The Microcap Speculator

Look for a strong boost in shares of Novavax (NVAX) tomorrow. After the bell, the Baltimore-based vaccine research company announced positive data from tests of its VLP technology against two live virus strains of the avian flu:

“These are the first live-virus challenge data we have presented,” said Dr. Rick Bright, Novavax’s Vice President of Global Influenza Programs. “These new data are exciting because not only do our VLP vaccines trigger a robust immune response, but we have shown that a single vaccine can protect against two different strains of pandemic influenza.” Human tests are expected to begin later this year.

The news comes on the heels of an announcement that the company had made substantial progress on its HIV/AIDS vaccine, and would soon begin clinical trials.

Bottom line: I expect that Novavax’s share price will soon begin to reflect the positive momentum apparent in the company’s clinical and development programs. If either of these vaccines is remotely successful, NVAX will see tremendous upside. I wouldn’t be surprised to see the shares over $5 by the end of the week and over $10 by the end of the year.

UPDATE (1/26): Novavax budged higher after the announcement, but quickly retreated. That reaction is negative and the stock bears watching. Let’s see if support holds in the $3.75 area. If it doesn’t, I need to rethink my investment thesis.

DISCLOSURE: I am long NVAX. Not a recommendation to buy or sell any security. For informational and educational purposes only.

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A few of you have written to ask whether I am still long virus technology company Novavax (NVAX) since purchasing shares for $3.74 on October 2, 2006. The answer is yes, and I intend to hold the shares for a much higher price. A quick glance at the chart shows that it has turned the corner technically and, if it can break through minor resistance around $5.50, could go much further. Keep in mind that the company’s technology is still unproven but it has made tremendous strides over the past year. Novavax announced positive results from preliminary trials of its VLP technology, hired an all-star virus researcher and an avian flu expert from the CDC, and attracted top shelf institutional investors like Kleiner Perkins. Another year like that and Novavax could join companies like Crucell (CRXL) in the top echelon of antiviral health.

Despite this progress, Novavax continues to attract the shorts. In November, short interest grew to over 4.5 million shares, or 8.19% of the float. I have nothing against shorting, but I think they are on the wrong side of Novavax.

DISCLOSURE: I am long NVAX. Not a recommendation to buy or sell any security. For informational and educational purposes only.

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Reader Tom left the following comment on this recent Novavax entry:

Hi MS. I found your blog recently and have been reading with interest. I don’t have a comment on Novavax but just a general question.

This may be microcap 101 for most people but I have read that one risk when buying small company stock is the lack of liquidity compared to a mid or large cap. I have seen impressive gains on small stocks, but what good are those gains if they cannot be realized?

Is there a way we can estimate current and future liquidity based on how many shares we own vs. how many outstanding shares exist?

For example if I own 5,000 shares of a microcap trading at $2 with 20,000,000 common stock outstanding, should I be concerned about liquidity? What about if I own 10,000 or 50,000? Since many microcaps are not yet profitable, are P/E and debt significant variables when trying to gauge the sellability of a stock?

Tom, illiquidity can be a risk, and if you try to trade a thin microcap the same way you would trade Microsoft, you will be disappointed. I don’t think liquidity has much at all to do with debt or P/E. To me, its a function of only two factors: float and volume. Be careful about the latter on a microcap, because volume can vary greatly. Don’t be fooled into thinking a microcap is liquid just because it has a high volume spike where it trades several hundred thousand shares a day. Look at the volume over the course of six months or longer. The low points are what you might have to deal with when you want to unload your stock.

Here are the tactics I use with illiquid issues. First, I don’t use hard stops. They just get picked off. While I do use mental stops, I make sure they are wide enough to accomodate the increased volatility that often accompanies illiquid issues. I also control risk by taking smaller positions.

It is much easier to sell illiquid issues into the ramp, instead of waiting until the stock has peaked. As a much wiser trader than I once said, you need to feed the ducks when they are quacking.

Finally, when possible I like to turn the tables and take advantage of a stock’s illiquidity. I do that by consistently entering limit sell orders at prices that are 10-14% above current prices (or buy orders at similar discounts). Every once in a while, the orders will be picked off by someone who just has to get in or out of an illiquid issue. Their loss, my gain.

That’s what works for me.

DISCLOSURE: I am long NVAX. Not a recommendation to buy or sell any security. For informational and educational purposes only.

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Microcap vaccine developer Novavax (NVAX) today announced that it hired Merck & Co.’s (MRK) former Senior Director of Vaccines Clinical Research, Dr. Penny Heaton. Dr. Heaton will serve as Novavax’s Chief Medical Officer.

Vaccine development is a risky venture, but respected management and institutional support go a long way to separate worthy prospects from the rest of the crowd.

Novavax has developed a “virus like particle” or VLP platform that it says can be used to create vaccines for both standard influenza and avian flu viruses, including the fatal H5N1 variant. The company recently announced that it is working on an intranasal delivery system for VLP vaccines.

I bought some Novavax today at $3.74, not too far from its September support levels. I will probably hold the shares as long as the September low is not violated.

DISCLOSURE: I am long NVAX. Not a recommendation to buy or sell any security. For informational and educational purposes only.

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