Tuesday, July 20, 2010

Jim Cramer likes ARNA as a speculative play


Normally, Jim Cramer's endorsement is the kiss of death, since I tend to be a contrarian. He has shunned ARNA before, so I was comfortable being long ARNA. Now that shares of ARNA have almost doubled since the July 1 announcement of the marketing partnership agreement with Eisai, Cramer is jumping on the bandwagon. In all fairness, I don't always disagree with Cramer's assessments; his recommendations are just badly timed, and viewers (largely retail investors) end up buying and selling at the exact inopportune times. His viewing audience on CNBC will perhaps drive shares up some more for the time being, as he has a large following. But be careful, because Cramer's rosy predictions have been known to set up retail investors for a disappointment, as short hedge funds could manipulate shares down after the run up. The smart (and sometimes crooked) money ends up slaughtering the dumb money.

However, with this knowledge, longs might be able to wait and buy the dip. The danger is if the horse has left the barn, and shares run up further on anticipation of positive outcomes at the Advisory Committee review September 16, and of course PDUFA review on October 22. It also provides shorts an opportunity, but I don't recommend retail investors short any stock, because the potential losses are limitless, and unless you're in the know, you will lose money even if you are correct on the direction of the price, but wrong on the timing. Wall Street will whipsaw you out of your position, leaving you with losses, despite being "right."

Overall, shares are ARNA are heavily manipulated, with a huge short interest of up to 27% of the float recently. Expect high volatility. Due to recent bullish news, there is heavy buying pressure, but naked shorts will manipulate the stock in order to cover their shorts and escape intact. If the outcomes are positive, shorts without an escape hatch will get torched.

I've been long ARNA for over a year, with an average entry point above $3, way below the current price per share of $5.26. I can afford to spectate while the share price gyrates, confident in Lorcaserin's FDA approval and commercial launch--that's why I'm long. My initial buy of $5 last year was untimely, but due to my bullish conviction for ARNA, I accumulated more shares on the way down to its lows. In other words, I doubled down, a risky proposition, but potentially highly rewarding. I won't deny there were some nervous moments, but in hindsight, my conviction enabled me to accumulate more shares at lower prices. I was able to overcome fear and doubt, and the price suppression ended up being a gift--everybody loves a sale. Sometimes courage and conviction are rewarded.

I'm long, locked and loaded. I'm not interested in trading in and out of this stock. For those that are, good luck to you.

See disclaimers in the side bar.

Disclosure: long shares of ARNA, short January ARNA put options.

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