The first half of 2022 was marked by concerns over inflation, rising interest rates and recession, with the S&P 500 registering its worst half year since 1970.
However, not everyone is seeing dark times ahead. Marko Kolanovic, head of global markets strategy for JPMorgan, believes that current conditions may also be a set-up for a rebound in the second half of the year, especially among the small-cap stocks. Kolanovic writes of this case, “If there is no recession – which is our view – then risky asset prices are too cheap. For instance, small cap stocks in the US currently trade near the lowest valuations ever.”
If Kolanovic is right, and we’re looking at a potential rebound in the small-cap sector, then the natural response for investors would be a move toward the ‘pennies,’ the stocks priced below $5 per share. While not always a sure indicator, low share price usually goes hand-in-hand with low market cap – but it also comes with the solid upside potential, as even small gains in absolute terms can quickly turn into large-percentage increases in share price.
That said, before jumping right into an investment in a penny stock, Wall Street pros advise looking at the bigger picture and considering other factors beyond just the price tag. For some names that fall into this category, you really do get what you pay for, offering little in the way of long-term growth prospects thanks to weak fundamentals, recent headwinds or even large outstanding share counts.
Taking the risk into consideration, we used TipRanks’ database to find two compelling penny stocks, as determined by Wall Street pros. Each has earned a “Strong Buy” consensus rating from the analyst community and brings massive growth prospects to the table. We’re talking about over 200% upside potential here.
Codiak BioSciences (CDAK)
We’ll start with Codiak BioSciences, a medial research firm working on new therapeutics agents for the treatment of a wide range of diseases that have in common high levels of unmet medical needs. Codiak’s main research focus is on exosomes, or the RNA degradation mechanism, and the thrust of the research is to create a class of medicines that use exosomes to transfer genetic material for a therapeutic effect.
The company currently has three drug candidates in clinical trials, all in early stages of testing. All three are under investigation as treatments for cancer. The two more advanced candidates, exoIL-12 and exoSTING, treatments for cutaneous T-cell lymphoma and solid tumors respectively, have both demonstrated ‘favorable safety and tolerability profiles’ in Phase 1 trials, which began in September of 2020. This past June the company released data on both trials showing clinically significant results, and justifying further studies. Codiak plans to initiate Phase 2 trials on both tracks in 1Q23.
On the third clinical track, the drug candidate exoASO-STAT6 started Phase 1 clinical trials earlier this year and the company announced the initiation of patient dosing at the end of June. The drug is being investigated as a treatment for myeloid rich cancers, and this trial will focus on developing a tolerability and safety profile to determine the proper dosing for later studies. Initial data is expected to be released during 1H23.
Codiak has several preclinical tracks underway, in addition to these clinical studies. The most prominent of the preclinical research programs is being undertaken with CEPI, the Coalition for Epidemic Preparedness Innovations, and is a broadly protective vaccine program as a prophylactic against SARS-CoV-2, the virus family causing COVID-19.
While Codiak shares have taken a hit year-to-date, at $2.82, several analysts believe the price tag represents a unique buying opportunity.
Among the bulls is David Nierengarten, 5-star analyst with Wedbush, who sees the recent clinical data as the key factor to consider. He writes, “We believe the data presented further validates CDAK’s exosome platform and has de-risked two of its therapeutic candidates, which we view as best-in-class molecules. With three programs in the clinic, two data catalysts expected over the next 12 months (final dose escalation data for exoSTING in 4Q22 and initial exoASO-STAT6 data in 1H23), and an EV of $50-60MM, we see a favorable risk/reward for CDAK.”
In line with his bullish stance, Nierengarten rates CDAK a Buy, and his $17 price target implies room for an impressive 513% upside to the shares over the next 12 months. (To watch Nierengarten’s track record, click here)
What does the rest of the Street think about CDAK long-term prospects? All of the other analysts that have thrown an opinion into the mix recently see the stock as a Buy, making the consensus rating a Strong Buy. Based on the $11 average price target, the upside potential lands at 289%. (See CDAK stock forecast on TipRanks)
Olema Pharmaceuticals (OLMA)
The second penny we’ll look at is Olema, an early-stage biopharmaceutical research company with a focus on estrogen-linked cancers. The company is working on the discovery, development, and long-term commercialization of estrogen receptor antagonist drug candidates, as therapeutic agents for cancers specific to women. Olema’s prime drug candidate program, OP-1250, is under investigation as a treatment for various types of metastatic breast cancer, both as a monotherapy and in combination with established treatments.
Last month, Olema released a clinical update on its OP-1250 studies, showing strong progress across the program, which includes two Phase 1b clinical trials.
The first of these trials is testing OP-1250 as a monotherapy against ER+ HER2 cancers. This trial, which is examining dose expansion in preparation for later stage studies, has shown both favorable tolerability and ‘encouraging’ anti-tumor activity. The second Phase 1b trial is a combination study with Palbociclib, and the first two cohorts have completed the dose limiting toxicity evaluation. That step has demonstrated compatibility in the combination study.
