On shorts, gaps, index inclusion and in answer to @dontfollowme...

On shorts, gaps, index inclusion and in answer to @dontfollowme

1. Will MSB come back and fill the 5.5% gap left today between $A2.53 and $A2.67?

I've previously been asked why stocks tend to fill gaps and whether it has to happen. I responded with a philosophical rant about people's behaviour and said that filling gaps happens often enough to be noticeable and that it's a trait of human behaviour - however, it isn't an immutable law!

Have a look at our favourite MSB comparison, CSL. Here's a gap it left in January 2017, and it never came back to refill it. The red bars on the left are Volume At Price bars and show no trading in the gap and the blue brackets show the gap. The closing price on Jan 18 2017 was $99.12 and the gap up to the low ($106.80) the following day was 7.7%. That left a bigger % gap than MSB has left today!

Of course, CSL has had pullbacks along the way, but it has never closed that gap of 3 years ago, and it is now more than 3x the price of the bottom of the gap (now $304).

Moral of the story, if it's a good story, you can get big price jumps, and gaps don't always have to fill.
CSL price in 2017:



2. Shorts are being hammered all over the world - MSB not the only beneficiary!

Sure, global stockmarkets are on their highs (and I think they're overpriced - but I also thought that in late 1986 to early 1987 and I was wrong because they kept powering higher before crashing months later). So, of course pure shorts have been smashed, but it also seems that recently the most shorted stocks are among the best performers - and I'll explain the reason for that below. This is a global phenomenon.

Last

Wednesday​

, the

total dollar amount of shares borrowed to sell Tesla short rose to $US14.5 billion ($A21 billion). That's above the $US14.3 billion invested in a bet Apple will go down. Apple overtook Tesla as the most-shorted US stock on September 20 and had held that position until Wednesday. The dollar amount of short interest in Apple, however, is of little surprise given the size of the tech giant's $US1.4 trillion market capitalisation. Tesla's market cap is 14 times smaller than Apple's. Since the start of June last year, Tesla has risen from $US180 per share to $US510 now, with a high of $US547 - that's a 3-bagger in less than 8 months!​

So, shorts have lost 3x their investment in shorting the most shorted stock in the US (TSLA) while over the same period the US Proshares Nasdaq short ETF has fallen 25% and the NASDAQ has risen 29%. The Proshares UltraShort Nasdaq ETF (3x inverse exposure) is down 60% over the same 8 month period!!! It's only a $US400m fund - but it shows the squishing that a leveraged short fund has worn in a short period.​

I have friends who run short strategies in Australia and overseas who have been butchered over the past 8 months - and, as noted previously, many of the biggest share price rises have been among the most shorted stocks (including MSB). ​

Some of the recent Australian experience has been a rapid lift in the prices of the most shorted stocks since early December - even though they may still be down heavily over 12 months, they may have doubled in price since early December (see section below). ​

MSB has likewise risen strongly since early December, up 50% to today's closing price, although it isn't clear if much of this is short covering as the short position has been relatively unchanged in total over that period (despite crazy one-day rises and falls). There has clearly been solid long buying support for MSB with the $A75m placement at $A2 per share and the $A46m selldown by Capitalat $A1.711 and very high market volumes continuing to trade in the market right up until today. It isn't yet clear how much of the increased volume may be short covering (if any).​

Some of the shorting fraternity are closing up shop and waiting for this current period of price strength to end before re-entering shorts. Some would be nursing such large losses that their clients will eventually pull their funds, forcing the managers to cover their shorts - some of that is probably what is driving the big rises in the prices of the most shorted stocks now.​

Also note the massive 13% price gap ($US255 to $US289) left back on October 24 last year on the graph in the TSLA share price below. The share price only had a shallow dip from $360 to $330 on the way up to its high of $547 last Tuesday. So, another example of a share price which failed to retrace to fill a gap, but rather shot dramatically higher - it is currently 2x the gap price:​

​

MSB has moved from being one of the most shorted stocks in the Aussie market, particularly in relation to number of days to cover the short where it had been in the Top 10 in early 2019. With the massive recent increase in daily trading volumes and the drop from 8.35% of the shares shorted in Feb 2019 (41.6m shares) to only 5.74% now (30.8m shares), MSB is no longer one of the top shorts by days-to-cover. In fact, the current short position represents only 8.5 days of trading at today's high level of volume. Note however that www.marketindex.com.au/short-selling is quoting 14.3 days to cover the short (ie assuming trading volumes of 2.15m shares per day) which puts MSB just outside the Top 100 most shorted in terms of days to cover.

