This week has been a “fascinating” one. The increase of COVID-19 cases across the globe has sent shockwaves through financial markets. Yesterday, the Dow experienced its largest one-day point drop in history, the S&P 500 posted its sharpest fall since August 18, 2011, the Nasdaq composite finished the day 4.6% down and stocks in general might experience their worst week since the last financial crisis.
However, this has proved to be a perfect setting for some publicly traded companies in the biotechnology and healthcare sectors. Several small, micro and nano tickers are experiencing parabolic runs and/or suspicious levels of volatility. Notable tickers include CODX, AHPI, APT and IBIO. To many investors this might seem like the perfect chance to purchase these stocks. COVID-19 is giving no signs of slowing down any time soon.
But one thing is very likely: most of the tickers that have recently enjoyed a meteoric rise will soon suffer a similarly impressive collapse. Why? Because many of these companies are capitalizing on the mass hysteria engendered by the media. Simple PRs with little to no substance have led to unwarranted appreciations which have been further exacerbated by short squeezes.
Take for example CODX, a ticker that has seen a four-fold increase in its price level over the last five trading days. CODX is in the business of developing, manufacturing and marketing tests for the diagnosis of tropical diseases transmitted by mosquitoes and the diagnosis of Hepatitis B and C. These diseases bear little to no resemblance to COVID-19 and CODX is a company that is no position to develop diagnosis tests for a new diseases (1). After all, its quarterly net losses over the last seven quarters average $1.5 million and it regularly sells newly issued shares in order to stay afloat as demonstrated by a 50% common stock increase over the last two years. It should thus come as no surprise that the company has put out several press releases claiming that they are on track to develop a COVID-19 test as well as announcing a $4.2 million registered direct offering (2). Given CODX’s links to dubious transfer agents and institutional shareholders and that is has also been heavily promoted through “pump” email newsletters, it is reasonable to assume that there is no real substance to CODX’s COVID-19 diagnosis test claims and that it is simply a ploy to offload overpriced shares on anyone who is willing to purchase them.
Another example is IBIO, a vaccine company with laughable financials (negative stockholder equity, quarterly losses that exceed cash in hand and obscene levels of dilution during 2019) that despite selling 2.45 million shares at $0.20 as recently as October 2019, traded as high as $3 today. Like CODX, there is no indication that IBIO has sufficient resources, knowledge or expertise to develop a product that could be of use in the fight against COVID-19. Once again, it should come as no surprise that the company put out a press release claiming that it has initiated a joint venture to develop a COVID-19 vaccine (3) and that yesterday it filed an offering prospectus for the sum of $100 million (4).
Other publicly traded companies that have seen unwarranted increases in their share price on the back of the current COVID-19 hysteria are AHPI and APT, manufactures of respiratory products and protective apparel respectively. AHPI has been losing money for years. APT’s masks are sold out until May, yet they have been able to add about $450 million capitalisation on around a $5 million increase in gross profit.
As previously mentioned, these crazy share price appreciations have been compounded by short squeezes. The high levels of volatility have led many inexperienced short sellers to take wild risks by shorting too many shares too soon, leading to massive buy ins that have wiped out accounts and given brokers many headaches. This is why we always warn inexperienced traders against getting involved with these types of tickers, one ill-timed and careless short can wipe out months or weeks of hard work or in the worst cases blow up an account.
These tickers will likely crash in the near future meaning that one is better off going short than long. However, careful scaling and risk management are a must if profits are to be made.
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