The coronavirus panic sent this biotech stock soaring more than 150% in a single day. Here's why you shouldn't buy the hype.
Not to be confused with a low budget Mexican beer, the coronavirus is a big deal. It’s got hundreds of people sick and rocked equity markets around the globe. But while most stocks suffered modest dips amid fears of a massive global pandemic, some companies have seen their share prices rise astronomically.
To say these stocks have “gone to the moon” is only a slight exaggeration.
Shares in late-stage biotechnology firm, Nanoviricides (NYSEAMERICAN: NNVC) rose over 150% on Tuesday on coronavirus fears, and there may be more gains to come if the outbreak intensifies. But while speculation may boost Nanoviricides stock in the short term, the company is too small and too broke to actually capitalize on the race for a cure.
Coronaviruses are a family of viruses causing symptoms that vary in intensity. They run the gamut from the common cold to more deadly conditions like SARS or MERS. This recent coronavirus outbreak started in Wuhan, a city in central China. And it is believed to have come from a fish market that sold wild animals.
While the Wuhan coronavirus is not as deadly as its cousin, SARS, it is spreading quickly. It has sicked at least 300 people and killed one. The CDC reported the first case in the United States Tuesday. This announcement had a big impact on financial markets.
Nanoviricides, along with several other biotech names, saw their share prices soar amid the outbreak panic. This rally is based on speculation that they will be able to bring a cure to market. But unfortunately for Nanoviricides investors, this is unlikely.
The company is too small and too broke to fund such a massive undertaking.
According to Nanoviricides’ most recent financial report, the company has only $875 million in cash and equivalents on its balance sheet. This sounds like a lot until you look at its expenses for the quarter. $1.4 billion went to research and development while $505 million went to general and administrative costs — and that’s in just three months. The company is running out of cash faster than it can issue new shares.
While this latest boost to the stock price may fund another round of dilution, over the long term, the investment is a dud. It’s bleeding cash at an unsustainable rate.
Low-quality biotechs like Nanoviricides have posted the biggest gains due to coronavirus fears. But they aren’t a good way for investors to hedge their portfolios against this risk.
Over time, as coronavirus fears subside, look to see Nanoviricides give up most of its recent gains. The stock is burning through cash at a stunning rate, and the equity may soon be worthless.
Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com.
This article was edited by Josiah Wilmoth.
Last modified: January 22, 2020 11:38 PM UTC