In Australia, the most shorted stocks are currently KLA (a massive 27% short position and a price up 72% in the past year), GXY (17% short, price down 47% in a year, but up 45% since early December), SYR (16% short, price down 68% for the year, but price doubled between early December and last week), ORE (14% short, price up 62% since early December). Even last year's disaster SDA (13% short) which fell 84% between April and August last year had a bounce of 50% from early Dec up until the second week of January. So, something has definitely improved in the pricing for these most shorted Aussie stocks since early December. I'd argue that there is probably some redemption by investors in shorting funds due to big rises in global markets, and then these shorting funds have been buying back shorts and hence pushing up share prices since early December.

Despite the fall in its short position, MSB is still a large short to cover, and is the 41st most shorted stock in the ASX (5.74% short). If short funds get hit by redemptions, they'll eventually have to unwind some of their MSB short, thus pushing the share price even higher. Again, as I said earlier, it isn't obvious that MSB has been as big a beneficiary of the short covering rally as some other stocks, but my intuition tells me it is part of the reason for the 50% MSB share price rise since early December.


3. Index inclusion looking good for June, but still a long shot for March

I know some are still hoping for ASX200 inclusion in March, but I'm not counting on it, even after today's 6.3% rise. That's OK, as it gives us another 5 months until the end of May when instos will probably steadily buy stock for the June index inclusion. That means the overall index buying can stretch over the period when we are expecting positive Phase 3 trial results for global blockbuster product candidates in heart failure and chronic lower back pain.

ASX200 Index inclusion in June is looking good if we can just maintain the current share price. We are currently averaging $2.07 for the 33 days since the end of November. Just staying near today's price for the remainder of the 93 day period up until the end of May will get the average up to around $A2.52 for the whole 6 months - which should be enough to get us in, even if the overall market rises another 10% or so. The good chance of inclusion for June should drive enough insto buying over the next 5 months to keep the price strong and make ASX200 inclusion even more likely (not to mention possible partnering deals and good phase 3 trial results). Of course, we have been in this position before, and then hit by share placements and major shareholder ructions (Capital selling down 5% of the company), or hit by misunderstood trial results, so while nothing in life is guaranteed, ASX200 inclusion in June is currently looking pretty good.

I still think we need to see MSB average over $A3.30 between now and the end of February for ASX200 benchmark index inclusion in March - that's simply because it spent so much of the 6 month calculation period at prices well below my estimated requirement of at least $A2.23 (averaged $1.92 for the 97 days so far). It will also require stocks to drop below number 220 so that they are kicked out of the ASX200 to make way for MSB - if no stocks exit, none can enter. There are still 28 trading days to go, so a lot can happen - but we need 3 more huge days like today (ie 6.3% rises - and they have to come NOW) to get above $3.20 and then we have to stay there until the end of February to have a chance at ASX200 inclusion in March - still looks like a big ask to me.

4. In answer to @dontfollowme who raises some interesting questions worthy of exploring

I've never advocated putting all the eggs into one basket and have explicitly said that in previous posts. I think that causes particularly bad outcomes for the majority of investors who naturally wilt under the pressure when their stock performs badly and they end up selling the low (in fact, their panic selling CREATES the low).

I've also noted previously, that just because I haven't posted on other stocks it doesn't mean I don't follow them or invest in them. In the past few years I have had a 20-stock portfolio but have had big positions from time to time in FMG, STO and MSB when they looked bombed out and with good prospects. I have previously mentioned that I held big positions in the past in QAN, CGF and BSL. What these stocks had in common was a bombed out share price, with analysts demanding capital raisings, short sellers picking them off, yet they had good market shares or production that was at competitive cost prices in markets that weren't going away - they restructured, cut costs and prospered - in other words, they had a competitive future but were priced as if they were failing. In some cases (like BSL) there were capital raisings (at equivalent of $A1.50 - price now $A15.70 - high was $19); in other cases I was told by analysts that companies were "no longer investment grade" right at their share price lows - Qantas got down to $1 - the market was convinced it would have a capital raising and it was heavily shorted, it didn't have a capital raise but cut expenditures, restructured and is now over $7; FMG was a similar story, with analysts saying at the low of $1.50 that it was uninvestable because the market cap was below the debt - well, yes, but that would obviously be fixed by a big rise in the share price (the market value of the equity is not always a good reflection of the true value of the equity) - good management with a real focus on cutting costs and restructuring got FMG through the tight spot and then a few things went right on the iron ore price to get the share up to $11.80. STO was another near-death experience after its massive LNG terminal expansion, capex and debt load - it was abundantly cheap at $2.50 and is still going up at present at $9 - analysts at the time told me they had no confidence in its future (it might work out, but most preferred to be conservative and abandon it at the low). CGF was another with a near-death experience in the GFC but which had a great underlying client base, great new (very smart) management but no confidence from the analysts or investors because of historical missteps and lack of investors willing to look forwards rather than backwards - it rose from under $1 to a high of over $14.

