Monday, December 29, 2014

A Speculative Biotech Catalyst Trade: ORMP

DELAFIELD, Wis. (Stockpickr) -- The recent selloff in the biotech sector hasn't left much behind. Type just about any biotech ticker into your screens and you'll likely get back an ugly chart. The bears have done damage to a hot sector that's often driven by momentum players -- which should be of no surprise to seasoned traders. Momentum cuts both ways on Wall Street. It's not just a bull's playground.

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The recent pummeling of the biotech sector has some people on Wall Street claiming that the entire complex is in a bubble, and there is absolutely some truth to that. The iShares Nasdaq Biotechnology Index ETF (IBB) soared from $83.50 a share in mid-2011 to its 2014 high of $275.40 a share. That's an incredible run, and there's no doubt in my mind that the biotech sector entered the frothy stage. As we all know, on Wall Street, bulls make money, bear make money, but pigs get slaughtered.

That being said, the sector could be setting up for a tradable bounce soon, and many of the beaten-down names will rebound sharply to the upside. Remember, the smart short-sellers don't stay in the game long without taking profits -- and when they come in to cover their short positions, many of these beaten-down stocks will get squeezed higher as the bulls take back control, at least temporarily.

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With this in mind, it's time to start identifying some of these beaten-down biotech stocks that could be ripe for big rebounds.

One small-cap biotech stock that's been beaten down and pushed into extremely oversold territory is Israeli-based Oramed Pharmaceuticals (ORMP), a development-stage pharmaceutical company that's engaged in the research and development of pharmaceutical solutions for the use of orally ingestible capsules of pills for delivery of polypeptides. The company's product portfolio includes ORMD-0801, an oral insulin capsule that is in phase IIa clinical trials for the treatment of diabetes; and ORMD-0901, an analog for GLP-1 gastrointestinal hormone, which is in pre-clinical trials.

Oramed Pharmaceuticals has a market cap of $108 million and an enterprise value of $93 million. This company currently has $7.79 million of cash on its balance sheet and around $47,000 of debt. This is a highly speculative biotech stock that has about 11 employees, no approved product on the market and zero revenue. If you're a fundamental investor, then this stock is probably not for you. However, if you're a trader like me, then this could be the perfect stock to play in the near-term for a variety of reasons.

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The first reason I am bringing this name to you is because Oramed Pharmaceuticals is insanely beaten-down at its current price of just above $11 a share, down 27% so far in 2014. To get the true picture of how far this stock has dropped, though, look at its chart: ORMP hit a high in January of $31.73 a share and crashed to a March 24 low of of $9.64 share. Anyone who held this stock all the way down from those highs truly knows the meaning of oversold. Yes, oversold can always get more oversold, and obviously a stock doesn't crash that badly for no reason at all. That being said, ORMP did not go down on Thursday as the market slid lower, and it's held up relatively well the last few trading sessions while the market has been in turmoil.

The second reason that Oramed Pharmaceuticals looks interesting here from a trading perspective is because this company has a major catalyst on the horizon. It will be presenting detailed results from its recently completed phase IIa FDA trial on ORMD-0801 at the 2014 Diabetes Summit taking place April 23 to April 25 in Boston. I have no idea if the results will be good, but what I can easily foresee is the stock running up into that event off its extremely oversold condition.

The third reason I like ORMP here from a trading perspective is because the stock is heavily shorted. The current short interest as a percentage of the float from ORMP is pretty high at 11.6%. According to the most recent data, ORMP has a tradable float of 7.63 million shares and 886,000 of those shares are sold short by the bears. This is the type of situation that's begging for a squeeze since we have a significant catalyst that's less than a month away.

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The final reason I like ORMP from a trading standpoint here is because a major shareholder just bought 75,000 shares, or above $796,000 worth of stock, at $10.62 per share. This same beneficial owner, Regals Capital Management, also bought 51,000 shares, or about $800,000 worth of stock, at $14.96 per share in early February. A major holder of ORMP shares is in the market buying stock right now -- that should be enough to make any trader take notice.

All things considered, this is a situation that could produce a monster short squeeze as the catalyst for ORMP gets closer. Remember, this is a trading opportunity I am highlighting here -- nothing more and nothing less -- but it's an opportunity that I think could potentially bank big dollars if ORMP can start to trend in the right direction and soon.

From a technical perspective, this stock has started to find support right around its intraday low from its previous gap-up-day zone from last December that took the stock from $6.83 to almost $14 a share. Shares of ORMP are bouncing sideways here right above the 200-day moving average, and the stock is starting to trend within range of triggering a major breakout trade. That trade will hit if ORMP manages to take out some near-term overhead resistance levels at $11.80 to $12 a share and then $12.50 a share with high volume Look for volume on that move that hits near or above its three-month average action of 734,136 shares.

Traders can look to buy ORMP off weakness as long as it's trending above its 200-day moving average at $10.25 or above its recent low of $9.64, or look to buy it off strength once it clears those breakout levels with strong volume. Keep in mind that I would want nothing to do with this stock from the long side if it broke below $9.64 with volume, since then the risk would be that ORMP could fill the gap that started at $6.83 last December.

If this stock does break out soon, then it could easily squeeze big and tag $14 to $15 a share or even $16 to $18 a share. The upper end of these targets would not be hard to hit, considering how oversold and heavily shorted ORMP is, so keep this name on your trading radar.

-- Written by Roberto Pedone in Delafield, Wis.


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At the time of publication, author had no positions in stocks mentioned.

Roberto Pedone, based out of Delafield, Wis., is an independent trader who focuses on technical analysis for small- and large-cap stocks, options, futures, commodities and currencies. Roberto studied international business at the Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany. His work has appeared on financial outlets including and You can follow Pedone on Twitter at or @zerosum24.

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