UK investors are buying Sareum Holdings. Should I?

When a market minnow attracts more buying interest than heavily-traded FTSE 100 shares such as Lloyds Bank, Rolls Royce and International Consolidated Holdings, it’s worth paying attention. Today, I’m looking at one such stock, Sareum Holdings (LSE: SAR).

Last week, Sareum was the second most popular buy on share-dealing platform Hargreaves Lansdown. Should I be buying its stock too?

Wait – what is Sareum?

Sareum is a Cambridge-based drug developer focused on tackling cancers and autoimmune diseases. Its most advanced programme (Chk1) is currently in Phase 2 of clinical trials. However, it’s Sareum’s other development programmes (TYK2/JAK1) that appear to have got investors in a frenzy.

Last week, the company announced that it had raised £1,470,000 (before expenses) by issuing shares at a price of 4.9p. Interestingly, this money has come from just one “high net worth individual” who had already invested in Sareum. 

This money will be used to advance the aforementioned TYK2/JAK1 programmes. Right now, the company has the goal of completing its preclinical studies for its SDC-1801 inhibitor drug in Q3 of its financial year. From here, clinical trials — including the potential application of its inhibitors to Covid -19 — will commence. 

So, time to buy the shares?

Not so fast. There can be no doubt that Sareum has been a wonderful investment in recent times. Anyone buying a month ago would now be sitting on a gain of roughly 175%. The result is even better for those who’ve been holding for the last year (1,150%). And yes, some positive data in the coming months could certainly see the shares soar even higher in 2021.

However, there’s are also reasons for thinking Sareum may have peaked.

Drug development is notoriously risky from an investing perspective. For every drug that succeeds, thousands do not. Delays are also very common. Indeed, Sareum has already stated that the completion of preclinical studies is “subject to successful progress”. Should the wait be longer than expected, some holders will inevitably jump ship. Moreover, clinical trials aren’t cheap and management has already stated that they are “subject to funding“. 

I’m also inclined to take a cue from what’s been seen in other Covid-related stocks over the past year. One example of this would be hyper-popular diagnostics firm Novacyt.

Having multi-bagged over the second half of 2020, Novacyt’s momentum has since reversed in a spectacular fashion. Priced at 1,190p a pop in January, the stock closed at just under 391p last Friday. Sure, I’m arguably comparing apples with oranges here. Even so, the on-off ‘coronavirus buzz’ could lead Sareum’s share to behave in a similar manner. 

Beware the dip

While I congratulate anyone already holding Sareum, the recent spike seen in its share price would make me nervous if I were a potential investor. It’s particularly worth highlighting that the company was also the third most popular sell by Hargreaves Lansdown clients last week. After such a strong run, some profit-taking is inevitable. However, this suggests that the Sareum’s near-term performance is firmly in the hands of traders, rather than long-term investors. 

At times like this, I remind myself that no share price rises in a straight line. So, if I were tempted to buy Sareum today, I’d only consider investing money I could afford to lose. There’s no shortage of promising small-cap stocks out there.