So, QAN was a 7-bagger in 5 years; at the high, BSL was a 12-bagger in 6 years; FMG is nearly an 8-bagger in 4 years, STO was a 3 1/2 bagger in 4 years, CGF was a 14-bagger in 9 years.

Why go into detail in a bunch of stock price moves unrelated to MSB? Well, I'd argue that MSB was down at a low of $1 for much the same reason as these other stocks. Fears of a near-death experience, fears of capital raisings, lack of support from analysts (most don't cover MSB) and heavy short selling pushed MSB down to a very attractive low and I expect a similar rebound to these other stocks. Those other stocks rose between 3 1/2 to 14 times in an average of around 6 years - and they weren't world leaders in global medical technology, they were just well managed companies bouncing back from very oversold levels. MSB has done all the same sorts of things in terms of cutting costs, restructuring, improving board and management - that alone could give MSB a similar bounce to those other stocks, even before considering they may become a global healthcare leader!

Please note that while I held all those stocks at the low, I sold them all too early. I'm not a genius, and I am constantly amazed at how much further prices go than I would've thought possible (both up and down). Also note, this isn't an exhaustive list of well-performed stocks - it's just a group I owned with some characteristics similar to MSB. I don't include CSL, for example, because it didn't have what I consider a near-death experience (although I have owned it, but don't now). This is also to address

@dontfollowme and to assure him that I have indeed had other interests in stocks outside of MSB.​

I started posting on MSB because I felt I could add some value, particularly at a time that it appeared to be under heavy attack from shorts, who were frankly annoying me with their pompous know-all language and their constantly negative spin. I had been an investor in MSB some years earlier, riding it up from $1.75 to the $9.95 high then exiting on the downside. I followed it with interest for some time and then thought it was a tremendous opportunity below $1.50 - actually I couldn't believe it was trading below $1.50 after achieving so much.

Furthermore, to answer another point made by @dontfollowme, that my commenting on dud companies BNB and MRE "the track record does look underwhelming", while I had a 10-year hiatus from HotCopper, the couple of one-line posts I made in 2008 were just a bit of fun - they weren't recommending stocks, they were poking fun at some other posters (although were a bit obscure) - it turned out not to really be much fun being a smart-a**e, I didn't really get anything out of the experience (because I didn't put any effort into it) and I drifted away.

Anyway, even if I had recommended stocks in the past that turned into duds, so what? I reckon a good trader/investor needs to bank on getting up to 40% of calls wrong - and accept that you will make errors when investing in uncertain markets, with all investors (including yourself) making irrational sub-optimal decisions. If you are scared of making a mistake, or of posting on a stock because you are afraid of looking silly, then you won't make the most of the opportunities out there. Just write off the dud investments as part of the 40% wrong decisions - or as the cost of doing business - and be confident enough to move on to the next one.

So, why did I start posting on MSB in the past couple of years?

There was a time that no matter how positive MSB announcements were, the shorts managed to spin it into a negative - there were some contortions worthy of The Yogi Kudu - but they ended up folding themselves up in the box! They also used the historic fall in the share price to "prove" they were right - constantly citing how bad the company must be if it had fallen from $10 to $1. I thought this was grossly unfair to the shareholders, but also to The Prof who must have felt under heavy pressure if only for his own loss of value. Over this time the company managed to self fund years of expensive medical trials, did major partnering deals (even if some partners ultimately reneged - not MSB's fault), achieved amazing results in the trials (where most others had failed) and set about clearly prioritizing its approach and controlling its cash burn. They attracted the support of the top biotech lenders who were confident enough to take long-term subordinated debt and gained the enthusiastic endorsement of the top global researchers and practitioners in the stem cell field (see the achievements of Dr Joanne Kurzberg among others). The patent portfolio of over 1000 patents is a major strength, as seen by the need for TiGenix/JCR and and Takeda to pay MSB royalties and the manufacturing processes and facilities designed with Lonza are the most progressive in the world.

