Monday, 13 February 2017

CBIO: The Next Reverse Split-Fueled Runner Like KBSF?


If you don't know the KBIO story click here to see how a short caught in a squeeze destroyed his account and had to go e-begging.

Before we get into this report, we encourage you to follow our blog by clicking on the follow button at the top of the left hand panel if you like our stuff and want to be alerted on our next picks as soon as possible. At the time of this writing we have 121 followers. This has grown from 83 since we first picked KBS Fashion Group Limited (KBSF) on Thursday, an indicator of the success of the pick. This pick is for free and it only takes a few minutes to read. If you are interested in subscription services we have links to a few at the bottom of this report. Look at our 2016 year in review to see that the bulk of out picks made our readers money last year. We still hold a substantial portion of KBSF shares even as is surpasses its cash per share value today. It's still trading at about a 50% discount to working capital.

Catalyst Biosciences (CBIO) just went through a 1-for-15 reverse split, reducing its shares outstanding to a mere 868,000. Based on the action of KBSF as well as many other companies like DryShips Inc. (DRYS), EnteroMedics Inc. (ETRM), Signal Genetics, Inc. (SGNL), Interpace Diagnostics Group, Inc. (IDXG), Real Goods Solar, Inc. (RGSE), Globus Maritime Limited (GLBS) and SAExploration Holdings, Inc. (SAEX), we think CBIO has a good chance to spike hard. A lot of haters out there called our reports on KBSF a pump. We are not pumpers and will call it like it is. We raved on KBSF because there was a lot of fundamental value to rave about. In contrast, CBIO is a typical Phase 1 biotech and it will do what all Phase 1 biotechs do - have a cool story, burn through a lot of cash, and hope to have a story that's good enough to navigate through the FDA process and/or get a partnership deal or buyout before the money tap runs dry.

CBIO focuses on the treatment of hemophilia, for which there is no cure, but for the purpose of this trade this is not too important. For those who are interested in the merits of CBIO's drug pipeline we suggest that you browse through company presentations or relevant papers in medical journals. As with any other early stage biotech there could be news that lifts the stock at any given time. Whether CBIO will time news to the reverse split remains to be seen. Here is a summary of the similarities and differences between CBIO and KBSF:

Similarity: Both CBIO and KBSF traded at a substantial discount to cash at the time of our reports.
Disadvantage: Unlike KBSF, CBIO is cash flow negative so it's burning through its substantial cash balance.
Advantages: CBIO's float is smaller and it has higher short interest than KBSF, making it susceptible to even wilder swings.

Let's start off by looking at CBIO's balance sheet from the Q3 SEC filing:

Total cash and equivalents is $49.2 million as of September 30th. Subtract the $32 million in liabilities and net cash is $17.2 million, or $19.82 per share. There are convertible notes on the balance sheet but those are not toxic in nature so we don't have to worry about death spiral dilution like RGSE or GBSN. Net loss for the first nine months of the year was $13.2 million, or $4.4 million per quarter on average. Continuing that burn rate for another 1.5 quarters would leave CBIO with $10.6 million in cash to this point of time in mid-February. If our estimate is accurate that means cash per share is $12.21. If the company was to dissolve operations today, shareholders would get paid out that much in cash, less any restructuring and lease buyout fees plus any money CBIO would get for selling the company's intellectual property. So there is some inherent value in CBIO. It's just that there is a risk of financing at some point in the future if it maintains status quo.

While CBIO lacks the strong fundamental case for a huge spike like KBSF, it does offer advantages on the float and trading side of things. First, it has only 868,000 shares outstanding, about half of KBSF. Institutional and insider ownership combine to own over 50% of the shares, so the tradable float will be less than half of that. Short interest was 214K on January 31st, or the equivalent of 14.3K now adjusting for the split. Not a lot, but a higher short interest than what KBSF had going into its split. So it could be part of a short squeeze along with anyone else who shorts the stock at a bad price.

What we think will happen to CBIO

Here is our prediction on CBIO. We think that the spike in KBSF which helped us gain many more followers as well as increase the market's sensitivity and interest to these extreme low-floaters will cause an original buying frenzy on the stock. It will then capture the attention of the Twitter and chat room daytraders, who will add to the buying pressure by recommending it to their followers. The dumb first-mover shorts will then pile in early, adding fuel to a short squeeze and next thing you know the early entrants into the trade have a nice profit. Our CBIO position is much smaller than our KBSF one, and we expect to be selling for less percentage profits. Our take profit process will be the same, to scale out with many small sell orders at different price levels. Make sure to pay close attention to the date at the top of this article and time stamp (PST) at the bottom so you know who called CBIO first. 

If you are interested in penny stock picks, check out Microcap Millionaires.

If you're interested in trading options, both, calls and puts on some large cap stocks, check out

Learn to trade stocks, options, commodities and forex Profitably with Trader Review.

If you are interested in dividend stocks and return analysis, Then or Dividend Stocks Rock are for you.

If you're interested in gold, this WSW special report or the Ocean Of Gold Report are for you.

No comments:

Post a Comment