Short Squeeze

It looks like the short squeeze is on for shares of the biotech firm I invested in. The price gapped up over 15% within the first hour of trading and is holding, despite the overall market being down (the Dow Jones was down over 100 points). Rumor has it they will announce results of a Phase III clinical trial Monday or Tuesday, and the longs are being joined by the shorts looking to cover their short bets.

Short interest is high, which could potentially intensify the short squeeze next week if results are positive. Call option volume is also high, indicating available shares are scarce, so shorts are turning to calls to hedge their short bets. Other factors that attracted me to this stock was high institutional ownership, relatively few floatable shares, and NONEXISTENT INSIDER SALES. In other words, executives believe in their products and their own company, instead of cashing out early for personal gain. Their interests are aligned with shareholders like myself. They are looking to build large enterprise value, instead of looking to cash out for their own immediate financial gain.

If results are negative, the shorties will overwhelm the longs, driving the price down by more than 75%. If results are positive, we could have a triple from here. Longer-term, with forthcoming Phase III trials also positive, a new drug application, an announcement of a co-marketing partner, and finally FDA approval, this company may attract a bidding war among big pharma companies to buy out the company. Big Pharma has been on an acquisition binge lately, as they aim to replenish their drug pipelines, as many of their drugs are about to go off-patent, destroying their profit margins in the process to generic manufacturers. Good for consumers, bad for Big Pharma. In any case, this tiny biotech company is on the radar of several potential acquirers, as they have shown promising results for a class of drugs that the Big Pharmas have failed to get FDA-approved.

If the company can secure enough capital to address cash flow concerns until FDA approval, the return to shareholders will be even larger, as the market potential for this drug is huge. Based on its risk/reward profile, this speculative play worth it, in my humble opinion.

Increasing shareholder value is contingent on execution by company executives and employees. But the absolutely essential ingredient is the golden goose. The drug needs to be effective and safe--everything else is noise. We should find out soon enough whether we have a mega-blockbuster on our hands, or a dud.

Due Diligence

In this environment, there's not much to be excited about in the stock market. I'm hearing many aren't even opening up their 401k statements, knowing they're down over 50% from their 2007 peak levels, and knowing they've been declining for months on end.

I believe we haven't reached a secular low in this bear market yet, but I do believe when we do reach it, it will be the buying opportunity of a lifetime. In between, we may even experience violent bear market rallies, but the trend is still down.

It just doesn't feel like a bottom, because so many are trying to find it. Stock market bottoms usually aren't reached until the last bull has thrown in the towel. I don't think we're there yet.

Yes, some stocks are cheap, but they could get cheaper. Investors with a very long-term horizon (10+ years) will probably do well buying at current levels, and if the fear is missing the train, perhaps nibbling at solid companies with cash flow, dominant market share, and low debt levels may be tempting. But this falling sword isn't done falling yet.

Meanwhile, aside from precious metals, the only promising sector I see is biotech, as they look increasingly enticing as acquisition targets. Big pharma companies face daunting challenges going forward, as their pipelines are depleted and at risk of being decimated due to patent expiration. Pfizer will acquire Wyeth, and Merck is paying over $41 billion for Schering-Plough. Genentech is mulling over Roche's higher bid of $95 per share. Expect to see more mergers and acquisitions activity.

I've placed bets on a biopharmaceutical company that will announce results of Phase III clinical trails by the end of this month. It's a calculated speculation--if results are negative--either due to lack of efficacy or safety, it'll drop by 50%. However, if results are positive, it will triple. If a partnership agreement is offered to co-market the drug, it should double again. And if an outright buyout offer is made, it'll double again. I like that reward/risk profile.

I performed heavy due diligence on the company: no insider selling, phase I and II trials results, manufacturing facilities, preliminary feedback, competitive analysis, marketing partners, history, fundamental analysis, subjective analysis and technical analysis. All indicators look good, but with biotech, the odds are indeed against success. Volatility is high. In other words, biotech investing is not for the faint of heart. It can be disastrous, but it can also be extremely rewarding--both for investors and health patients. Good luck to all longs.

Snow in California and slippery slopes

I drove down I-5 thru the Grapevine, where we got tons of snow yesterday. I actually pulled over at a rest area to throw a bunch of snowballs (at trees, not people). It was the most fun I've had in a while, but my hands got really cold, and all I had on was a t-shirt.

Then as I descended upon the Valley, the full moon was shining brightly against a backdrop of some clouds. It was as clear an evening as I ever remember in LA. The rain must have cleaned out the smog temporarily. Traffic was light, probably due to the tattered economy.

The City of Angels really is beautiful when you can see all the lights against the hills. It made the long drive more bearable.

It was a good day, as the biopharma company was up big again, with CNBC now reporting it in New York at the biotech conference. I got in at $4 last week, and it closed above $6 today. If Phase III trials are positive, it'll double from here. If they're negative, it'll collapse back to $4. We'll know next month. Biotech investing is a slippery slope--it can be dangerous as most drugs in clinical trials fail, but when they hit, it's a beautiful thing. Kinda like LA.

Next up is a melanoma drug company, with results due in the 2nd quarter. People afflicted with this aggressive cancer can't wait--there hasn't been an FDA-approved drug in 30 years. It's do or die. Which makes this play dicey for investors, but more importantly, patients really need some positive news.

The government's stimulus plan should include investments in biotech and stem cell research--that's where the new frontier is. We need to find cures for these terrible diseases. A lot more than we need more frisbee golf courses.

Good news

The shares of the biopharmaceutical company gapped up again in pre-trading, so my purchase yesterday are up big, but I didn't buy the calls because they are just way too expensive. The chatter is starting to circulate and the speculators are driving up the premiums on the call options. They will probably pay off if the results of the Phase III trials are released next month. But I don't want to chase it. I'll wait for a down day where the market takes down all stocks before I buy the calls. Patience, grasshopper...