Just last month, back-to-normal stocks were all the rage. But now that the novel coronavirus has quickly rebounded, traders are flooding back out of travel and retail stocks. Instead, they’re moving back into Covid-19 plays. Sorrento Therapeutics (NASDAQ:SRNE) stock has been a big winner on this.
In fact, Sorrento shares have quadrupled off their 52-week lows and recently hit their highest point since 2018.
Sorrento has emerged as a player in the coronavirus space, as it may have an antibody that can help counter the disease. While shares slipped last month thanks to short sellers questioning the company, Sorrento is on the mend now.
Here’s what’s going on.
An Improved Balance Sheet
Sorrento management’s has adeptly used the surge in its stock to shore up its financial position. In June, Sorrento paid off the entirety of $120 million in term loans. That transaction got rid of the majority of Sorrento’s debt and ensured it has a viable pathway to fully funding its coronavirus research and development costs.
Furthermore, in conjunction with the recent capital raise, Sorrento should build a strong net cash position. In April, the company filed a prospectus to issue as much as $250 million in common stock over the next 36 months. That would have amounted to a crushing share dilution if it issued all the shares at the then-prevailing share price of around $3.
With shares now up to $7, however, the company should be able to raise their $250 million with manageable dilution, leaving the company well-financed for coming years.
Pump and Dump Allegations
Short-selling research firm Hindenburg Research blasted Sorrento in May, accusing the company of engaging in a stock promotion scheme. On the firm’s widely followed Twitter feed, Hindenburg suggested that Sorrento greatly overstated the importance of its Covid antibody candidate. Hindenburg claims to have spoken to a former Sorrento executive who says the data is overhyped.
Later, as Sorrento’s CEO clarified his remarks, Hindenburg fired back: “The $SRNE CEO walked back his comments about having a cure moments ago. We believe this amounts to flagrant securities fraud when compared to his statements to Fox last week. We encourage regulators to investigate any stock sales in the interim.”
Sorrento’s founder and CEO Henry Ji was surprisingly level-headed in responding. He acknowledged that many investors might suspect Sorrento of being a pump and dump operation given its small size, huge stock price run-up, and the claims to have a potential antibody for Covid-19. However, he said that Sorrento is different from many other Covid-19 stocks. In an interview with Yahoo Finance, Ji said that:
“So what we are focusing on instead of watching the stock going up or going down, we are focusing on making sure we have the real deal. So you have the antibody that can prevent the virus from infecting healthy cells. That means you will have a real product. If you have a real product, eventually the stock will be reflecting the assets you have.”
Sorrento: A Healthier Track Record
I’m on the record here as being skeptical of Inovio’s (NASDAQ:INO) potential vaccine, and Co-Diagnostics’ (NASDAQ:CODX) Covid testing kits. In both cases, the companies in question have little history of generating meaningful revenues or profits. It’s always worth being skeptical when a company emerges out of nowhere claiming to have a solution to a massive societal problem.
In the case of Sorrento, however, the company has had more prior success.
Also, notably, a private equity fund attempted to acquire Sorrento outright in January. The private equity shop was offering $7 per share for Sorrento, which seemed like a generous offer prior to the virus outbreak.
While that deal wasn’t consummated, it gives some sense of what a potential suitor might value the company at. Then, throw in a premium for any potential upside from the Covid-19 product, and there’s an intriguing bull case here.
SRNE Stock Verdict
All these stocks chasing a coronavirus cure or vaccine are high risk and high reward. These are speculative names, rather than ideal long-term investments. So, go into the sector forewarned.
That said, if you want to speculate on a coronavirus company, Sorrento seems much worthier than most of the other options. Sorrento, unlike many of the other Covid-19 companies, has produced real revenues and generated outside interest in the past. This gives the company a level of credibility that a firm like Inovio or Co-Diagnostics hasn’t earned yet.
It could all go wrong. Hindenburg makes a solid skeptical case against Sorrento. However, there’s a decent bull story here underpinning SRNE stock; it could work as a trade, particularly if the second wave of the virus continues to build.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, he held no positions in any of the aforementioned securities.