Sell Sangamo Biosciences (SGMO): SGMO develops and engineers zinc finger DNA-binding proteins, a naturally occurring class of proteins, for the regulation of disease-associated genes to drive desired therapeutic outcomes. It has two lead compounds, SB-509 and SB-728 in phase 2 trials for diabetic neuropathy and HIV/AIDS respectively, and it has four more compounds in various phase 1 and earlier stages for glioblastoma, hemophilia and other indications. Its shares collapsed 40.6% on Monday after the company announced that its phase 2b trial of SB-509 in diabetic neuropathy did not meet its primary or secondary clinical endpoints, and that the company would discontinue further development of SB-509, and it would focus its attention on its pipeline of ZFP Therapeutics for HIV and monogenic diseases.
A central issue in deciding whether SGMO is a good buy here after the steep fall is figuring out whether the failure of its ZFP Therapeutics platform in diabetic neuropathy is a vote on its core ZFP Therapeutics platform and consequently, the entire pipeline of products (especially its phase 2 HIV treatment), or is it in some way isolated or limited to just that trial and/or indication. There was certainly a lot of hope on this trial as its success would not only have led to a blockbuster drug in the large diabetes population which numbers over 25 million in the U.S., with about 60%-70% of them developing mild to severe forms of neuropathy. Furthermore, the success of vascularization in this indication could have expanded the application of this technology potentially to many other indications where vascularization would be beneficial, including especially cardiovascular disease. In that context, the fall yesterday, however severe, does not seem like an over-reaction.
However, there are aspects to this trial and indication that cannot be broadly extended as a vote on the core ZFP Therapeutics platform. First, the company indicated during a conference call that there was a placebo effect that negatively impacted results, related to the fact that diabetes improvements have significantly improved. Second, there is a fundamental difference in the way the ZFP platform is applied to its SB-509 therapeutic for diabetic neuropathy versus its SB-728 therapeutic for HIV. Furthermore, phase 1 results from the HIV phase 1 trial released in February were promising, with three of the six patients seeing their viral loads decreased, including one of whose viral load decreased to undetectable levels. Furthermore, the company has over $91 million in cash and short-term investments, and it trades at only $159 million market-cap at Monday’s close, indicating that much of the downside from this failure has already been captured.
We would not recommend shorting SGMO, but we would suggest exiting any existing SGMO position. There is a risk that shares could sink further so that it cuts through the lows it made during the crisis in 2008/09 when its market-cap dropped to as low as $80 million, about half of the current market-cap of $159 million. And at the same, the upside risk is limited in the short-term as there are no near-term catalysts; the earliest is a phase 2a HIV trial that will not release results at least until the end of 2012.
Sell Chinacast Education Corp. (OTCPK:CAST): CAST is one of China’s leading e-learning and private education services providers, offering e-learning services and post-secondary education to 15 universities and 6,50 K-12 schools. Its shares dove 31.4% yesterday, and were subsequently halted after the close of regular market, after the company reported that it had hired an independent audit firm to review its cash balances, and has canceled its share buyback program. The company press release elaborated that the audit of cash balances was driven by “certain issues and conduct that came to the attention of the company.” Of course, this caught the imagination of the trading community, given past incidences of fraud among Chinese small-caps.
At its closing price of $2.58 yesterday, CAST trades at a forward 3.7 P/E, while earnings are projected to almost double from 36c in 2010 to 70c in 2012. But that is not really as important right now given the company’s revelation that there may be an issue with the conduct of certain employees that has required them to conduct an audit of the cash balances, and also withdraw their proposed $50 million share buyback. While it is unclear what the outcome will be from company’s audit of cash balances, we would be in favor of exiting any positions if and when the trading halt is removed. For readers who need to read more background on the company, we refer you to an article by Seeking Alpha Contributor Ian Bezek last April that detailed his short thesis on CAST based on the findings from his investigation that the company had engaged in several dubious transactions, that the company funds were misused or misappropriated during these unusual transactions, and errors in the company’s past filings with SEC.
Buy Eastman Kodak (EK): EK manufactures digital and film imaging systems for the photographic and graphic communications markets. Its Consumer Digital Imaging Group offers digital capture devices, including cameras, digital picture frames, imaging sensors and inkjet printers; its Graphic Communications Group offers digital and traditional prepress equipment and packaging solutions; and its Film, Photofinishing and Entertainment Group offers consumer and professional film, and one-time-use cameras. Its shares have been extremely volatile lately rising 70.5% on Monday, thereby almost reversing a 53.8% plunge on Friday.
The volatility has been triggered by rumors, on the one hand, that the company may file for bankruptcy, after Fitch last week cut its rating on EK’s debt to a level suggesting that default is probable. On the other hand, the company by its own admission has vehemently denied that bankruptcy is even conceivable, reiterating that it “remains focused on meeting its commitments to customers and suppliers, and on delivering on its strategy to become a profitable, sustainable digital company.” At the heart of the discussion is whether Kodak, which completely lost out on the digital photography revolution, and has been losing money since 2005, has any value left in its patents that might be of value to a strategic buyer like Apple (AAPL) or Google (GOOG), or even Samsung (OTC:SSNLF).
