3 Small-Cap Stocks That Could Be Big-Time Winners

Think small. It's one of the best ideas for investors seeking to reap returns that trounce the overall market.

Three Motley Fool contributors identified small-cap stocks that they think could especially become big-time winners. Here's why they chose Bluebird Bio (BLUE 1.13%), Travere Therapeutics (TVTX -2.41%), and Viking Therapeutics (VKTX 7.92%). 

The upside is huge, but beware of the risks 

Prosper Junior Bakiny (Bluebird Bio): Bluebird Bio is a gene-editing specialist currently sporting a market cap of $402 million, putting it squarely in small-cap territory. The biotech has encountered a series of clinical and regulatory setbacks over the past three years, leading to it losing nearly 90% of its value. Yet, there could be some hope for the company. 

Last year, Bluebird earned approval for two gene-editing therapies, Zynteglo and Skysona, that target transfusion-dependent beta-thalassemia (TDT) and active cerebral adrenoleukodystrophy, respectively. But the company's most important approval yet could be on the horizon. In April, Bluebird submitted an application to the U.S. Food and Drug Administration (FDA) for lovo-cel, a potential treatment for sickle cell disease (SCD).

Why could lovo-cel be a game changer for Bluebird? While Zynteglo and Skysona target a maximum of 1,540 patients in the U.S. between them, lovo-cel is looking at a much larger opportunity with about 20,000 eligible patients in the country. The FDA set a PDUFA action date (by when it should complete the review) of Dec. 20, 2023. 

Still, as Bluebird's tiny market cap suggests, there remain plenty of risks with the stock. For instance, administering the company's gene-editing therapies is a long and complex process that can only be done in select qualified treatment centers. This factor considerably slows the pace at which Bluebird can treat patients and, by extension, generate money. Further, Bluebird could face some competition in the TDT and SCD markets, with Vertex Pharmaceuticals and CRISPR Therapeutics nearing the approval of exa-cel.

Lastly, Bluebird's Zynteglo and Skysona cost $2.8 million and $3 million, respectively. Their price tags could scare off some third-party payers.

All these crucial details make Bluebird's stock risky. However, the upside for the stock is enormous if the company can do three things. First, Bluebird must earn approval for lovo-cel without a hitch. Second it needs to continue the (so far) smooth launch of Zynteglo and Skysona. Third, the company must carve out a solid niche for itself in the TDT and SCD markets even with competition from larger biotechs.

There are huge potential rewards and huge potential risks with Bluebird. Invest accordingly. 

Wall Street thinks this stock can potentially double in value

David Jagielski (Travere Therapeutics): At a market cap of around $1.2 billion, Travere Therapeutics could make for a cheap acquisition target for a larger healthcare company. The stock is down 25% this year. Investors could find Travere's valuation attractive. 

The bullish case for Travere is that it obtained accelerated approval for Filspari earlier this year to treat IgA nephropathy, a kidney condition also known as Berger's disease. With a list price as high as $100,000 and potential peak annual sales of $745 million in the U.S., the drug could be a game changer for the business as Travere currently generates less than $60 million each quarter from its bile acid and tiopronin products.

But it's not a slam-dunk buy for investors. Filspari comes with warnings relating to birth defects and liver inflammation. If those don't prove to become big obstacles for the drug, there could be a massive upside for the stock. Analysts are optimistic as Travere has a consensus price target of $30.85, which is close to double where the stock trades at right now.

This week, the company announced that it was selling its bile acid portfolio to Mirum Pharmaceuticals for up to $445 million, giving Travere some additional funding to help put more money behind Filspari and its launch. That's a positive sign that Travere is confident in Filspari. A big push for the product could help maximize its future growth.

As of the end of March, Travere had more than $561 million in cash and investments. With a stronger financial position, the business should be in even better shape moving forward.

Travere isn't without its risks as the company is unprofitable. However, the drugmaker is bolstering its balance sheet with this latest deal, which should make it a safer buy in the long run. The transaction also lessens the need for Travere to conduct a stock offering in the future, which should encourage investors who are worried about dilution.

Huge opportunities for a tiny biotech  

Keith Speights (Viking Therapeutics): In many cases, a biotech with a market cap of only around $1.5 billion might have one promising pipeline candidate. Viking Therapeutics is a striking exception. It has three drugs in clinical testing that have the potential to be huge winners.

Viking recently reported positive top-line results from a phase 2b study of its lead candidate, VK-2809. The experimental drug demonstrated that it can significantly reduce liver fat in patients with non-alcoholic steatohepatitis (NASH). There currently are no drugs approved by the FDA for treating the liver disease. 

The obesity-drug market is exploding right now with sales for Novo Nordisk's Ozempic and Wegovy skyrocketing. Viking thinks that it can compete in this market in the future. The company plans to soon advance its VK2735 subcutaneous (under the skin) injection into phase 2 clinical testing in treating obesity after reporting encouraging results from a phase 1 study. Viking also is evaluating an oral version of VK2735 in an early stage study.

In addition, the small biotech is conducting a phase 1b study of VK0214 in treating rare neurodegenerative disorder X-linked adrenoleukodystrophy (X-ALD). There currently are no approved medications for the disease. Viking expects to report initial results from the study later this year. 

Like Bluebird and Travere, Viking faces the risk that its clinical programs flop. However, the stock could be a massive winner if any of its drugs achieve their potential.