Like other biotech penny stocks, Reddit traders so far this year have sent Atossa Therapeutics (NASDAQ:ATOS) on a rollercoaster ride. First, ATOS stock soared and cratered in the winter and spring, during the rise and decline of the initial “meme stock” wave. Then, as the mania went for an encore, this heavily shorted name soared once more.
But since late June, it has again sold off. After trading for as much as $9.80 per share, it’s down to $3.95 as of this writing. So, should you pounce on it after the pullback? Not so fast.
Sure, there’s more working in Atossa’s favor than just its status as a Reddit play. The company has several promising candidates in its treatment pipeline, the success of which could materially change its fortunes. Yet, these positives may be more than accounted for in the valuation.
Speculators are cashing out, as the chances of another “meme stock” wave wane. This points to shares continuing to fall, barring any game-changing news regarding its drugs. So, what’s the best move for now? Even if you’re bullish on its pipeline, don’t fight the trend. Wait for lower prices before entering a position.
Why ATOS Stock Isn’t Going Parabolic Anytime Soon
As InvestorPlace’s Chris MacDonald wrote at the time Atossa went on its hot run in June, two factors played a role in renewing Reddit enthusiasm for ATOS stock. First, an overreaction to its inclusion in the Russell 2000 and Russell 3000 indices. And second, its status as a short-squeeze “meme stock.”
What’s the takeaway from this? With both of these factors being one-time events, there’s little reason to buy ATOS stock right now on the expectation that it will go parabolic again. The index inclusion is clearly a one-and-done deal. But so is the short-squeeze angle.
Yes, back in late June, short interest was still moderately high. Short volume data may point to short-sellers continuing to bet against it. Yet, rising short interest is just part of the recipe for creating a squeeze. There also needs to be corresponding heavy buying from the long-side to compel the shorts to scramble and cover.
With the decline of not only ATOS stock but other popular short-squeeze plays, it’s clear new money isn’t arriving to the party. And, as Michael Burry (of The Big Short fame) recently pointed out, without new money the Reddit stock bubble is at risk. Even if it doesn’t burst in an epic fashion, declining interest in the phenomenon likely means a continued deflation — something you could argue is already playing out with names popular among r/WallStreetBets.
Pipeline Looks Promising, But Not Worth the Risk
Admittedly, the end of the Reddit stock bubble isn’t entirely the end of the world for ATOS stock. Hype may have sent it “to the moon.” But at least in this situation, there’s also substance; this biotech’s pipeline does look promising.
The candidate Atossa has worked on the longest is its breast cancer treatment Endoxifen. A study initiated earlier this year could show its merits as an ovarian cancer treatment as well. Along with Endoxifen, though, the company has also made progress with two Covid-19 treatments. The first, a nasal spray called AT-301, could help reduce virus systems. The second, AT-H201, is for the improvement of lung function in long-haul Covid-19 patients.
The problem? First, today’s valuation likely more than reflects the possible upside from bringing one (or more) of these candidates to market. And, as one Seeking Alpha commentator discussed a few weeks back, the approval stage remains years away for any of them. As such, the risk of all of these candidates fizzling out may outweigh the possible gains for shares.
So, as speculators are giving up on their recent “faves” — and barring any material progress with its pipeline — shares of Atossa will likely stay on their downward trajectory. There’s little reason to buy this at $4 if its set to head back to $2 and below.
ATOS Stock: Sit Tight for a Better Entry Point
With its candidates still either in Phase 1 or Phase 2 of clinical trials, what is a reasonable price to pay for Atossa Therapeutics today? Chances are it’s best to pay what ATOS traded for in between its first and second “meme stock” waves. In other words, between $1.50 and $3 per share.
At lower levels, it may make sense to take a position in this high-risk, high-possible return biotech play. But until then? Don’t fight the trend with ATOS stock. Sit tight and wait for shares to return to a more reasonable entry point.
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On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.