Shares of Spectrum Pharmaceuticals (NASDAQ: SPPI) immediately popped over 4% following earnings, after beating expectations on Wednesday. However, the stock then fell lower and closed with a near 5% loss, and has since lost 10% of its value since announcing its quarterly results. At first glance the company's earnings look great, but what caused the stock to fall is not earnings, but rather management's unwillingness to give investors what they want, and an overwhelming presence of short traders.
- Revenue for the quarter was $69.0 million ahead of Street expectations for $65.9 million, also a 35% gain year-over-year.
- EPS of $0.42 compared to estimates of $0.27
- Fusilev's market share penetration rose to 31% compared to 29% last quarter, despite generic pressure.
- The company raised full-year guidance from "around $300 million" to "exceed $300 million" and increased the expense savings as a result of the Allos acquisition.
Click here to view Spectrum Pharmaceuticals' earnings call.
You now see the headline numbers, everything looks good, so then what happened? The company beat on every metric, popped at the open, and then traded lower. Sure, the massive losses in the market contributed to the selling pressure, but the level of loss is hard to figure.
The truth is that this is a stock dominated by shorts, and any pessimism causes it to fall. The stock is already trading with a P/E ratio near 7.0, yet continues to have one of the highest short ratios in biotechnology, with a 23.50. More than 60% of the company's float was short as of October 15, which is surprisingly two million shares less than in September. To put this in perspective, the troubled biotechnology company Dendreon (DNDN), has a short ratio of 11.20 with 31.20% of its float being short.
If you were to compare Dendreon to Spectrum you would see that Spectrum is the far better company, with much fewer questions. Spectrum has a better balance sheet, is more diversified, and is profitable. However, sometimes simply logic such as this is irrelevant. The fact of the matter is that shorts make money on Spectrum, so why would they stop?
The company's CEO, Rajesh C. Shrotriya M.D, continues to speak highly of his company, beat expectations, raise guidance, but continues to sell his own shares. Most bulls, such as myself, will argue that the selling is planned, however if the company truly is undervalued and long-term prospects are great, then why sell at $13, $12, or $11?
According to the NASDAQ, there has been 14 insider sells during the last three months, compared to just one buy. Of the 384,400 shares sold, most has been from the CEO. However, in the previous nine months, there were only seven sells, compared to six buys. During this nine month period, prior to the last three months, more than 1.3 million shares were bought and less than 300,000 were sold.
It's fairly easy to look at the trends of insider activity over the last year, and see that insiders have begun to sell in the last three months. When combined with the short ratio, and the fears that generic pressure will hurt sales of Fusilev, it creates panic among shareholders, and slowly causes longs to lose faith. This is yet one more example of Raj not drinking his own Kool-Aid, and to sell so aggressively implies that trouble may be lurking, whether it is accurate or not.
The ultimate sign of long-term growth, security, and assurance would have been to announce a dividend. A dividend would have increased the risk involved to short the stock, and also make it more expensive in the process. There were a lot of investors who truly expected a dividend, and when a yield was not announced, some were pessimistic.
Spectrum Pharmaceuticals is a company that has cash in excess of $140 million. The company has been spending its money on buybacks, with over 800,000 shares last quarter, but obviously it's not working. It's common sense that it's not effective to buyback shares while your CEO is selling his shares, and why the company would approve such a plan will always remain a mystery.
For the last two months investors have been talking about a dividend, ever since the CEO mentioned the possibility of a dividend in a presentation. The company is growing, and with the synergy provided through the Allos acquisition, the company should be spending some of its money to rebuild shareholder confidence, in the form of a dividend.
The stock is trading at 2x sales with a P/E ratio near 7.0. This is the cheapest of any biotechnology company growing at Spectrum's rate. At $10.25 a 5% yield would be enough to attract longs, repel shorts, and would be more effective that the company's "buyback plan".
In order for Spectrum to reach its one-year target the stock would have to increase by nearly 150%. At that point, a 5% yield would be 2%, a very manageable payout for the company. However, if Spectrum does not announce a dividend then it will never rid the shorts and it will never trade to its worth. There is not one biotechnology company in the entire industry that lacks "questions" surrounding its future. But for some reason, shorts believe that Spectrum's questions are more serious than others.
At this point, Spectrum's 10% decline in the two days following earnings is not related to fundamentals, it is technical. The company is not providing longs with any reason to hold the stock, and over the last two years, I have been among the most bullish of SPPI investors. The company has to give us something. They have to put their money with their mouth is, and just maybe the company will appreciate to reflect its fundamental improvements, its worth, and its future. Perhaps the reaction to earnings will be enough to show the company that its tactics are not working. The company is executing to perfection on every fundamental measure, but now it's time to take care of shareholders, and a 5% yield at $10.25 is not too much to ask.