Contrarian Investing
In terms of the broader overall markets there is a sure fire method if you're looking to lose money. Simply stated all you have to do is read the news and act accordingly. When the news is bad take your money out and wait until things turn around to put your money back in. Sell low and buy back higher in other words.
Over the past few years there has been no shortage of events that have sent shivers down the spine of the equity markets. There's been the Greek bailout, fears over the US defaulting on debt repayments and a government shut down, and of course the very recent vote by Britain to exit the EU.
Fears over these news stories have sent markets tumbling, but they've always rebounded.
Contrarian investors of course do the opposite. When others are taking their money out of the markets based on news driven fear, uncertainty and doubt, (FUD) the contrarian runs against the herd and buys in.
There's a big difference however between the broader markets and individual stocks. While the overall markets have always overcome periods of fear based selling, some companies have not. They say a rising tide lifts all boats, however when bad news hits and the water drops, some companies sink right to the bottom and become ship wrecks.
Its the old risk reward dynamic. Employing a contrarian investment philosophy with vehicles like Mutual Funds and ETFs is much safer than using the same strategy with individual companies. While you can be confident that the overall market will recover from bad news, there are always the Enrons, the WorldComs and the Nortels that fade to black.
But if you get it right with an individual company? The rewards will blow away anything you'll achieve in an ETF or Mutt fund. Apple is the most obvious example given its near extinction back in the 90s, but there are plenty of others like GM and Starbucks.
Galena Biopharma Inc.
So what about Galena? 2016 has certainly been a roller coaster year for this company as reflected in the trading of its shares (Nasdaq GALE).
After closing out 2015 trading in and around $1.50 the share price was cut in half early in 2016 as the the company announced that it was going to zoom its focus in on its cancer immunotherapy pipeline. That drop however started reversing in February and by June shares had climbed over $2 per.
Then the bad news hit. The Independent Data Monitoring Committee (IDMC) conducting an analysis of Galena's Phase III clinical trial for NeuVax™ recommended that the trial be stopped due to futility.
I'm not going to go into detail about the PRESENT clinical trial because I don't have the requisite background and there's plenty of information out there already providing a more in depth look. All I will add is that it appears that the drug arm of the event based trial did not significantly outperform the placebo arm. One aspect that is interesting however is the wording used by the IDMC which is disclosed in the company's 8k of June 27th 2016:
At this time the DMC recommends that the study be stopped for futility unless it is determined that there has been a systematic reversal in the study drug treatments in the two arms, in which case the IDMC should reevaluate the clinical evidence.
The IDMC recommends that this be investigated as quickly as possible and, in the meantime, that this information be disclosed only to any individual(s) with a need to know about the procedures used to clarify the current situation. Finally, the DMC requests that Galena Biopharma inform the IDMC members of the outcome of this investigation and any decision with respect to discontinuation of the clinical trial as soon as possible.
I don't want to read too much into the verbiage used, but it appears to me there is some "wiggle room" and that perhaps PRESENT could be re-started. However I consider that to be a faint hope and something that shareholders might cling onto even though it appears to me as likely unrealistic.
Sometimes companies do bounce back from failure
Besides, there are other ways a company can recover from a so called "black swan" event. Look at Ziopharm, a company some suggest I love to hate.
Back in 2013 Ziopharm had a Phase III trial failure with palifosfamide which sent shares of ZIOP crashing from up around $6 down to less than $2. A short two years later Ziopharm caught fire again and climbed to almost $15 in 2015 as investor excitement about the CAR T space sent shares bubbling with Ziopharm attaining a market cap in excess of $1.5 billion USD.
Those that bought ZIOP in 2013 had the chance to realize gains of 500% or more if they played the contrarian game and bought the bad news of Ziopharm's trial failure. Perhaps those buying Galena around 40 to 50 cents currently will have a chance at similar gains in another year or two.
Was this a dead cat bounce?
All my regular readers (both of them) know that I keep a close eye on short interest. I don't view bears as an enemy however, but rather as a potential canary in the coal mine...so to speak. If short interest is too high I fear the hedgers might know something I don't.
Leading up to this trial stoppage short interest was significant at over 25.6 million shares up to June 30th 2016. The most recent update current to July 15th shows the number down to a little more than 17.6 million, a substantial drop. Obviously the bad news gave shorts a chance to realize some healthy profits and no doubt some decided to turn paper gains into capital gains.
When short sellers cover off on a stock that's just experienced a big drop it can lead to what's often referred to as a 'dead cat bounce'. The bears buy back the shares they borrowed, but they're not buying them because they're bullish, but rather to cash in on winning short investment strategy. While a bull invests in hopes of a company's success, a bear is "investing" in hopes of failure.
Does Galena have the resources to survive?
Science is expensive, tackling diseases like cancer can't be done cheaply. The people employed in this overall space don't work for free, far from it. Sainted figures like Albert Schweitzer and Mother Theresa never worked for public companies
Motley Fool writer Brian Feroldi put out an article detailing the company's financial state on the very day Galena stopped its trial. Linked below:
Why Galena Biopharma Inc. Is Being Obliterated Today
The headline is absolutely brutal, and if it wasn't designed to inflict maximum pain to the collective psyche of shareholders, I have little doubt that was the effect. The article chronicles the current situation as of the date it was written and concludes by saying that its hard to see how the company could ever bounce back.
The article is well written and for the most part factually based, but it also constitutes what I consider to be a hatchet piece, and I express that opinion as someone who currently has no position long or short. And the article is already out of date with conclusions that are questionable in light of more recent developments. Mr. Feroldi was completely wrong on one point, saying:
"With its share price down so much today, the equity markets are no longer a viable source of funds".
The company just raised approximately $11.7 million through a registered direct offering with Raymond James acting as the exclusive placement agent. Combined with existing cash and the $23 million raised via a recent debt offering it looks to me like Galena is going to have no trouble keeping "the doors open" in the near to medium term.
Bottom Line Opinion
I'm not a bull or a bear on Galena at this juncture, but I will continue watching. Almost 80 million shares changed hands on June 29th, the day the bad news hit. Some of that was undoubtedly short covering, but there was also buying going on. Enough that the bounce off that day's low under 30 cents was more than just a dead cat in my opinion.
I will be watching to see if bears continue covering off their winning bets, doing the smart thing and buying back low after selling high.
Disclosure
I currently have no position in GALE either long or short, in the future however I may take out a long position. This is strictly an opinion piece and I have received no compensation whatsoever for the writing of this blog entry. For further disclosure statements please see the very bottom of this site.
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