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One, Two, Three Quiet Little Biotechs

|Includes: CDMO, Precipio, Inc. (PRPO), RVXCF, ZIOP

Before I name any specific stocks I want to start off by explaining my view on the nuts and bolts of investing and/or trading. By my reckoning it is essential to understand how the market machine operates if one is going to put money at risk in the heavy duty machinery that is the public markets.

Firstly I will divide publicly traded companies into two very broad groups. In the first group are those companies that actually make money, that have positive earnings, and some in this group will even pay their shareholders for owning their stock in the form of dividends. The second group, obviously, includes those companies that must use brackets when reporting their earnings and profits, because they don't have any.

The public markets in North America have thousands in each category to choose from. So why would anyone chose to risk money in the second group? The answer is simple enough, potential.

If a company is already turning a profit, then the prospects for exponential growth in the share price are much less, as compared to a speculative company that may become profitable down the road.

In fact, with money losing speculative stocks, there are often huge gains made even by companies that never earn a single penny in positive earnings.

So how does this happen? How do companies with no revenue, that are burning cash. How do they take off and double, triple and more?

That brings me to my next point. I have identified two very broad types of investments, those earning profits and those that use brackets for their earnings because they have none. Now comes the market players buying and selling these stocks, and these players I divide into, not two, but three broad categories.

The first group are the Market Maker Broker Dealers, which henceforth I will refer to as MMs. They aren't all the same, some deal mostly in penny stocks, others stick to the bigger boards. But essentially they all provide the same function, they provide liquidity to the market. They will quote a bid and ask on a stock, even if they're neither long or short.

The most important thing to realize about MMs in my (not always so humble) opinion is that they are not in business to lose money. If they get hit with a buy order for a stock they don't have a position in, many times they will still fill the order regardless. Why? They don't want to be labeled as a "non-performer". The markets are about money certainly, but they're also about speed. If a broker ABC sends orders to MM XYZ and XYZ repeatedly passes on filling it, then ABC is going to stop sending them orders. The difficulty for MMs is they can end up long on a stock that they'll need to sell, or short on a stock that suddenly shot up.

What is an MM to do? Simple, get a little help from your friends. The US Department of Justice actually investigated and discovered a practice used by MMs called "Moves on Request". Basically when an MM is, (for example) caught short on a stock, he'll simply notify his fellow MMs and ask them to move their bids/asks down. Why would the others comply? Because its a quid pro quo situation (you scratch my back I'll scratch your's). The other MMs know they will eventually be in a bind, where they will need the favor returned. And the same applies when a Market Maker has shares he needs to move, in which case he asks his MM brethren to move their bids/asks higher:

Here's an article explaining it in more detail:

www.justice.gov/atr/case-document/competitive-impact-statement-9 (See section VII or hit Ctrl+F and search 'move on request').

Enough about MMs, onto the second group. These are what I'll call Industry Hacks, or IH for short. This is a very large group that includes all those who aren't MMs but who make their living in the public markets. Everyone from Hedge Fund employees to Analysts and even company insiders, especially when their compensation is at least partly affected by their company's share price. It also includes boiler room type outfits that hype stocks via websites or through email blasts, often these sites use anonymous hosts like godaddy and the like.

And the third group? Me...and those like me. The herd, the great unwashed, the bleacher bums. The first two groups represent a multi-billion dollar industry....and its "Joe Retail" who is the mark.

The deck is stacked against us retail players my friends, the entire machinery of the markets is designed to chew us up and spit us out...or at least our money. Its a zero sum game, some people end up with shares and others end up with cash. If you want 10,000 shares of a stock trading for a buck, then you have to part with $10,000 and the seller gets the cash. If the stock moves to $2 and you sell it, then someone else gets the shares and you get $20,000. But you can't have the $20,000 and keep your shares too, zero sum.

Now...before I get down to brass tacks I really want to drive this point home, the point being that the public markets are a game where retail investors have a bulls eye on their foreheads. You might think, "okay, I get it...but I'm smart, I'll avoid the traps...maybe not all the time but enough". You think so eh?

Years ago 60 Minutes did a profile on a legend in the world of sports betting, Billy Walters. This self described "hillbilly" is so successful at betting on pro sports that he has employees place his bets because some betting houses won't take his wagers, he wins that much. How? Data, data and more data.

So why sports gambling? Why not the stock market? This guy is smart....super smart, so smart he's spied on and bookies will move their lines based on his bets. So why not the stock market? Watch the show, he claims its crooked, full of swindlers.....And I happen to agree with him:

youtu.be/lMa3vkXtWsY (fast forward to about the 12:20 mark if you want to hear his disdain for the crooks on Wall Street)

But why is the market crooked? Remember, its a zero sum game. One party ends up with paper (or the electronic equivalent represented by shares) and the other party gets cash. If you want someone to buy high, whether its Enron, Worldcom, or some hyped up cash burning biotech that's once traded for $1 and is now selling for $10...then you need someone willing to pay the inflated price.

And that is what the market machinery is designed to do....to convince retail investors to buy high what the smart money types (market participants in group #2) are selling.

Still want to play? Yes? I figured as much.

There are so many stocks out there....which ones are good and which ones are bad? And you are here, on a social media site reading about stocks, that makes you an idiot. Do you really think the big winners are being talked about all over social media sites like this one? Maybe they are.....but if there are big winners to be found I would wager there is very little chatter going on, that or they are being trashed by industry hacks posing as market experts.

So what are the one, two, three quiet little biotechs I referenced? Patience, I'm getting there.

First though, in terms of identifying what to look for I think it helps to know what to avoid. Plato is his many discourses often said that to truly understand something, that it was helpful to first understand its opposite. To understand valor one needed to understand and contrast it with cowardice, and the same with virtue and depravity, or just and unjust.

