Elite Pharmaceuticals - Pride comes before a fall....

I haven't been shy about sharing my successes here at Avoid The Bag, so its only fair if I also share my failures, and Elite Pharmaceuticals was a big failure.  

I did a blog posting about Elite last month on June 19th, basically saying that while I didn't view it as a good long term investment, that I could see it providing potential for a profitable short term trade.   And it might have, had I been willing to sell for 38 cents when it got to that level briefly, instead of at 21 cents.  

Elite Pharmaceuticals - Is the herd about to storm in? (ELTP)

Greed kills.  

Given my opinion on Hype, News and Promotion...what I call the "Unholy Trinity" of the markets, I should have avoided it all together.  All three were right there, and I knew they were there. My rationale, explained in that original blog posting, was simple.  I figured there was a good chance that a storm of buying would come in to push the PPS higher which would allow me to sell for a profit. And it did, but I got greedy and then it was hit with bad news (an FDA Complete Response Letter) and tanked.

I lost a few hundred dollars, but I wasn't going to hold on, or average down, not given my overall opinion of the company.    Fifteen or twenty years ago that's likely what I would have done, but no more.

Often you'll see disclaimers used by outfits touting penny stocks that say, "investors should be prepared to lose some or all of their investment".  Those disclaimers are there for a reason.   I lost some, but not all of my "investment", as it says in the subject line, pride comes before a fall.  

With over 700 million shares issued and outstanding I don't doubt that ELTP has attracted some short selling, and the recent bounce after the FDA news, in my opinion that was likely the result of some bears covering off and taking profits.  I also think they could reload and short it down even more.

Ninety nine percent of the time I view OTC penny stocks as only being suitable as trading vehicles, not as long term "buy and hold" investments.  I'm not saying I won't perhaps try again to catch some momentum on a hyped up penny, but if I do then I will endeavour to sell too soon as is my usual habit.

For the larger part though I will spend my energies trying to find the ones that are quiet with thin volumes.  They're harder to find of course, because they're not screaming for investor attention, but I like the ones that play hard to get.  

Elite Pharmaceuticals - Is the herd about to storm in? (ELTP)

How do you find out about potential investments?  There are somewhere around 20,000 companies that trade on various exchanges and OTC in the United States. That's an awful lot of DD to preform if one wanted to research all of them.  If you examined 10 each and every day for a year you'd hardly put a dent in the pile.

That's why stock promotion and investor relations type services are everywhere.  There's a lot of competition out there for companies trying to attract investors.  And for companies that use their shares as capital to keep the lights on and pay salaries, it can be a matter of survival.  

Elite Pharmaceuticals popped onto my radar in a curious way.  I use Google as my primary source for news.  When I click on my news feed I get links to stories divided into several different categories: Top Stories, World, Business, Sports, Entertainment etc.  There's one category that I really like, its called "Suggested for you".  I assume Google puts news stories here based on my search history.  I've done a lot of searches lately including the keyword SEC, so I'll often see stories that are about the Securities Exchange Commission.  I also like listening to Willie Nelson on You Tube so I'll get links to stories about the last surviving King of outlaw country.  

I've also done a number of recent searches that include the term "OTCBB", and today there was a story included in that "Suggested for you" section about Elite Pharmaceuticals entitled:  Record Sales Spark Elite Pharmaceuticals (OTCBB:ELTP).  

The linked story takes me to a site called MicroCapDaily and it provides a very bullish write up of Elite, citing a 150% increase in revenues right off the bat.  Its a well written piece and very positive in tone.  You can read the entire story by clicking the link above but I will include this little snippet at the very end.  

• Currently trading at a $246 million market valuation ELTP does have $11 million in the treasury, manageable debt and fast growing revenues reporting $12.5 million in sales for fiscal 2016 up 150% from last year. ELTP has fast become an Investors favorite; the Company is fully-funded moving forward, has nineteen FDA approved drugs to be manufactured, approximately eighteen more in the pipeline in various stages with numerous partners, and just announced they successfully completed the studies for opioid SequestOx(TM) and in January submitted their first NDA. We will be updating on ELTP when more details emerge so make sure you are subscribed to Microcapdaily so you know what’s going on with ELTP.

Am I sold on ELTP as a long term investment?  Uhm.....no, anything but.  After perusing their most recent 10K, for the long term I'll definitely take a pass.  With over 726 million shares outstanding, an accumulated deficit of over $140 million and having reported losses every year from 1990 forward, I don't see this as a buy and hold play.  That is my opinion, others of course can disagree.

But just because I'm not sold on ELTP as a long term investment vehicle, that doesn't mean it might not be suitable for a short term trade.  

Why?

I am certain there are a lot of other people in the world who use Google as a source for news in the same manner that I do.  And I'm equally certain that there are other people who have done searches which included "OTCBB".  I think its highly probable that this "news story" about Record Sales for Elite, that it could be popping up on a lot of news feeds.  Even though there are over 700 million shares outstanding, at about 35 cents per share an investment of just $5,000 equals about 14,200 shares.  

If the dotcom bubble taught us nothing else, it showed that fundamentals are ultimately meaningless. All that really matters is supply and demand.  And with this MicroCapDaily story I definitely see the potential for a significant level of buy side interest to pour into ELTP.

I'm viewing this as, potentially, a prime Greater Fool type play.  Despite what I view as incredibly poor fundamentals, I see the possibility for a lot of fools to come storming into this stock starting Monday, and I might just be one of them.  The thinking is that if the PPS starts climbing, that even Greater fools will show up and be willing to pay even more providing the possibility of a profitable short term trade.  

I will have to see how my day is shaping up tomorrow, I might just be jumping on this one, but not for the long term.  With a stock like ELTP I don't want to be in a situation where I'm unable to watch it for any extended period of time.  With a penny stock like this I'd be afraid of going to mow the lawns only to come back to find the PPS down big.