Novavax (NASDAQ:NVAX) stock fell more than 40% in the last five weeks, which sounds terrible. Yet, the bulls are still enjoying NVAX stock. It’s still up over 2,000% so far in 2020, which is far better than Moderna (NASDAQ:MRNA)’s gains of about 180%.
Having a pandemic is good for companies whose business it is to inoculate people against viruses. Healthcare and biotech companies in general are headline stocks on Wall Street, so they tend to make massive moves — and when they crash, they do it in fantastic fashion.
It wasn’t all that long ago that Novavax had to reverse split its stock so it didn’t get delisted from the exchange. Then, as tragic as Covid-19 was and continues to be, it pumped life into the stock. I remember the time in 2016 when it collapsed from around $9 per share pre-split to 73 cents. That was a great buy-the-dip opportunity, but it is also where the risk lies.
Today the opportunity in NVAX stock is one of hope. Usually they say that “hope is not a strategy” but in this case it is the whole thesis.
Novavax has never a vaccine go to market. Therefore, this time it will be different is a massive assumption driving investors to own it now. Otherwise its stock is too expensive — in 2019 it earned revenues of $18.7 million and its price-to-sales now is a whopping 72x.
Clearly, a lot hinges on the success of items in its pipeline.
The Good News About the NVAX Stock Correction
Since NVAX stock moves fast, it makes for a great trading vehicle. Its rapid descent is bringing it to prior pivot points, which usually act as support. The buyers should defend the levels around $81 per share first. Then there is also a strong band of support between $60 and $45 per share. This is not my forecast here today but I am noting where its fans would buy-the-dip of a worst case scenario.
Last week was horrific for the entire stock market. The Nasdaq suffered a full-blown 10% correction in just two trading sessions. Under such conditions, all stocks are in danger not just this one. Case in point, the almighty Apple (NASDAQ:AAPL), which is arguably the best company on the planet, fell 20% from high to low in three trading sessions. If Apple, which has $71 billion in free cash flow, suffered like this, then NVAX is definitely vulnerable.
The Chart Offers Guidance for Trading Novavax
The last rally in NVAX stock started on June 26 and from the base of $70 per share. There is a chance that if the selling persists here, the bears would want to push it to that level. Investors should consider the possibility that it could continue to fall to that before finding footing. Those who own the shares should wait out the next few hours — maybe even days — to see where equities go.
Averaging down in stocks that have a binary thesis like this is not usually a good idea. Just ask those who did that in, say, Webvan. This was a failed online grocery store that would probably have been a massive success now.
Those who are itching to get in should exercise patience this week. It is also important to not take a full sized position all at once because it’s a double edged sword. The stock moves fast on its own due to the nature of the business, and the stock market could still be in free-fall. Perhaps the best way to trade a stock as wild as this is through the options. In early August I suggested shorting the stock using a bearish option $110/$90 debit put spread. It has since doubled in value and with little out of pocket risk. Today is not a call to repeat the bearish bet because the stock has shed a lot of froth. Shorting it here is as risky as going long.
The Bullish NVAX Stock Trade that Leaves Room for Error
Using options, investors can take a bullish position in NVAX stock and minimize the money at risk. This can be done in several ways. The first would be to simply buy long-dated calls. This costs a fraction of a full stock position, yet investors would profit on rallies at a greater percentage than equity holders. It’s literally risking less to make more, albeit while adding the risk of time running out on the trade.
A second options strategy would be for speculators to sell bull put spreads about 25% below the current price. For that, traders collect a premium now and create income without needing a rally to win.
A slightly different version of this is to sell a naked put and collect even more premium. This trade fits only those who wants to own the shares, not the speculators. For example, they can sell the NVAX $50 December put and collect almost $10 for it. To win they merely need price to stay above $50 to retain the maximum gains. The downside is that it offers a $10 per contract maximum profits, or the equivalent to an 11% rally in the shares.
If You Build It Will They Come?
Regardless of the method, investing in the upside of NVAX stock now is a risky bet. The discovery of vaccine is still an uncertainty and emotions are running high. Price has so much hope in it that the bulls need many things to go right for this stock to soar. First they need the vaccine then they need the financial metrics from trafficking it to also work out. There are so many competitors and there are so many skeptics who will submit to take the doses. This also brings in the added unknown of the balance of supply and demand. For what it’s worth, I for one won’t be taking this not for at least a few years of it being on the market.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.