Conatus Pharmaceuticals (CNAT) closed Wednesday up 56%
$6.05 on Tuesday
$9.48 on Wednesday
56%. In a single session.
With no news from Conatus this week and no groundbreaking events anticipated in the next few weeks, what made this small biotech company move in such a big way? Two things:
A small float – shares freely available for investors to buy and sell on the open market.
A meaningful short interest – investors who’ve borrowed shares, sold them at high prices, and expect to buy them back at lower prices.
Why a small float and high short interest matter – and why they can precede a big stock move.
Conatus Pharmaceuticals develops treatments for liver disease, a compelling target and a compelling asset in the pan-caspase inhibitor, emricasan, once owned by Pfizer, Inc. (PFE). But that’s neither here nor there as far as traders were concerned.
Conatus has just 15,632,000 shares outstanding. Consider that Apple (AAPL), after this week’s 7:1 stock split, has 6.03 billion shares outstanding. Amgen Inc. (AMGN)? Nearly 800 million.
Nearly half of the company’s stock is held by insiders and institutions, meaning that Conatus’ float, shares actually available on a given trading day, is in reality closer to 8 million.
Share price is a product of basic supply and demand economics – low supply in the presence of high demand results in a rapidly increasing price.
Compounding this supply-demand imbalance for CNAT – a high short interest, the amount of stock that has been borrowed then sold, with the intent to re-purchase at lower prices. As of May 30, 1,665,307 CNAT shares had been sold short, around 20%of the float. When a stock begins to rapidly rise, short-sellers may need to cover (or buy back) the shares they’ve sold short. This is a typical short squeeze.
Conatus’ low float combined with short-sellers covering into the rally to avoid paying even higher prices was a recipe for rapid appreciation.
PropThink recommended Conatus (CNAT) to our Premium readers on Wednesdaymorning before the open – you can read the column here – based on the company’s fundamentals: a quality cash position, an attractive pharmaceutical asset in emricasan, and what we considered a low valuation. That was enough to get the stock moving, and PropThink Premium members who took advantage of the alert saw their position climb nearly 60% within 8 hours.
That’s a pretty sweet return.
PropThink specializes in identifying quality emerging-growth healthcare companies. Understanding the capital structure at Conatus’, which was set up for a robust rally, was just a small facet of the thesis.
