Tuesday, February 21, 2017

Falling Forty

In an effort to keep you readers engaged while I study for midterms I wanted to post a brief analysis on the two companies that fell greater than 40% today based on finviz.com.

1. [RTK]

     Rentech is a Agricultural Chemicals company specializing in wood processing.  i.e. wood fiber processing, wood chips, and wood pellets, among smaller segments. They fell from $2.75 to $1.44. A grand total of $1.33 which amounts to a 47.64% loss. Looking at this from a technical standpoint, they are in a good position to buy. If you believe in the efficient market hypothesis then you won't agree with me on this. Price $1.44 appears to be a solid support based on what happened in December. Second, with today's mega drop the stocks RSI is approaching the point of oversold. Third and most notably against efficient markets, people tend to overreact to news and send stocks higher or lower based on the momentum of fear or greed. In this case fear. All else aside, the price we see today mimics a price we last saw in December, right before they started a two and a half month rally up 86.67%

     Looking deeper into the fundamentals of the company is where the problem arises. The huge news today that send investors scurrying was a shareholder alerts stating Levi & Korsinsky will be investigating Rentech for fraud. 
On February 21, 2017, Rentech announced that the Company would idle its Wawa facility due to equipment and operational issues that would require additional unbudgeted capital investments. Rentech also cited “continued uncertainty” about the profitability of pellets produced at the facility and advised investors that it was exploring strategic alternatives for both the Wawa facility and the Company as a whole. (Source: SHAREHOLDER ALERT: Levi & Korsinsky, LLP Announces an Investigation Involving the Board of Rentech, Inc.2.) 
     Apparently this law firm has experience involving financial fraud and have given millions of dollars back to shareholders. Basically, Rentech said they would stop work at their Wawa facility due to operational issued and no funding and most likely stop manufacturing the wood pellets because they are irrelevant to the companies bottom line. In the long run, this may not be the stock you throw your savings on, but in the short term it may return a small profit due to the inefficient price.

2. [TRVN]

     Trevana is a biotech company currently working on a drug to take the place of morphine. At least, they were trying to do that. The reason their stock plummeted today down 40.11% or $2.86, was because news came out that their drug, oliceridine, beat the placebo in 2 trials in phase 3, but underperformed to morphine. Only two doses of the Trevana drug were as effective as late stage morphine. Interestingly, one doctor was quoted as saying, "these data are exciting - they confirm earlier data, and show an improved safety and tolerability profile of oliceridine compared to morphine, with very similar results across the two studies" (Source: Trevena Plunges 34% On Painkiller Results (TRVN)). 
    That quote actually plays into what this 40% down thinking is all about. The man quoted, Dr. Timothy Beard, is the chairman of surgery at the Bend Memorial Clinic in Oregon. Though it is only one doctor saying it, others may have the same feeling. If a drug can perform up to par with morphine and is safer and less addictive then fantastic. Morphine helps patients a ton, but it is highly addictive and the patients can develop a dependence for it. I wouldn't go as far as calling it an epidemic, but opiate addiction is a problem in the United States. The drop is this stock looks like people are overreacting and not reading into what is really going on. To back up the inefficiently low prices it is as simple as looking at the volume. On average, shares of Trevana trade about 508 thousand times per day. Today, shares traded 10.5 MILLION times. The sellers definitely over powered the buyers with fearful selling and greedy short selling.  
     Technically this stock looks very cheap as well. It isn't down as low as it was pre-election, but it is close. Not close enough to form any kind of support, but close. After today, the RSI for TRVN dropped below 30 into the oversold category due in large part to the spike in volume. I think the price it sits at now, $4.27, represents a cheap buying point for a company that is in phase 3 of a drug that is nearly keeping pace with morphine in terms of effects. 

     Ultimately irrelevant and in no way a good indicator of what will happen tomorrow, but both stock were positive in the after hours market.

Edit: February 22, 2017 @ 9:15 pm

     So yes. Very irrelevant that the stocks were up in the after hours market because today they plummeted. RTK was down an additional 20.14% as more and more law firms filed suit against this company. It isn't looking good and probably isn't one of those irrational gems. It broke down hard below the support line and kept falling. The RSI is now officially signaling oversold, but duh.

     TRVN fell only 7.49% today. They are inching their way closer to the support line around $3.75. They are currently 20 cents above at $3.95. This one is in a better position than RTK in that law firms aren't looking to sue them. An article actually came out a few hours ago saying that maybe this stock is actually heading in a positive direction. Trevana reports earnings on March 7th and there is talk going around about how positive they can be. This one may be on of those gems, just need to polish off the dirt first.

     Volume for both stocks was well above average yesterday and today.

Edit: March 04, 2017 @ 1:21 pm

     Rentech looks like it finally bottomed after the news of the law firms investigating for fraud. There were many very negative days in a row where it plummeted from $1.75 ish down to around $0.60. To me, it looks like it bottomed. The news was bad, sure, but realistically their assets and the company is worth between $1.50 and $2.00. If the law firms win in court and shareholders are paid out, they have assets worth more than the current stock price. Basically, the company is underpriced right now. For me, this stock is below my margin of safety and may be a solid buy. #SethKlarman   People got scared and institutional investors, the market makers, got nervous. I was on a Bloomberg terminal and they gave RTK and 12.86% chance of going out of business this year. Really not that bad. Also, the RSI indicates it is still oversold and the volume has come back down to near average. 

     Trevana went down two more days after the initial 40% drop. At that point it hit the support line created in early November in the pre election drop and bounced up. The stock has been slowly increasing, up 4.5% this week and returning to normal volume levels. I stick by my original thoughts in that there was an event that didn't warrant a 40% drop in stock price and that is inefficiently under priced right now. 

Edit: Tuesday, June 13th. Nope

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