We all like to think that we evaluate markets objectively, but in reality the wide range of all too human emotion can take over and, temporarily at least, blind us to the obvious. Sometimes, when you follow a particular stock, you fall in love with your original idea. If you thought originally that it was a good buy at a particular level, it is easy to continue to believe in it, even as the price goes higher and the situation changes, or as it moves against you. Conversely, if you detect weakness in a company it is possible to ignore an enormous amount of evidence of a turn around.
I am often guilty as charged, but sometimes I have an epiphany. This is the case right now with Clovis Oncology (CLVS). I have followed the company since near the IPO and have always believed in the stock. I have a soft spot for oncology companies in the Bio-tech sector. I justify it by saying that investing in them, or recommending them, could one day give me a chance to say that I did my small part in curing cancer. At heart, however, I am a trader. Therefore my motivation is more likely to be that, should I find myself holding or recommending the right stock when a cure is found, it would be one of the all time great trades. Heartless, I know, but honest.
The 6 month chart for CLVS above is, to say the least, interesting. The stock lost around half of its value in November, when the company stopped work on its pancreatic cancer drug CO-101, following disappointing early phase study results. At this point I was still in love, telling myself, rightly as it turned out, that the sell-off was overdone. Clovis had several other drugs in development and, while the loss of the great hope, CO-101 was a blow, it wasn’t a fatal one. Those at the company presumably agreed as significant insider buying was later reported at those depressed levels.
Then, following a February 28th earnings call, the much heralded (by me, anyway) price explosion began. In that call, President and CEO Patrick Mahaffy acknowledged the disappointment of CO-101’s trial results but spoke positively and enthusiastically about two other drugs in development, CO-1686 targeting lung cancer, and rucaparib, principally focused on ovarian cancer. The market reacted as if a President and CEO being optimistic and enthusiastic about his company’s products was a rare and wonderful thing. In a phrase popular in my native England “Well, he would say that, wouldn’t he?”
Amid all of the enthusiasm, the market has seemed to overlook, or at least forgive, a widening $21.1 Million loss and a predicted cash burn of $53-57 Million this year, depleting the approximately $144 Million held in reserve. It would seem there are plenty of others blinded by the chance of being part of an historic medical breakthrough.
I am not saying that the company and its drugs won’t succeed. It is just that a price approaching $30 for the stock seems a bit rich. The stock IPO price was $13 and since then the company has burnt a lot of cash and had one major hope dashed. I don’t think I am speaking with undue animosity about a previous love. It’s just that I can’t see much up-side in the short to medium term. I do, however, get a distinct feeling that a collapse is possible any day. The risk-reward is all out of whack.
When looked at through a trader’s cold hard eyes, the only thing to do here is recommend a sell. Whether that is just taking a profit and remembering the good times, or the more treacherous feeling of shorting the stock, it has to be done. The affair is over, at least for now.
Martin Tillier has been dragged, kicking and screaming, into the 21st century and can now be followed on Twitter @MartinTillier.