Olema expects further data releases later this year to show additional validation for OP-1250, and expects to begin a pivotal monotherapy study in 2023.
Going forward, to develop new drug candidates, Olema in early June announced a new agreement to launch a collaboration with Aurigene in the development of novel small molecule inhibitors in the oncology field. The agreement will commit Olema to pay out $8 million up front in licensing fees, with additional payments to Aurigene as clinical milestones are reached.
Canaccord analyst William Maughan lays out a clear path for Olema going to the end of this year, writing, “We think that data updates over the next 12-18 months will help characterize OP-1250 as a potential best-in-class agent and clarify the clinical development pathway, both as a monotherapy and in combination with currently approved agents… In 2H22 we expect mono and initial combo data with palbociclib, where we expect additive efficacy and will be watching neutropenia rates and continued lack of palbo metabolism alteration from OP-1250. In 2023 Olema expects to initiate a pivotal monotherapy study in ER+/HER2- mBC in 2L+. The design will depend on upcoming data, and we look forward to more clarity on the drug’s path to market and plan for clinical development while recognizing that combination therapy likely represents major upside beyond monotherapy.”
All of this prompted Maughan to rate Olema shares a Buy, along with a $12 price target. This target conveys his confidence in OLMA’s ability to climb 250% higher in the next year. (To watch Maughan’s track record, click here)
All in all, other analysts mirror Maughan’s sentiment. With 100% Street support, or 6 Buy ratings to be exact, the consensus is unanimous: OLMA is a Strong Buy. Shares are priced at $4.64, and the $17.17 average target implies 270% upside from that level. (See OLMA stock forecast on TipRanks)
To find good ideas for penny stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.
Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
American Weed Stocks Are Cheap. They’re About to Get a Sales Bump.
How Do Mega Backdoor Roths Work?
A mega backdoor Roth is a unique 401(k) rollover strategy that’s designed for people whose incomes would ordinarily keep them from saving in a Roth Individual Retirement Account. The advantage of using a Roth IRA to save for retirement is being able to make tax-free qualified withdrawals. But not everyone can contribute to these accounts; higher-income earners are excluded. That’s where the mega backdoor Roth comes into play. If you have a 401(k) you’d like to roll over, you could use this strategy to enjoy the tax benefits of a Roth IRA without having income be an obstacle.
Make sure you’re taking advantage of every opportunity to maximize your retirement assets by working with a financial advisor.
Roth Account Basics
Before diving into the specifics of a mega backdoor Roth, there are a few things to know about Roth accounts, including Roth IRAs and Roth 401(k)s.
First, these accounts are both funded with after-tax dollars. That means when you make qualified withdrawals later, you won’t pay income tax on the money since you already paid it upfront. This is the key characteristic of Roth accounts and what makes them so appealing to investors who anticipate being in a higher tax bracket at retirement.
Next, your ability to contribute to a Roth 401(k) is not restricted by your income. But it is for a Roth IRA. For the 2021 tax year, you must be within these modified adjusted gross income limits to make a full Roth IRA contribution:
Single filers: MAGI of $125,000 or less
Married filing jointly: MAGI of $198,000 or less
Head of household: MAGI of $125,000 or less
You can make partial contributions above those income limits. But your ability to contribute phases out completely once your MAGI hits $140,000 (if you file single or head of household) or $208,000 if you’re married and file a joint return. For 2021, the full contribution allowed is $6,000 with a $1,000 catch-up contribution for savers aged 50 and older.
Finally, Roth 401(k) accounts are subject to required minimum distribution rules just like traditional 401(k) accounts. This rule requires you to begin taking money from your 401(k) starting at age 72. A Roth IRA, on the other hand, is not subject to RMD rules.
What Is a Backdoor Roth?
A backdoor Roth offers a work-around for people whose incomes are above the limits set by the IRS. When you execute a backdoor Roth, you roll money over from a traditional IRA to a Roth account. This way, you won’t have to pay taxes on your retirement savings in the Roth IRA when it’s time to make withdrawals. And you’re not subject to required minimum distribution rules either.
But there is a catch. You have to pay income tax on the money you roll over to a Roth account. So while you could save money on taxes in retirement, you’re not escaping the tax liability of a traditional IRA altogether.
How a Mega Backdoor Roth Works
A mega backdoor Roth is a backdoor Roth that’s designed specifically for people who have a 401(k) plan at work. This type of backdoor Roth allows you to contribute up to $38,500 to a Roth IRA or a Roth 401(k) in 2021. This is in addition to the regular annual contribution limits the IRS allows for these types of accounts. To execute a mega backdoor Roth, two conditions have to be met. Your 401(k) plan needs to allow the following:
You can ask your plan administrator whether your 401(k) meets these criteria. And if your plan doesn’t allow for in-service withdrawals or distributions, you could still attempt a mega backdoor Roth if you plan to leave your job in the near future.
