Spectrum Proves To Be A Winner, But Short Still Looms

The U.S. labor market is not taking off, Europe in in recession, Brazil has reduced its growth forecast almost down to 2%-- compared with 3.5% at the beginning of the year-- and China will apparently report another fall in the rate of growth of its GDP this week. And how does the U.S. stock market look in these days of disappointing macro figures around the globe? Not bad at all. Since the beginning of the year, the Nasdaq index has risen by almost 13%, and the other main indices have risen by between 5.4% and 9%.

On the micro level, the market's big test will be the reporting season, which began Monday after the close with Alcoa (NYSE:AA). On Thursday, Internet giant Google (NASDAQ:GOOG) will report, with two major banks to come on Friday.

Among the Israeli companies, two leading technology companies will report as early as next Wednesday: Mellanox Technologies Ltd. (Nasdaq:MLNX) and Check Point Software Technologies Ltd. (Nasdaq: CHKP). Expectations of the first are sky high, and of the second rock bottom, in line with their respective share prices.

Friday's severe warning from enterprise software provider Informatica (NASDAQ:INFA), whose share price plummeted almost 30%, caused sharp drops for nearly every company that sells enterprise systems of any kind, far beyond the decline in the market as a whole. Among the most prominent casualties were Check Point, Citrix Systems (NASDAQ:CTXS), and F5 (NASDAQ:FFIV), which fell 7%, while its small competitor Radware Ltd. (Nasdaq: RDWR) fell just 3%, because it is clear to investors that there are no concerns about Radware's results and guidance which will be released in another two weeks. The company is also much smaller than F5, which will report next Wednesday.

Exactly a year ago, I added Spectrum Pharmaceuticals (NASDAQ:SPPI) to my portfolio here, a small U.S. biotech company specializing in cancer treatments. Spectrum was different from other small biotech companies in that it did not rely on a single dream drug awaiting FDA approval, which, if it is not forthcoming, is followed by a collapse. In the summer of 2011, Spectrum had significant sales of a cancer drug called Fusilev, was nicely profitable, and had money in the bank. Two things very much worried me about the company at that time, but did not prevent me from bringing it into the portfolio and recommending it here.

The two things that worried me a year ago were the short level, which rose from one month to the next, and a journalist on TheStreet.com, Adam Feuerstein by name, who covers the field, and who was busily publishing articles critical of Spectrum, warning investors off it. In my view, he was overdoing it, and his timing was suspiciously coordinated with the level of the short position in the stock, and I wrote about that.

In response, Feuerstein attacked me over a recommendation in an article published on July 8 last year, called me a "fantasist", and asked contemptuously whether this was what passed for an investment recommendation in the Israeli press. To date, my return on this investment is nearly 100%. With a rise like that, Feuerstein apparently gave up, but not the short players-- and the short position still disturbs me.

In mid-June, 25.8 million shares were sold short out of 60 million Spectrum shares, more than 40%, an unprecedented short position in a single company. This is also not a negligible position in financial terms - around $440 million - and I'm the last to say that it's a matter of stupid money. I have seen short positions like this more than once in Chinese companies, which turned out to have been manipulating their books, but no-one claims that that is what is going on at Spectrum.

The short players in Spectrum, like Feuerstein a year ago, mainly counted on Teva Pharmaceutical Industries Ltd. (NYSE: TEVA) wrecking Spectrum's growth engine Fusilev with a much cheaper generic drug. Teva did indeed produce an identical but cheaper generic drug at its U.S. plant, but breakdowns caused the plant to be shut down last year, leading to a shortage of the drug and a huge increase in Spectrum's sales.

Teva has gradually renewed production at the plant concerned, but it is not clear whether it will return to producing this specific injection, the potential of which is negligible in relation to Teva's sales. The short players are apparently sure that it will, because since the beginning of the year the short position has doubled.

Even at a peak of $17, Spectrum's share is very cheap, not to mention the potential of the short players being wiped out-- which could happen any day-- if it emerges that Teva will not revert to threatening Spectrum's main drug. As time goes on, Spectrum's dependence on one drug will reduce substantially, because it has additional promising drugs in its pipeline, and it is on the way to a merger with Allos Therapeutics (NASDAQ:ALTH), which will further expand the development pipeline.

Published by Globes [online], Israel business news - www.globes-online.com - on July 9, 2012
© Copyright of Globes Publisher Itonut (1983) Ltd. 2012 Reprinted on Seeking Alpha with permission

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