If you’re like most people, you probably hadn’t heard of Sorrento Therapeutics (NASDAQ:SRNE) until recently. While SRNE stock has been listed for years, aside from one spike in 2015, Sorrento hasn’t done much. Up until 2020 anyway. Then the novel coronavirus hit, and Sorrento successfully re-positioned itself as a leader in the Covid-19 testing space.
On the strength of this successful transition, Sorrento surged from just $3 per share to a recent high of over $19. However, Sorrento’s penny stock past isn’t totally gone yet. Short sellers have taken aim at Sorrento, accusing the company of pump-and-dump tactics.
As a result, Sorrento shares have become one of the Nasdaq’s most volatile listings, and short interest is through the roof. So what should traders do with Sorrento now?
Too Much Hype?
If you’re just getting up to speed, here’s the background. In May, well-known short-selling firm Hindenburg Research issued a lengthy and blistering report questioning many elements of Sorrento’s business case. Hindenburg claimed that it spoke with former Sorrento employees who said the company’s rhetoric about its Covid-19 cure was highly misleading and inaccurate.
The short sellers then allege that Sorrento used this overblown excitement to raise a large sum of money.
Remember that, on Fox News, Sorrento’s chief executive officer Henry Ji said that: “We want to emphasize there is a cure. There is a solution that works 100 percent.” When you claim to have a 100% cure for something, that’s a rather bold statement. And, skeptics suggested there were flaws with the statement.
The Wall Street Journal’s Charley Grant, for example, noted that while Sorrento’s product worked in a lab setting: “There is not yet any evidence that [Sorrento’s] treatment candidate is safe or effective in human beings.”
Sorrento Fights Back
After Hindenburg’s initial report, the research firm continued to criticized Sorrento on Twitter (NYSE:TWTR). The firm’s latest salvo involved pointing out that Sorrento spent just $5 million plus royalties for the rights to its Covid-19 test that it acquired from Columbia University. Hindenburg cited an employee there who suggested the claims about the efficacy of the test might be overblown.
Sorrento didn’t take Hindenburg’s criticism without a fight. On Aug. 12, Sorrento issued a press release stating that it was considering legal action against Hindenburg. Sorrento says that Hindenburg has made false or misleading claims against the company with the goal of driving down the stock price.
Key Executive Leaves
Sorrento’s press release helped slow down the selling in its stock for a few days. But shares resumed their slide recently. That came following the news that Sorrento’s chief financial officer (CFO) is departing the company.
On Aug. 18, Sorrento disclosed that it had terminated the employment of its prior CFO, Jiong Shao. The company’s statement was terse and did not offer a specific reason for why it ousted Shao. In any case, the timing raises eyebrows, as the CFO switch came just one week after the latest scuffle with Hindenburg. Investors didn’t take the news well. SRNE stock fell from $12 to below $10 in the days following the CFO’s departure.
SRNE Stock Verdict
Even after the big pullback this past week, Sorrento, still has a market capitalization of around $1.9 billion. That’s a large sum for a company that hasn’t generated substantial commercial revenues yet. And we don’t know how long Sorrento will be riding this wave.
The demand for Covid-19 tests could drop quickly once a vaccine is approved. Additionally, there’s no guarantee that Sorrento’s test will end up being the best-in-class option. Many firms are competing with rival testing methods.
It does have vaccine and treatment options in the pipeline as well, but many of the same concerns surround those. Even if they work and are approved, there’s no guarantee they’ll be the go-to pick.
As such, Sorrento is a fully-priced bet on its technology working out.
And there’s reasonable doubt around that idea as well. The CFO’s sudden departure is not a reassuring development. For what it’s worth, Sorrento’s chief executive officer recently went on TV and had a blunt message for short sellers, saying: “I’m giving them a fair warning shot. Just cover yourself, don’t ruin your family.” While the bravado may be encouraging, investors should wait for concrete signs of progress before making a big move.
All told, that’s plenty of question marks you should consider before making an investment in Sorrento stock. The story could certainly still work out well for investors. But at this point, there are way too many uncertainties to make this an appealing Covid-19 stock.
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.