Consolidating The Highs In Front of Next Big Move
In answer to
@Quayle96 "I thought this was good news. Why is the share price dropping?" I would say that it is the weight and desperation of buyers vs the weight and desperation of sellers that determines the price. We only use "news" as an indicator that it may bring in more buyers or sellers. News may change the long-term value of a stock, but "news" of itself doesn't change the price - often the day-to-day price has nothing to do with value.
I don't think these short-term price moves mean anything, they are random fluctuations in the big price moves of MSB - don't fret about day-to-day moves, it's being invested for the bigger medium-term moves where you'll make the big returns. We're just consolidating near the highs at present after a phenomenal 2 month move higher. Once that consolidation and bout of profit taking is over, we'll be ready for the next big move, and in my opinion, it'll be higher.
1. Let's put this year's price rise into perspective
The price rise from the low of $A1.02 on 23 March to today's low of $A3.61 on 25 May defines the bottom of the log-scale uptrend on the graph below. I use a log-scale graph because the move is so big that you can miss the importance of the percentage moves at lower prices. The 3.5 bagger in two months is a MONSTER move - even with the pullback from the high. Annualise that!
A log-scale graph also puts the current pullback into perspective relative to the size of the move up - ie the pullback is small in % terms compared to the huge rise, and is really just a consolidation before the next move higher. If the uptrend continues, the upper end of the current trend channel right now is $6 (see orange arrow on chart below). This trend the line is rising at 88% per month, so it won't continue for too long (we'd be over $20 only two months after hitting $6 at that rate!) - it's just to emphasize how good the rise has been in the past two months, and we really shouldn't expect much more than that - it's amazing that it sucked up a 43m share placement (8% of the issued capital) and immediately moved higher - that indicates stonking demand for this company.
So, the pullback has been minor in relation to the huge rise, and today it hit the lower end of the trend channel - if the channel holds, there's plenty of upside!!
2. Index Inclusion drives price gains
The ASX200 Index calculation will be based on the average of the past 6 months of prices, and at present, on the expanded equity from the capital raising, I have MSB ranking number 162 in the ASX200 (after adjusting for the IWF of 0.85). That assumes the price stays at $3.68 for the rest of this week, and all other stocks stay at the same price. Without the capital raising, MSB would still have been in the Top 180 based on the 6 month average price.
Remember, to go into the ASX200 index, you have to rank number 179 or better. To make room to go into the Index, enough stocks have to drop out below number 220, and I have enough stocks dropping out at present to accommodate MSB and a handful of other stocks going in.
Please do your own calculations to make sure - as I am not a professional index calculator. The Index Committee may also change the IWF's for the June rebalance - however, that could even help MSB as at present the IWF is 0.85 and the Prof's holding has been diluted to less than 15%, so the IWF could rise. Note that the index committee also have discretion as to how they apply the rules - so you can't ever be 100% sure - as their decision to abandon the March rebalance due to Covid19 volatility shows. Note also that to get the IWF's you have to subscribe to S&P (it used to be a free service of the ASX, but they sold us out to the Americans years ago).
After the June rebalance, at current prices, I have MSB currently well into the ASX200, at stock number 122, even after applying the 85% IWF (Index Weight Factor). Going forward, MSB should stay safely in the Index, as you have to rank at stock number 221 or worse to drop out. That means the share price would have to collapse from current levels for the market cap to average below $A820m for six months (before discounting to $A700m with the 0.85 IWF) which is around a share price of $A1.40 (six month average price) - you can't be too precise as it is a moving feast and depends on prices of other stocks and on new entries to the Index and stocks dropping out from takeovers, bankruptcy etc.
While there has been very strong volumes recently, I haven't seen any evidence that Aussie index funds (and quasi-indexers) have been buying. It is quite possible that the big US index funds have been adding to their holdings through the placement period (eg Vanguard, BlackRock, State Street etc) and it is also possible that some of the smarties have been accumulating in order to pass stock on to the index funds for a profit after MSB hits the index - that could also explain some of the recent S3XT crossings. However, with over half of the Aussie market now quasi-index/ index-hugging, it is likely there is a lot more jockeying yet to go.
