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2 Drug Stocks Under $10 To Pick As Favorites

Chris Lau, Kapitall: If there was a recent mild sell-offs in the stock market, investors would not really notice it. Wide intra-day swings in the U.S. markets were not accompanied by an increase in the volatility index, as measured by the Volatility ETF (VXX). For market participants speculating on drug and biotech companies, the sell-off is a risk factor. Companies on the verge of launching a product could face a drop in share price, if investors reduce exposure to the high-risk sector.

In the biotechnology sector, stocks that happen to have a share price below $10 experienced a rise in short-selling in February 2013: [Related list:  7 Biotechnology Stocks With Insider Buying Activity]

Screen shot 2013-03-25 at 2.15.16 PM

Read  descriptions for all companies mentioned

Affymax (AFFY) shares experienced a 166% increase in open short-selling volume by February 28 2013. Short-sellers gained 64% on March 19 when the company said it will reduce its workforce by 75% and will consider bankruptcy protection.

Investors should avoid Affymax. The company issued a press releasing saying that Omontys, an anti-anemia drug, may never reach market.

Accuray (ARAY) issued $100 million in senior debt due in 2018 that pays 3.50% on February 8 2013. Bearish activity increased 23% to an short open interest of 9.9 million shares. The notes are convertible at $5.33 per share. Accuray closed recently at $4.54. In Q2, the company lost $0.30 per share, beating expectations. Revenue (non-GAAP) was $77.7 million, beating estimates by $3.47 million.

ZIOPHARM Oncology (ZIOP) traded as high as nearly $6, but closed recently at $4.85. The market is anticipating results from the palifosfamide sarcoma study. Poor results will, needless to say, hurt shares, and investors may be pocketing profits ahead of the news. Short-selling open interest rose 13.1% in February.

PDL BioPharma, (PDLI) reported quarterly (Q4) earnings of $0.34 per share, on revenue of $86 million. Short-selling open interest rose 13.5% ahead of the report. PDL pays a generous dividend of $0.60, yielding 8.23%.

Investors should strongly consider PDL in favorable terms despite the bearish bets against the company. Healthy royalty revenue (which rose 7% year-over-year) and earnings of $1.45 per share in 2012 suggest this company is not appreciated.

Arena Pharmaceuticals (ARNA) is another company to look at favorably. Weak sales from Vivus (VVUS) are creating so much fear that Arena traded at around $7.40 last week. Short-selling open interest rose 5.3% to 58.27 million shares on February 28 2013. With $216.23 million in share float, short float is 26.8%. It still makes sense to remain bullish on Arena.

- Chris Lau, Kapitall Contributor

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