avid’s future. Rather, Avid’s assumed growth is tied to building additional manufacturing capacity. In my view, it is a much easier task to understand the dynamics of building an additional manufacturing facility than it is to understand the dynamics of alleged TAM, potential CAC, and unknown churn.

Second, unlike most biotech stocks, Avid is a real business, not a binary bet on whether or not a drug will meet its hoped-for end state. Lastly, and most importantly, Avid Bio has one characteristic that staunchly separates it from other high flying growth stocks and biotech stocks that have been punished by the market: it is set to gush cash in the not-too-distant future.