Furthermore, to me, a fall of 90% in a share that shows great promise only shows how irrational (or under pressure) investors can be, not how bad a company's prospects are - in other words, it created a phenomenal buying opportunity. It just seems ridiculous to justify shorting a stock because the price has already fallen - surely what matters going forward is where the price is headed next, not where it has already been.

On top of all that, my wife and family are proud of me for investing in a company which is already saving the lives of kids and has a strong possibility of saving millions from chronic disease - and that's worth a lot!

@dontfollowme I'm glad you revised your sell pricing to $A2.75 as that gave you the chance to get out today at up to $2.815 - always better to improve on your original hopes! I think the price has a lot more upside and I don't consider it upramping when I am really just quoting the share price valuations of the major international analysts and also pointing out how conservative those analysts' assumptions are (ie using more reasonable long-term assumptions and discount rates gives multiples of their price targets).

The share price won't go up in a straight line, and good luck to you if you jagged a short-term high today. I see much more upside than downside and I have previously pointed out that I have never previously looked at investing in an Aussie stock with a better potential risk/reward ratio. That's why I'm prepared to invest long-term. With several big drivers occurring in the first half of this year (phase 3 trial results in heart and back pain and potential big partnering deals) I think the short-term and long-term prospects are both very attractive. I have friends who have sold on a short term basis from $1.50 and up, but they now find it very difficult (mentally) to re-enter at significantly higher prices - I understand that thinking, and for that reason I don't want to get suckered in to taking short-term profits when the international brokers show such tremendous upside in their forecasts.

Finally, you say "

to continue the upside potential for only 1 stock on the whole ASX forum does tend to ring a tiny bell with me" ​

- I honestly have no idea what you mean by that. I did a post on FMG several months ago when I thought people had not appreciated the importance of the Brazilian dam wall collapse - the only response I got was from a guy calling it "fake news"! People got onto it fairly soon afterwards and the price started to rise (although it took a long time to fully price it in). I didn't really get anything out of that experience, I really can't add much value, and most people get enough info on a stock like FMG, so why should I waste my time?

MSB, on the other hand, looked like it had tremendous upside, was under heavy attack from shorters and seemed to have a large number of people looking at it who wanted help understanding some of the technical aspects of shorting, how fund managers work, how analysts work, and how discounted cash flow valuations and NPVs work. I thought I could be of help in raising the level of understanding, and maybe help people pause and think about what they were doing before getting sucked into selling to the shorts. I have put quite a big effort into doing this and I appreciate the thanks of the regular posters.

My recent post about "why worry about pennies" when there are dollars of upside was seen by you as "blatant upramping" was really a simple outworking of looking at the valuations by the major analysts and exploring their upside potential from their very conservative assumptions. I even included the DawsonJames valuation table so people could plug in their own assumptions and see the upside or downside.

So, I don't consider that headline was upramping - it was trying to point out that a 10% or 50% price rise may seem exciting and may tempt people to take profits - but if you consider the dispassionate views of the global analysts, this price rise has just begun (Edison's valuation on conservative assumptions is over $A7) - remember that DawsonJames only include a 25% to 30% probability that heart and back pain will work, they discount back to net present values at a 30% discount rate, they don't include big chunks of MSB's potential business (no-one includes the Tasly China partnering possibilities, and DJ doesn't even include European back pain, where MSB already has a major partnering deal), they have tax rates of up to 37% and most of them are diluting for shares/options which haven't been issued yet.

I appreciate your questions, because in thinking about answering them, it makes me even more bullish!

I may have missed most of the great share price rises in history (or not recognised them near the start) but if this thing works, you have a global opportunity in the fast growth, high P/E health sector with potential cures for 2 blockbuster indications in heart failure and chronic back pain which have just completed phase 3 trials and three other potential blockbusters in earlier phase development and which still has a market cap of (just) under $US1 billion at today's closing price of $A2.69. I've honestly NEVER seen something this exciting - if it rings a tiny bell for you, it rings Big Ben for me!



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