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Investment Capitalist and its founder, Peter "Pej" Hamidi, a well known trader on Wall Street, present a unique global macro perspective of financial markets, technology and the geo-political landscape affecting market movements. There is also an important "micro-structure"... More
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  • Accuray (ARAY) - Earnings Surprise Risk Is To The Upside

    Accuray (NASDAQ:ARAY) brings some hope to those with tumors in areas of the body inaccessible via surgery. Fundamentals show a strong rebound following Accuray's acquisition of ToMo Therapy in June of 2011 and dealing with the resignation of their CFO in September of 2013, who stayed on in a consulting capacity.

    For a young, growing company, quarterly earnings are likely to be in the range of $350mm. Anything higher and we'll have an upside gap. There's much work to be done in the area of improving internal ROI and improving employee efficiency, but steps have been taken in the right direction. More importantly, with a young company engaged in the bleeding edge of medical technology, one should expect much higher R&D spending as a percentage of total revenue, thereby generating a "fundamental" backdrop which isn't pretty, but as a wise man once told me, revolutionary biotech companies are not valued like other companies. So in these cases, absent going to med school or hiring an oncologist, we resort to quantitative data. It's important to take a long-term view to get an accurate picture because although the saying "everything is displayed in the chart" is true, for companies like Accuray, investors are long-term, so any attempts at short-term analysis of quantitative data would be futile and confusing as most of the short-term movement in Accuray is noise.

    (click to enlarge)

    With their new M6 release, I'm keeping an eye on pending earnings this week, and expecting an upside surprise after management issued two intra-earning updates raising analyst guidance higher on both counts. Downside surprises have historically been much less significant than upside surprises with regards to the stock's reaction. I imagine this has a lot to do with an extraordinarily high short-interest resulting in a short-to-cover ratio over 20!

    Accuray Short Interest

    With such a huge Short Interest and Cover Ratio (click for Definition), an upside gap is bound to be much larger because of the rush to cover, while a downside gap is likely to be smaller due to built-in demand for shares. Any imbalance to the downside will be used by used to cover short positions, likely resulting in a swift rally to close the gap. When 56% of the stock is tied up in the hands of Top 10 institutional holders, the actual float and available float are often very different. With 76mm shares outstanding and a trading float of 70mm shares, the true float is closer to 31mm shares. Based on the chart above, as of July 30, 2014, 50% of the available float is short. Therefore, any surprise is likely to be to the upside with downside risk somewhat offset with demand from short-sellers who will use any sell-side imbalance to unwind positions. And as the table illustrates, bears have been reducing their short positions between July 15th, 2014 and July 31, 2014. Having update earnings guidance twice with upside revisions, and earnings only 2 days away, short sellers appear to be taking risk off the table. But this works in both ways, thereby creating short-term "noise". Those short seller's taking risk off the table ahead of earnings will likely short into any upside gap, creating a higher chance for a counter gap move. If you are long into earnings and there is an upside gap, consider booking profits and re-enter once the gap is closed.

    Free Trial Metastock 13

    Disclosure: The author is long ARAY.

    Additional disclosure: Charts Created Using Metastock 13 By Permission

    Aug 20 3:37 PM | Link | Comment!
  • BioCryst - One Of A Few Companies Targeting Ebola In West Africa

    Although BioCryst (NASDAQ:BCRX) has the potential to see a surge in revenues as the global Ebola pandemic continues to escalate, I will admit this is certainly a dreadful situation. Nonetheless, as traders we must focus on events with an unattached perspective to find opportunities where quantitative and macro data align. BioCryst had been on my radar for several weeks while it toyed with significant multi-year resistance, ultimately breaking above, as the chart below illustrates. Once it broke above resistance levels, BioCryst became "in play." After monitoring the stock for several days, observing action following the breakout to see if the move was valid or would ultimately fail, BioCryst held and consolidated above resistance. Then a headline crossed the wire indicating the US Government, specifically the NIAID or the "National Institute of Allergy and Infectious Diseases was exercising options that would channel an additional $4.1 million to the company to accelerate human trials as well as efficacy studies in non-human primates to assess effective dose ranges and dose schedules." The objective of BioCryst's BSAV research program is to develop broad-spectrum parenteral and oral therapeutics for viruses that pose a threat to health and national security (emphasis placed on national security). The ongoing Ebola epidemic in West Africa is triggering global alarms of a possible pandemic. Although I am hopeful this will be contained, I recall the shortage of Cipro when Anthrax was allegedly mailed to members of Congress. The reality is set in Behavioral Finance and herd behavior. In this case, BioCryst is focused on particular viral strains that pose a threat to national security. Therefore funding from NIAID will enable BioCryst to advance development, which could lead to a new drug application being filed as quickly as possible.