In terms of identifying a stock that should be avoided, in my opinion I can give no better example than Ziopharm Oncology, (NASDAQ:ZIOP). Back in March of last year it was brought to my attention and was being heavily pumped by an outfit that calls itself 'stockreversals', one of those aforementioned shops with an anonymous godaddy website. They even offer a premium service, which they charge for. Imagine not only being a mark and a rube, but paying for the privilege.

I had the audacity to call ZIOP a bubble back in March when it was trading over $13, and the attack dogs wasted no time in launching an all out assault on this pathetic little blog. Check it out here:

seekingalpha.com/instablog/15663412-joe_...

If you read the comments I was a complete moron with poor writing skills and a total lack of understanding vis a vis the science. ZIOP was going to $20, $40, $100 a share.

So what's it worth now? A little over $6, less than half of what it was when I first blogged about it. Did it go straight down? Of course it didn't. Smart money sellers need dumb money retail buyers, and the sheep need to see positive price movement to get them engaged. But as I blogged more recently this past December, there has been selling...Institutions have shed millions of shares in the last two reported quarters, and there's been insider sales as well. Going forward might ZIOP rally? Sure!!! I do think its possible, if there are smart money sellers dumping, then in my view a rally or two or three might very well happen.....but I wouldn't bet on it.

So that's one thing to avoid.....stocks that are being hyped to high heaven, that are the darlings of social media.

Another point is short interest. Short sellers, commonly called bears...they are not stupid. And ZIOP had, and still has, very high short interest. And the shorts haven't been covering, in fact they've been increasing their bets.

So that's two things to look out for, stocks that are being hyped to high heaven and have a high level of short interest.

Is there a third? I will suggest something that runs counter to a lot of common market commentary, and it has to do with volume. Many market watchers will recommend looking for high volume, as it represents liquidity. I think this is valuable for those looking to swing or daytrade, but not when looking for a stock with the potential to double, triple or more.

So these are the three things I look for, a lack of hype and promotion, a low level of short interest, and light volumes.

So what are my one, two, three quiet little biotechs?

I'm almost there. But first I want anyone reading this to understand something. Take everything I write with a grain of salt, and no matter that I made great calls going bear on stocks like MOBI, or ZIOP....or made great long calls with stocks like Regal Lifestyles and Amica Mature Living (both were taken private for large premiums)....I've also had losers like Sandridge and LEDIF.

2015 overall was an awesome year for me, but I am just a retail squirrel looking for nuts....and I know that this market is full of squirrel hunters who have a bead on players like myself.

So here they are, I've already blogged about 2 of them before so I'll start with the new one:

(NASDAQ:TBIO) Transgenomic Inc.

Okay, so what do I like about this stock? Let's look at my three criteria and see how it measures up.

Is this stock a darling of the social media set? On the yahoo boards my ID is krill66, and if you look on the yahoo board for TBIO you'll see its very quiet. As I write this there are just two topics and five total messages for all of January so far, one of them is mine. And prior it was equally quiet. On stocktwits, (where my user ID is growacet) there are typically just a few messages a day, sometimes zero. Contrast that with my example of a hyped up and inflated ZIOP where yahoo has 100s of messages each day and hundreds of tweets a day on stocktwits.

What about my 2nd point, short interest? According to WSJ, up to December 31st 2015 the number of shares sold short for TBIO is a bit over 600,000 or just 5.26% of the float, and it just dropped from the previous month by over 6% from just over 640,000 shares. Remember I view short sellers as smart players, so if they're covering (buying) I see that as a good thing. How does that compare with Ziopharm? WSJ has ZIOP's short interest at over 37.8 million or 32.74% of the float for the same period, an increase of 8.7% from the previous period.

And finally volume. Yahoo finance has TBIO 3 month average daily volume at less than 100,000 while my comparable ZIOP is just shy of 3 million.

So there are the three things I look for. A lack of hype and chatter, low short interest and light trading.

What might whip the herd into a buying frenzy? Obviously there's the potential for investors to get excited about a biotech focused on cancer. But even better in my opinion is the involvement of RJ Kirk, someone followers of ZIOP will need no introduction to. Saint Kirk's ownership of ZIOP had many convinced that stock was a bargain in March even after it shot up from around $2.50 in October of 2014 to nearly $15 in less than 6 months.

Could TBIO do something similar? I don't know for sure, but I do think its possible.

Hey!!! That's only one quiet little biotech??? What are the other two???

Okay, but I've already written two much already, and as I mentioned, I've blogged about the other two before. Both fit my overall criteria, but neither has involvement (unless I've missed it) of RJ Kirk. The other two are (PPHM) and (OTCPK:RVXCF) and while Saint Kirk isn't behind either of them that's not to say they don't have a billionaire in their corners. With these two the billionaire is Kenneth Dart through his investment arm Eastern Capital.

Here's my blog post on them:

seekingalpha.com/instablog/15663412-joe_retail/4195215-my-reasons-for-going-long-on-peregrine-pharmaceuticals

That's it folks. The comment field is open for industry hacks to tell me what an idiot I am for hating ZIOP, same as when it was over $13. I'll be interested to see what is said about TBIO.

DISCLAIMER

This is strictly an opinion piece, and my opinion(s) could very well turn out to be wrong. This instablog post is intended strictly for informational and entertainment purposes and should not be used as a basis for any investment decisions. Verify all information presented, while I have endeavored to ensure accuracy I do not warrant that any or all information presented is without error.

Investing in stocks or options involves significant risks. For investment advice you should seek the input of a professional.

Disclosure: I am/we are long TBIO, RVXCF, PPHM.

Additional disclosure: You can find me in numerous forums where I use the names krill66 (yahoo) growacet (stocktwits) and ledrog (stockhouse).