If your plan meets the criteria, then you can take the next steps to execute a mega backdoor Roth. This is typically a two-step process that involves maxing out after-tax 401(k) contributions, then withdrawing the after-tax portion of your account to a Roth IRA.
Again, whether you can follow through on the second step depends on whether your plan allows in-service withdrawals. If it doesn’t, you’ll have to wait until you separate from your employer to roll over any after-tax money in your 401(k) into a Roth IRA.
You also need to watch out for the pro rata rule. This IRS rule says you can’t only withdraw pre- or post-tax contributions from a traditional 401(k). So if you’re completing a mega backdoor Roth, you couldn’t just withdraw post-tax contributions if your account holds both pre- and post-tax funds. In that case, you may have to roll over the entire balance to a Roth IRA.
Benefits of a Mega Backdoor Roth
There are three key benefits associated with executing a mega backdoor Roth. First, you can contribute significantly more to a Roth IRA upfront this way. For 2021, the contribution limit is $38,500 on top of the regular annual contribution limit and any catch-up contribution limits that may apply.
You’ll need to know the maximum amount you’re allowed to contribute to the after-tax portion of your 401(k). So for 2021, the IRS allows a maximum contribution of $58,000 or $64,500 if you’re 50 or older. You’d subtract your 401(k) contributions and anything your employer adds in matching contributions to figure out how much you could add to the after-tax portion.
Next, you can enjoy tax-free withdrawals in retirement. This is a benefit you may otherwise not being able to get if your income is too high to contribute to a Roth IRA. By reducing your tax liability in retirement, you can help your investment dollars go further. And you may have a larger legacy of wealth to pass on to future generations.
Finally, a mega backdoor Roth IRA would allow you to sidestep required minimum distribution rules. This means that you could retain control over when you choose to take distributions from a Roth IRA.
So who is a mega backdoor Roth right for? You may consider this move if you:
Have an eligible 401(k) plan at work
Have maxed out traditional 401(k) contributions
Are not eligible to contribute to a Roth IRA because of your income
Have additional money that you want to invest for retirement
Want to leverage the higher Roth IRA contribution limits allowed by a mega backdoor rollover
Talking to your financial advisor can help you decide if a mega backdoor Roth makes sense. And your 401(k) plan administrator should be able to tell you if it’s possible, based on your plan’s guidelines.
Mega Backdoor Roth Alternatives
If you can’t execute a mega backdoor Roth because your plan doesn’t allow it, there are other ways to increase your retirement savings. For example, you could try a regular backdoor Roth instead. This might be something to consider if you still want to enjoy the tax benefits of a Roth IRA but your plan doesn’t fit the criteria for a mega rollover. You could also elect to make Roth 401(k) contributions to your retirement plan at work. This way, you still get the benefit of contributing after-tax dollars and making tax-free withdrawals. You’d be subject to the regular contribution limits and you’d still have to take the required minimum distribution. But that may outweigh the value of tax savings in retirement.
Investing in a Health Savings Account (HSA) is another option. While these accounts are not specifically designed for retirement, they can yield multiple tax benefits. Contributions are tax-deductible and grow tax-deferred. Withdrawals are tax-free when used for eligible healthcare expenses. And at 65, you can take money out of an HSA for any reason without a tax penalty. You’ll just owe ordinary income tax on any withdrawals that are not used for healthcare expenses.
Finally, you could open a taxable brokerage account to invest. This doesn’t necessarily save you money on taxes since you’ll owe capital gains tax when you sell investments at a profit. But it could help you to diversify your investments and there are no limits on how much you can invest in a brokerage account annually.
A mega backdoor Roth strategy could work well for higher-income earners who want to take advantage of Roth account benefits. There are certain rules that need to be followed to make it work, however, so you may want to talk to your plan administrator or a tax professional before going ahead. Keep in mind also that even if you can’t complete a mega backdoor Roth rollover, you still have other options for growing retirement savings.
Tips for Retirement Planning
If you’re saving for retirement in a 401(k) or IRA, pay attention to the fees you’re paying. For instance, check the expense ratios for each fund you’re invested in to understand how much you pay to own that fund on an annual basis. You can then compare that to the fund’s performance to determine whether the fees are justified. Also, consider any administrative fees you might be paying and how those affect your net returns.
Consider talking to your financial advisor about a mega backdoor Roth and whether it could be right for you. If you don’t have a financial advisor yet, finding one doesn’t have to be complicated. SmartAsset’s financial advisor matching tool makes it easy to connect with professional advisors in your local area. You can get your personalized recommendations in minutes just by answering a few simple questions. If you’re ready, get started now.
Photo credit: ©iStock.com/designer491
Alibaba Is Tumbling. Chinese Tech Stocks Have a New Headache.
Chinese tech stocks were tumbling on Monday as two of the embattled sector’s leading players faced fresh fines from market regulators over disclosure rules.
China’s State Administration for Market Regulation announced Sunday a wave of penalties for improperly reporting past deals, in breach of competition law.
(ticker: BABA) and
(0700.H.K.) were among the companies fined as a result.
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