    (click to enlarge)
    (Produced Using Metastock 13..Click for Enhanced View)

    The above technical snapshot, although zoomed to a longer time-frame, is for the purpose of illustrating why BioCryst popped up on our radars initially, before we even knew BioCryst had anything to do with the Ebola outbreak in West Africa. The quantitative implications alone are significant but adding the macro theme of Ebola to the picture presents a situation where the herd may soon stampede into this stock. Before that were to happen, it's crucial to get positioned with risk somewhat reduced as overhead resistance is now an area of major support. Moreover, the stock consolidated the move as was to be expected and appears ready for a continuation. With all that said, this is purely a momentum or event-based trade and has nothing to do with the potential value of the company. There is an "event" (Ebola outbreak) and herd behavior suggests momentum is building in the stock. With the summer retreat coming to an end and many hedge fund managers soon to return to their desks, the algo's might end up running this stock higher as the headlines continue to flash Ebola such that when the Hamptons are once again emptied out and traders have returned to the city, they'll have an ideal opportunity to short into a short-term, unwarranted spike. Our target in the short-term is $18-$20, at which point, we will actually consider reversing our position and catching a possible move back towards $15. Until then, lock and load.

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    Disclosure: The author is long BCRX.

    Aug 18 2:23 PM | Link | Comment!
  • Intermune - Profit Taking Opportunity

    Elevator Pitch

    A significant rally has analysts chasing the tape with recent upgrades "after the fact" setting up a contrarian situation. A recent "breakthrough" assessment by the FDA sent the stock surging from $15 to over $43. This was followed by a slew of analyst upgrades to just above $50, with most setting their targets within 1% of all-time highs. More importantly, this would be an ideal opportunity to compare market "hype" with market "reality".

    Company Description

    Intermune (NASDAQ:ITMN) focuses on a rare and irreversible form of lung disease. On July 17th, the FDA granted Pirfenidone "Breakthrough Therapy Designation". The FDA reserves this designation for drugs intended to treat serious life-threatening diseases when "preliminary clinical evidence demonstrates substantial improvement over existing therapies, in which case the FDA will expedite development and review of such drug."

    Thesis & Catalyst For InterMune, Inc.

    As traders, we must consider all variables. To put this into perspective, here is a recent snapshot of a trading ledger that exemplifies the idea of "scaling out of a position":


    Date Price Start Change End Type

    02/03/14 $13.11 0 6000 6000 Buy

    02/11/14 $13.46 6000 -500 5500 Sell

    02/25/14 $37.43 5500 -1000 4500 Sell

    06/22/14 $43.46 4500 -1900 2600 Sell

    08/08/14 $42.99 2600 -2600 0 Sell

    Total: 0

    The point of the above example is to show that as traders or investors, our objective is to make money. To do so, one must never get married to a position. Specifically referring to the massive spike on February 25th, professionals must overcome their instinct to either book all of their profits, or to not book any profits. Either case would be incorrect. One must take some profits when they land on their lap like that but using other risk control parameters, whatever is held onto could be allowed to run until the move appears to be losing momentum. In this case, as the stock weakens, analysts run to support it with upgrades. I tend to look at these types of ill-timed upgrades by analysts as shady tactics by investment houses to assist their most-favored-clients in getting in or out of a position.

    After trading past its Enterprise Value in June, the stock began to lose momentum. As the small technical snap-shot below shows, the stock is trading between a narrow range established by the 50-day Exponential Moving Average and the faster 24-day Exponential Moving Average, which is precariously close to crossing below the 50-day and triggering a sell signal. This all follows what now appears to be a double top forming around $47.

    (click to enlarge)Intermune (<a href='' title='InterMune, Inc.'>ITMN</a>) Possible Bearish Top Forming

    What appeared to be a line in the sand by bidders around $45 seems to have been depleted. What is the significance of $45? Nothing. Perhaps the "round number theory". The question is: does one short the stock at this price point or would it be prudent to wait for additional validation?

    Sitting on its 50-day Exponential Moving Average, the timing of the entry would be premature. However, a correction is expected and a more ideal entry point would eliminate some risk. Legging into a short line between $44 and $45, then waiting for a break below $40 to add to the position is a purely quantitative take on this trade.

    Qualitatively, there are other indications the stock is bracing for a correction. Geo-political tensions in not only Ukraine but also Iraq, coupled with the slew of analyst upgrades as the rally loses momentum may not be enough to get Main Street "short", but should certainly be enough to close out remaining long positions.


    At present, the company is printing a market cap of $4.27 Billion and maintains an Enterprise Value of $3.96 Billion. It has no positive earnings, which isn't unusual for bio-pharma companies. In cases where earnings are lacking, we refer to "Price to Sales" and "Price to Book" to come up with some sort of opinion on valuation. In the case of Intermune, the stock is trading at 39 times TTM sales, and 13 times its MRQ book value. If you take Enterprise Value and divide it by TTM EBITDA, you end up with a negative $19.05. In other words, the company's true Enterprise Value after EBITDA is negative $19.

    Variant View

    If the FDA were to come out and "fast track" the drug, it's possible we'll see another upside gap like we saw back in June. This is why I'm not particularly fond of taking short positions in bio-pharmaceutical companies. On the contrary, I'd prefer to wait for a rather meaningful decline in the stock to the mid $20's to begin re-establishing a long line. However, I wouldn't be surprised to see the stock back in the mid to high $30's, where it would more closely reflect the company's Enterprise Value and hence, justify legging into a short position, although rather cautiously, with tight stop-losses in trail. The medium term assessment here is to follow a correction and reverse back to a long position around $30-$35.

    Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Aug 11 1:03 PM | Link | 2 Comments
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