Sorrento Therapeutics Stock Is Down but Not Out

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Sorrento Therapeutics (NASDAQ:SRNE) is the type of stock that lives and dies by headlines. By definition, this makes it a binary trade, so it is closer to gambling than investing. I consider any trades in it to be speculative bets inside a conservative portfolios.

Source: Shutterstock

This is the year of the virus, and the world is making things up was we go. Covid-19 was a novel virus, so even the experts are newbies at dealing with it.

Today we examine one of those brave companies that are trying to rid us of this threat. SRNE stock has been a chop fest ever since the CEO Henri Ji made headlines in May claiming they could cure it. Since then, investing in Sorrento has required a neck brace and anti-nausea medicine to withstand the spikes and falls that this lively stock delivered.

It is still up 125% year-to-date but that is a far cry from being up over 400% not too long ago. Nevertheless, the investment thesis has not changed much: Own Sorrento Therapeutics for a bet on their scientific success.

SRNE Stock Fundamentals Aren’t Great but That’s Okay

I know this may upset a few fans, but fundamentally, it’s hard to justify buying stock in companies like this without being honest about the odds of it working out. It has a $1.8 billion market cap and hardly any sales. Clearly the entire upside potential lies in their pipeline.

In the end, if they fail to deliver the results then the stock is too high now. Personally I prefer rooting for its success, because I want them to help the sick.

The company deals with life and death, so the emotions while trading SRNE stock also run high. Negative opinions solicit aggression. If you want to test this thesis, try tweeting something bad about it and see how the investment community receives it. On the other hand, it also has a huge number of haters, judging by the 22% high short interest that it carries.

Investors can and should do homework on the progress of the scientists to see who is gaining an edge. Even then, the bullish thesis should come with a warning that says “low conviction,” since we are at the mercy of the headlines.

Meanwhile the Stock Makes for an Excellent Trading Vehicle

Why bother trading a binary opportunity like SRNE stock? Because of what we saw it do earlier this year, when it spiked 200% in May, then again another 125% in late July. The temptation is too great to pass up.

This is especially true in the Robinhood era of investing. High-risk stocks are all the rage these days — just look at the bids chasing Tesla (NASDAQ:TSLA) and Zoom Video (NASDAQ:ZM) this week. Clearly there is room to make money for those who can stomach the uncertainty that comes along with it.

For that, I prefer using the options markets, where investors can risk less and create income opportunities with limited risk. For example, instead of buying 100 shares of SRNE stock, I can sell a $2 wide bull put spread at $6 and collect 80 cents per contract for it. To do this I sell the $6 put to open the risk and I buy the $4 put to limit it. If price stays above $6 through mid October then I would have created income without any money out-of-pocket.

This trade offers a high yield of 60% and with much better chances than the binary outcome that the stock currently offers.

The SRNE Chart Doesn’t Tell a Great Story

Sorrento Therapeutics (SRNE) Stock Chart Shwooing Support Zones
Source: Charts by TradingView

Sorrento stock is 60% off its highs, but such is the nature of these stocks. The hope is that they are always one headline away from greatness. The SRNE stock technical setup is not ideal. The bulls failed to hold the $10 level last week. This was a important because it served as the basis for the 115% August rally. It is okay to give back some of the rally, but in this case the bulls went too far and relinquished all of it — and its breakout neckline as well.

Going forward this becomes forward resistance, and onus is on the bulls retake it. This means that for the next couple of weeks, rallies into $10 are selling opportunities.

Of course this is still a headline stock, and anything can happen.

Until then, the assumption is that the stock is now in the hands of the bears and catching the proverbial falling knife becomes a risky proposition. There’s still hope for those long the stock. Support has held above the June neckline and above $7.40 last week. Investors who are still in the stock can feel better about holding here, as the stock finds its way out of this sharp descending wedge.

The stock has been setting a series of lower highs as it knocks on said support. As long as the fundamental outlook holds, the stock should bounce out of the wedge. This is not a certainty, so caution is still warranted. Those who are looking to open new positions can do so while the stock finds its footing but not all at the same time. Leaving room to add more is smart, especially in a situation where a stock is a falling knife.

Nicolas Chahine is the managing director of SellSpreads.com. Join his live chat room for free here. As of this writing, he did not hold a position in any of the aforementioned securities.

Nicolas Chahine is the managing director of SellSpreads.com.


Article printed from InvestorPlace Media, https://investorplace.com/2020/09/sorrento-therapeutics-stock-is-down-but-not-out/.

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