Since closing at a high of 7.48/share on 1/16/14, Galena Biopharma (NASDAQ:GALE) has seen some dramatic moves lower, the most recent of which occurred 2/12/14 when the stock shed over 16% to close at 4.34, which is nearly 42% lower than its January 16th high. For those new to the stock, several of these large moves lower have been the result of articles written by Adam Feuerstein (NYSE:AF) of TheStreet, which, among other things, criticized the company's Abstral promotional campaign, and the company's decision to solicit a marketing company that may have written two Seeking Alpha articles posing as two different authors.
AF is a self-proclaimed GALE bear, so it isn't surprising to find him writing articles that support his position. His two most recent articles, Galena, Free Fentanyl Samples and the 'Zombie Apocalypse' (2/3/14) and Galena Biopharma Pays for Stock-Touting Campaign While Insiders Cash Out Millions (2/12/14) certainly made an impact with GALE shareholders as the stock shed 20% and 16.9% respectively on the days the articles hit the web. In the interest of full disclosure, I think it's important to point out that AF's boss, Jim Cramer, recommended taking some GALE gains off the table in the middle of January. One should consider that AF's articles, among other things, may be an attempt to drive the share price lower to make his boss look good.
I find the first article, Galena, Free Fentanyl Samples and the 'Zombie Apocalypse', to be quite irresponsible, devoid of any facts about the company or its products, and nothing more than an attack on GALE. Abstral is an FDA approved drug, has been prescribed in Europe for years, and has helped numerous cancer patients control the debilitating pain associated with their disease. I find it shocking that AF, as controversial as he sometimes is, would stoop so low as to quote a blogger who viewed an advertisement for Abstral, which depicts a cancer patient and their child, and said it showed a, "…new-age style woman completely blissed out…". Each time I read that I come away incredibly offended.
The second article, Galena Biopharma Pays for Stock-Touting Campaign While Insiders Cash Out Millions, attempts to implicate GALE in a stock promotion/insider trading scandal. Here are the bullet points from the article:
· Two articles touting GALE were removed from Seeking Alpha because they were written by the same person.
· AF indicates this is, "serious and potentially damaging because of evidence linking Galena to a stock-promotions firm which wrote and published the articles on Seeking Alpha." He does not provide the evidence anywhere in the article.
· In July of 23013 GALE paid a company, DreamTeam Group, for 240 days of, "advertising, branding, marketing, investor relations and social media services"
· "…Galena insiders have made millions of dollars by selling company stock…"
· "Seeking Alpha was unable to determine if the author was paid by DreamTeam Group to write the two articles on Galena."
For the months of July 2013 through October 2013 (4 months) the stock price hardly fluctuated, hovering around $2/share. In November GALE realized a substantial increase in the volume of shares traded, and the stock shot up to $4 by the end of the month. The November move can be attributed to the 11/6/13 earnings release and the excitement generated by the unexpected pre-launch success of Abstral. The December and early January moves were, in my opinion, carry-over euphoria from the November earnings release, excitement about the analyst's coverage that was initiated on the stock, and the 13-F filings that showed institutional investors had increased their position in GALE. Insinuating the stocks move from October to mid-January, which added roughly $500M to the company's market cap, was the result of a $50,000 contract with a marketing firm, and a few Seeking Alpha articles, is irrational. That being said, the recent insider trades are concerning, and I would like to see the company put out a statement soon to address the issue.
Looking ahead to the March earnings call, I think there are some interesting short term trades that can take advantage of the mass selling that has recently occurred, coupled with my expectation that the company will report a substantial beat on both EPS and revenue. If you're not sold on the long term potential of GALE you can still trade the stock based on upcoming short term catalysts. Please be advised that trading options is not for the faint of heart, and individuals should understand the risk associated with options trading before executing any trades.
Trade Idea #1
This trade is conservative approach to take advantage of a potential stock rise following the 2013 Q4 earnings call scheduled to take place in March, but gain some downside protection in case of an earnings miss. The consensus revenue estimate for 2013 Q4 is 1.6M. Here's the trade, and for the sake of simplicity, these calculations do not factor in the cost of broker fees.
1) Purchase 100 shares of GALE (trading at $4.40/share at the time this was written)
2) Sell 1 April 19, 2014 call with a strike price of $4.50/share (selling a call means you, the seller, are giving the buyer of the call the right to buy those shares from you at a price of $4.50/share)
* Keep in mind that 1 options contract equals 100 shares
Purchasing 100 shares at $4.40/share will cost $440. The April 19, 2014 $4.50 call is trading at $0.70/contract at the time this was written, so selling 1 contract would net you $70.
If, on April 19th the stock closes at $5.00/share;
Your 100 shares are called away from you for $4.50/share, for a gain of $10. You keep the premium that was paid to you for the call contract you sold ($70), for a net gain of $80, or 18%.
If, on April 19th, the stock closes at $4.00/share;
Your 100 shares are not called away from you, and are worth $400. You keep the premium that was paid to you for the call contract you sold ($70). If you sell your shares, you realize a loss of $40, so your net gain is $70 - $40 = $30, or 6.8%.
To lose money on this trade, the stock price would have to drop below $3.70/share, but your upside is capped at 18%, which means you could miss out on a big move up.
Trade Idea #2
This trade involves positioning yourself around the 2013 Q4 earnings call scheduled to take place in March, and the 2014 Q1 earnings call expected to take place in May. The consensus revenue estimates for those quarters are 1.6M and 2.3M respectively. I expect a big beat on the 2013 Q4 estimate of 1.6M, and the stock to rise significantly from its current levels as a result. Here's the trade, and for the sake of simplicity, these calculations do not factor in the cost of broker fees.
1) Sell a GALE July 19, 2014 put contract with a strike price of $3.50 (selling a put obligates you to buy shares at the strike price. The obligation to buy occurs if the stock price is below the strike price at expiration)
2) Buy a GALE April 19, 2014 call contract with a strike price of $2.50 (buying a call gives you, the buyer, the right to buy shares of stock at the strike price. The buyer is not obligated to buy the shares)
* Keep in mind that 1 options contract equals 100 shares
GALE is trading at $4.40/share at the time this article is being written. The July 2014 $3.50 put is currently going for $0.90/contract, while the April 2014 $2.50 call is currently going for $2.00/contract.
Selling the put nets you $90, while buying the call costs you $200, for a net cost of $110.
Let's assume that on April 19th the stock closes at $5.50/share. The call you purchased would be worth $3.00/contract, while the price of the July put would be less than the $0.90 you sold it for; let's say $0.80/contract to be conservative.
If you close your positions you net $300 for selling the call, and pay $80 to close your put, for a gain of $220. Subtract out the cost of the trade ($110) and you've got a net gain of $110, or 100%. Conversely, if you'd taken your $110 initial investment and instead bought shares of GALE (25 shares at $4.40/share) the move to $5.50 would have netted you $27.50, or 25%.
Now let's assume that on April 19th the stock closes at $2.00/share. The call you purchased would be worthless, while the price of the July put would be more than the $0.90 you sold it for; let's say $2.25/contract.
If you close your position in the July put it will cost you $225. Your loss on the trade would be $225 - $90 + $200 = $335. As you can see, there is more risk involved in this trade.
There are many ways to position oneself to take advantage of the potentially good news that will come out of the upcoming earnings call in March, these are just a few ideas that can give you exposure. Given the recent bearish trend on this stock, it might be worth it to wait until we get closer to the earnings announcement in March to take any actions. Whether a bull or a bear, I wish you successful trading.
Disclosure: I am long GALE.