Note that MSB is already in the ASX300 Index, but that most of the big funds index to the ASX200 - as it is cheaper to replicate a 200 stock index, and the bottom 100 stocks are often illiquid and volatile. Thus, entering the ASX200 is much more important than the 300.
Some have asked whether index funds can buy in front of index inclusion. Not the "pure" index funds (they will try to buy stock at the closing match price the day before MSB enters the index) - but there are large numbers of funds who "seek" to replicate the index, with, say, 95% pure replication and allow themselves a 5% variation for stocks likely to enter, new floats etc. So some of those funds can buy before MSB hits the index. There are other funds who stratify their samples of similar performing stocks and may only buy 2 or 3 stocks in a sector, if all the stocks in that sector generally perform in a similar way - this cuts the costs of indexing and rebalancing. I have shown in the past that MSB's price performance is uncorrelated with the Aussie Index, so it is a dangerous stock for an index fund to ignore. It will go into the index with a weight around 11bp to 12bp, assuming an IWF of 0.85, so it isn't an absolute must-have from a size point of view, however its volatility means most indexers will want to own it to protect against performing too differently from index, particularly if good trial results mean that volatility is all positive!
So, I see continued demand through June and July from indexers. This should support the price. I really have no idea how much stock has been pre-bought by event-driven or index-inclusion players who plan to sell that stock on to the indexers, but as over half of the market is owned by indexers, quasi-indexers, index-huggers and "active" equity managers who hardly ever stray from index, you would expect that eventually more than half of MSB's share register will be owned by these funds. At present, it is nowhere near those levels, so there is a lot of latent buying yet to come.
3. Pre-buying of pending announcements
Again, in answer to
@Quayle96's question, there has already been a lot of buying in front of what are expected to be a series of fortunate events for MSB. We can see that some of the traders on HC have recently re-entered the stock (one famously at $3.81 a few days ago). So that's a pretty good indication that everyone who is likely to buy in the very short term is already in.
To get the price to go higher, we actually need to see the announcement, and it has got to be better than people are expecting, to bring in new buyers as the short-term traders are likely to sell no matter how good the announcement is. That's why sometimes you see what appears to be a great announcement but the price falls.
In the case of MSB, expectations are very low for Covid19-ARDS as most analysts have nothing in their valuation models for this potential blockbuster. Expectations for the Back Pain and Heart trials are also low, with analysts assigning probabilities of only 25% to 30% that these product candidates will go ahead.
So, beating expectations at present seems to be a fairly low bar for MSB. There are a horde of funds at the gate, waiting to buy if index inclusion goes ahead and it seems fairly simple to better expectations when the announcements come out. So, while several big announcements are expected between now and July-September, and most of the people who are going to buy in the short-term may have already bought, it looks like positive announcements are NOT in the price and there is latent buying for the next few months.
That means we are going through a period of share price congestion at the highs, and there still seems to be a lot of churning from profit takers after an enormous price rise over two months, and that stock will end up in safer long-term hands (possibly going through an intermediary on the way). I'm pretty stunned that after a big raising of $A138m, issuing 8% of the company's equity, the price didn't fall back to the placement price, and then shot higher. That's a very confident move by people semi-desperate to get their hands on big volume in this exciting company.
4. Rising price probably means people won't want to sell before June 30
In 2016 and previous years there has been pressure on the MSB price as people sold to take tax losses after 5 years of price falls. That hasn't been so evident since 2017 as the price has been stable to up through those more recent 3 years. This year, hardly anyone is in loss, so I don't expect tax loss selling in June to get in the way of the price rising. In fact, people are probably more likely to hold off profit-taking selling until the new tax year starts in July.