EK has over $6 billion in revenue, one of the most recognized brand names that alone maybe worth at least in the hundreds of millions of dollars, and a patent chest of over 1,100 patents that are estimated to be worth at least $3 billion. It would seem reasonable that management should be able to at least monetize some of their critical assets, even if one were to take the worst-case scenario about the viability of the company. We believe that EK shares are an attractive buy here.
VirnetX Holding Corp. (VHC): VHC is a developer of software and technology solutions for secure real-time communications over the Internet, but in practice more like a patent holding company. Its stock was shot down 18.0% on reports that the U.S. Patent and Trademark office decided to grant Apple Inc. (AAPL) and Cisco (CSCO) reexamination requests on its U.S. Patent No. #6,502,135 entitled “Agile Network Protocol for Secure Communications with Assured System Availability.” While the company issued a press release putting a positive spin on the USPTO decision, the market was right-on in dropping VHC stock over 25% intra-day, as generally, a majority of patents that end up under the scrutiny of re-examination eventually get over-turned. Overall, VHC is a very volatile and risky stock. If the company gets a decision from the re-examination in its favor, it will most likely reap a windfall as it did last year when Microsoft (MSFT) settled with the company for a one-time payment of $200 million. If, however, the USPTO rules in favor of AAPL and CSCO, then it could easily crash into the low-to-mid single-digits. We do not generally like such binary trades where the outcomes are so extreme, and would stay away from VHC.
Buy JA Solar Holdings (JASO): JASO, a Chinese manufacturer of mono-crystalline and multi-crystalline solar cells for solar modules and systems, fell 15.3% yesterday among broad based selling in the sector, triggered in part by SunPower’s (SPWRA) announcement that it will lower 2011 guidance during its conference call scheduled on November 3 to discuss the upcoming September quarter report. We indicated our negative bias on JASO in our August 22 review when the stock was trading at almost $4. We have since turned bullish, and believe that at Monday’s closing price of $1.51, the stock has an attractive risk/reward profile. It trades at a forward 2.8 P/E, while earnings are projected to rise from 45c in 2011 to 53c in 2012.
SPWRA’s negative announcement also triggered losses in Suntech Power Holdings (STP), a Chinese manufacturer of photo-voltaic cells and modules for worldwide distribution. Its shares fell 20.3% yesterday. We have been negative on STP since our coverage on September 25 when shares traded in the $2.60s.
Other major movers yesterday included the following:
- Sandridge Energy (SD), engaged in the exploration and production of crude oil and natural gas, fell 10.2% on no company-specific news but rather in tandem with the weakness in the broader markets, a drop in oil prices and a strengthening of the dollar.
- AMR Corp. (AMR), the parent of American Airlines, provides air transportation for passengers to 160 destinations in North and South America, Europe and Asia, dropped 35.1% yesterday on bankruptcy fears (which were later summarily denied by the company). Peers Delta Air Lines (DAL), U.S. Airways (LCC), JetBlue (JBLU) and Republic Airway (RJET) also fell in sympathy, falling 11.7%, 15.8%, 15.6% and 10.0% respectively.
- Arena Pharmaceuticals (ARNA), a biotech developer of oral drugs for cardiovascular, central nervous system, inflammatory and metabolic diseases, dropped 10.3% yesterday on no company-specific news.
- JDS Uniphase Corp. (JDSU), a provider of communications test and measurement solutions, and optical products to telecommunications service providers, cable operators and network equipment manufacturers, fell 11.1% on no company-specific news.
- Greek shipping companies Dryships Inc. (DRYS), Diana Shipping (DSX) and Navios Maritime Partners (NMM) were all down by 16.6%, 6.6% and 6.1%, on no significant company-specific news. However, the news from Greece continues to be troubling, as the government announced on Sunday that it would miss its 2011 deficit targets.
- North American and other non-Greek shipping companies Frontline Ltd (FRO), Teekay Tankers Ltd. (TNK) and DHT Holdings Corp. (DHT) also fell 17.3%, 15.9%, and 21.1%, not on any company-specific news, but in sympathy with the sharp down moves in Greek shipping companies.
- Melco Crown Entertainment (MPEL), an operator of casinos in Macau, the former Portuguese colony now a part of China, was down 13.0% yesterday after an 18.5% swoon last week. The shares of the Macau casino operator that draws most of its customers from mainland China were down on fears of a slowdown in China’s economy, and negative chatter that the Chinese government may clamp down on growth in Macau by imposing strict visa restrictions.
- Oil and gas exploration and production companies Kodiak Oil & Gas Corp. (KOG) and Whiting Petroleum (WLL), fell 13.6% and 12.6% respectively, on no company-specific news but based on a 3.0% drop in the price of crude oil triggered by increase fears of Greek default and a weakening global economy.
- Alcatel-Lucent (ALU), a French provider of telecom equipment and services to fixed line, wireless and internet service providers, fell 15.5% yesterday on no company-specific news, but rather due to fears of a slowdown in its core EU markets based on the increasing possibility that the Greek crisis could create a domino effect and spread to the rest of the countries in the EU.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.