Tuesday, July 3, 2012

STEM: Speculating on stem cells

I'm continuing my week of the weird, in honor of the trading week being split by a Wednesday holiday, by looking at another very low priced stock that is drawing analytical interest.

StemCells Inc. (STEM) is a biotech development company searching for ways to commercialize stem cell therapeutics.

Stem cell treatments are on the cutting edge of medicine and carry the promise of providing cures for and mitigation of a wide range of serious diseases. They are also a political hot potato because of ethical objects to the use of stem cells derived from embryos.

There has been recent research suggesting the adult stem cells will also work for some tasks, but the conventional wisdom about stem cells is that those from embryos are more flexible and offer a greater degree of success.

That's a long way of saying that the Newark, California company not only faces financial, market and research risks, but political risks as well. It is a very speculative play.

STEM rose 53% in three days last month on news of an interim research success. It has since then marked time in an eight-trading-day sideways move ranging from 78 cents to 85 cents. The upward thrust ended a decline from $1.08 on April 2 down to a low of 59 cents on June 4.

This quantum leap pattern has marked the company's entire existence. What I would be buying in STEM is the hope of big money in one of those leaps to the upside.

If STEM had options, I would consider the sort of spread that makes money if the stock moves, and loses if it stays put. But STEM has no options, and so my only choice is to buy the shares or not.

StemCells drew my attention because it actually has a brokerage following it, unusual for a micro-cap stock, and that analyst gives it a strong buy rating. It used to have two brokerages, one saying strong buy and the other strong sell, but the negative brokerage dropped coverage a month ago.

Also, a major aggregator of stock ratings has newly designated STEM as a top buy. So there's something going on with STEM that's drawing attention. Since I don't understand the research, I can only hope that the analysts know what they are talking about.

Ironically, although many religious people dislike stem cell research, STEM is pretty much a faith-based trade.

The financials are laughable.

StemCells has a negative return on equity, amounting to 234%. It's a development company, not yet on the market, so I wouldn't expect there to be any return. Long-term debt is frankly less than I would expect, amounting to 24% of equity.

The company has never earned a profit in the last 11 quarters. However, eight of those deeply losing quarter has produced an upside surprise, much like finding a lotus blossom blooming in the mud and muck.

Institutions own 7% of shares, and the price is such that it takes $12.64 in shares to control a dollar in sales.

The price, at 83 cents, is at the top of the five-day fair-price range, which encompasses 68.2% of trades surrounding the most traded price, 82 cents. The range runs from 80 cents to 83 cents.

STEM on average trades 291,000 shares a day. Of course, penny stocks are so cheap that trades tend to involve a lot of shares, just to make the trade worthwhile.

So with penny stocks, I adjust the average volume to what it might be were the stock priced in the normal range, say $20 and up.

I divide the price into $20 -- the low end of "normal" pricing -- to get how many penny stock shares it takes to equal one normal priced shares, and then divide the result into the volume, to get a normal-priced volume equivalent. In the case of STEM, it works out to about 12,000 shares a day.

StemCells next publishes earnings on July 23.

Decision for my account: I'm not going to trade this stock now, although it's an intriguing piece of speculation, just because of the stem-cell story.

Over the last five days the effective ceiling has been 84 cents, with two breaks above that level. A persistent break above 84 cents would be a signal that an uptrend was beginning. But given the quantum leap nature of STEM's price moves, I wouldn't quibble over a penny or two. I would buy it at the current price and wait for the big jump, or the big fall, if it came to that.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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