The price doesn't always collapse during June, but it has been capped by this selling in past years when the price had big previous falls through the year. There was only minor pressure last year, with a fall to a low of $1.33 during June and higher volume towards the end of the month. Similarly in 2018 a couple of attempted rallies fizzled in June as selling stepped up, but only resulted in share price falls of 10c or so each time. 2017 was similar, but in 2016 we were hammered from $A1.95 down to $A1.00 in June, which coincided with Teva walking. In 2015, the share price fell 50c in the last 5 days of June, but that was a year with some heavy tax losses for some traders (high $5.75, finished the year at $3.75). Similarly, there was an 80c fall during June in 2014, another year where the share price fell over $2.50 from the highs of the year, as the downturn from $10 continued.
So, tax loss selling was a feature in the years of the big price falls, but that is all over now, and like the past 3 years, I don't expect much (if any) tax loss selling in 2020.
In fact, the opposite is probably true this year - ie most people will now be sitting on profits, and will not want to realise those profits (if they can help it) until after June 30. I showed in my last note that the all-time VWAP for MSB is around $A2.80 - so even though some people may have losses they can realise, most people would be in profit now and wouldn't want to sell and realise taxable gains earlier than they had to. Furthermore, a lot of the previous years' tax losses would've already been realised.
So, the end of the tax year in June will probably result in less selling this year, which could help the price rise as desperate index buyers try to find stock by mid-June for the ASX200 Index inclusion, but traditional sellers may be reluctant to book profits just before June 30.
Bottom Line
The supply/demand situation for MSB shares seems to favour a consolidation near the highs in the short-term before another potential jump higher by mid-June as index inclusion hits and supply of stock is low. There has been enormous turnover recently both in the Aussie and US markets and that stock supply now seems to be tailing off. The profit taking is probably just about finished, but there's still a lot of pent up demand from potential index buyers.
That's all a bit of a side-show next to the powerful driver of results of the Covid19-ARDS trial and the FDA's approval of aGvHD (both due by September, and by July at the earliest) and the readouts on the Heart Failure and Chronic Lower Back Pain trial due around the end of June. So, there's plenty to keep driving the share price higher over the next few months.
While Covid results, could come faster, I'm not expecting the Covid trial results until mid July (at best) - that's simply going off the company's statements that it could take 3-4 months to fully recruit the 300 patients. The number of hospitals is still not up to the full quota of 30, so the number of patients being recruited may be a bit of a "J-curve" and accelerate towards the end of the 3-4 month period. I'm not expecting to recruit 100 patients in each month, I expect it will start slowly and then build up. It is possible we may see the trial end early due to overwhelming efficacy, but I'd like to curb my enthusiasm and not stoke expectations at unrealistic levels as MSB usually achieves its objectives by the due date and generally not before. None of us know at this stage - so let's keep expectations reasonable, otherwise there's a lot of grief when results don't meet over enthusiastic expectations.
Anyway, there's plenty of opportunity for the price to rise in anticipation of these events, and a couple of months of extra anticipation could keep the share price moving steadily ahead. That's a good thing - and a little less volatility would also make this stock less vulnerable to bouts of profit taking and short selling after some of the crazy short-term price rises. The recent moves by the shorts to cover 2.2m shares in the past 2 weeks is a sensible strategy post a big capital raising and in front of a slew of potentially company making announcements - they have no reasonable prospect of being able to buy back in a capital raising in the near term and could be hurt quite badly by a race to get set in front of ASX200 Index inclusion.
There is likely to be a quarterly report and conference call sometime this week - I expect the analysts will have a lot of questions re Covid19 and that may be an excellent opportunity for the Prof to update us on recruitment and the timetable of possible developments. There's a lot going on and a lot more instos looking at investing. A positive quarterly could go a long way to encourage some of those instos to cross the line and buy. We've already seen the quarterly cash flow statement and it was a bit better than expectations, and we know to expect a quarterly loss in line with previous quarters - however the proforma cash position will be very strong post the capital raising and I'd expect to hear more about the upgrades to manufacturing and the potential inventory build that the capital raising will fund.
There's a lot going on, and the story continues to build. Others have shown how it is possible to justify a share price north of $A20 and significantly higher than that if Covid19-ARDS is a winner for MSB. I agree with those valuations, and have outlined my thinking in several previous notes. We're still just in the first chapter and I'm hanging on for the ride of my life!
(20min delay)