Shares of Small-Cap Star Arrowhead Research Corp. (ARWR) are up sharply on Tuesday, with gains in excess of 15% in early trading. The move comes without any clear news item motivating the gains and could be connected to momentum trading related to a breakout from a double-top pattern with resistance at around $15 a share that developed in early June.
No News is Good News. At Least, in This Case, it Appears to Be.
The story behind Arrowhead’s jump appears to be that there isn’t really a specific story of note. The company reported its Q3 2014 earnings report two weeks ago, including an update on the company’s hepatitis therapy, ARC-520, which appears to be progressing well in its Phase-II clinical trials. But that news already produced a jump that peaked out on August 18 and then retreated.
However, that peak contains some of the explanation of Tuesday’s spike. The gains that followed the update on ARC-520 appeared to butt up against resistance at around the $15 level, notable as that level also appeared to push shares back on June 11, and then, after a retreat and rally, hit $15.32 on June 20th before abruptly pulling back below $15 a share.
As such, the chart pattern starts to distinctly resemble a double-top, and today’s early gains could have sparked momentum buying by those traders thinking Arrowhead finally has the fuel to push past $15 and stay there.
That optimism may be related to the fact that, on Friday of last week, Arrowhead’s 20-day SMA crossed its 50-day SMA from below, showing building momentum in the short term that’s red meat to momentum traders.
Arrowhead: No Products Now, but Hepatitis B Treatment has Potential
Hepatitis B affects some 350 million people worldwide, making it the most common liver disease in the world. Acute infection with the hepatitis B virus (HBV) results in an illness that typically improves gradually for infected people, while chronic infection can lead to inflammation and eventually cirrhosis of the liver. The disease is also responsible for 80% of primary liver cancers across the globe.
Arrowhead’s ARC-520 is intended to use RNA-interference to create functional cure, a serum that could be administered to chronic sufferers and kill HBV. It’s believed to be a potentially superior treatment to current options because the new method would hypothetically prevent the reproduction of the virus and any viral proteins, which current treatments don’t prevent.
Arrowhead’s 2014 May be Looking Up
Arrowhead has already seen the best and the worst that this year’s market appears to have offered. Like much of the rest of the biotech industry, it was hot at the start of the year, coasting off of a monster 2013 and riding the sizzling biotech market even high, gaining almost 150% in its stock price from the start of the year to early March.
However, like the rest of the biotech industry, things hit a screeching halt when the markets appeared to tack hard into a risk-off environment in mid-March. As investors shed their high-risk/high-reward plays in anticipation of a downturn, promising biotechs stocks were suddenly just the thing to drop, and Arrowhead was one of them. The company plunged over 60% in just over two months.
Now, as things appear to be evening out and the correction everyone was calling for from 2013’s huge run may have come and gone, shares in Arrowhead appear to be settling back in. The gains for the stock YTD have pushed past 40% with Tuesday’s big gains.
The company’s addition in the Small-Cap Stars could be a solid indication of why Arrowhead appears to be among those small-cap biotechs bouncing back mid-year. While market-wide bubbles and corrections tend to sweep up everything in their paths, fair or not, when the dust settles it’s the strongest contenders that pick themselves up and forge ahead.
In the case of Arrowhead, the company was highlighted by the Small-Cap Stars system because of its high enterprise value, low revenue in 20131, high value-line beta, and low effective tax rate. While the science behind ARC-520 is still under review, and there’s really no way of knowing what sort of results the clinical trial might produce, but a company with a strong underpinning is better suited to take advantage of a hot new treatment should one come its way.
And for Arrowhead, the near future could very well be bright. It’s certainly hard to say as the last time the stock tested this territory it did pull back soon after. However, if enough traders view crossing the $15 mark with the 20-day SMA crossing the 50-day SMA from below as a sign that the current resistance level is kaput, shares could be in for a sustained run. Something bolstered even further by a support level just above $10 that appears to be there should shares fall again.
1This is clearly a little counterintuitive at first blush, but it does make sense. For small-cap health care companies, those poised for big gains are usually companies developing big products for the future. As such, the best candidates are usually focused on R&D, not sales. Any company already cashing in on a successful treatment likely already has a share price that reflects their strong product portfolio.
Or, put more simply, if the company had lots of revenue last year, you’ve probably already missed the boat.
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