Jim Rickards - Institutions Are Way Under-Invested in Gold

http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2011/4/13_Jim_Rickards_-_Institutions_Are_Way_Under-Invested_in_Gold.html

Jim Rickards is one of the smartest guys around, with vast knowledge in foreign affairs, geopolitics, the defense industry, finance, and economic history.

Federated Investors ups the ante on ARNA

According to this SEC filing, Federated Investors increased their holdings from 10,934,434 million shares to 16,203,127 shares, which enables them to establish a huge stake in the company, a 17.49% ownership position.

http://invest.arenapharm.com/secfiling.cfm?filingid=1318148-09-1092

I did a quick search of institutional buying and selling during ARNA's last pivotal event when they announced BLOOM results on weight loss. Shares took a major hit as Wall Street analysts misinterpreted positive data release, deeming average weight loss for Lorcaserin-active groups as underwhelming. Sellers on March 31 were knee-jerk sellers in other words, and downright wrong--in hindsight. In my search, I noticed the following buyers and sellers of ARNA after the pivotal event.

Sellers (over 100,000 shares): William Harris Investors, Tradelink, Columbia Wanger, Royce & Associates, Barclay's Global UK, Noonday Asset, Janus, DE Shaw, Vanguard, Merrill Lynch, Oppenheimer, Bank of America, I-shares Russell 2000.

Buyers (over 100,000 shares): Rock Point, Fortis, BbBiotech, RBC Capital, Wellington Management, Susquehanna, UBS, Jane Street, Knight Capital, Federated.

With the luxury of hindsight, at today's current price per share, clearly the buyers on March 31 were correct in buying the dip.

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.