Over the past couple of months, the retail investor-fuelled rally around GameStop shares has set a precedent for the stock market. The precedent is that the collective movements of everyday investors can move the share price of a stock. The example of GameStop has led a lot of people (who missed the boat) to try and find what the next opportunity could be. In recent days, chatter around Clovis Oncology (NASDAQ: CLVS) shares has risen in this regard.
What’s the story?
So what does Clovis Oncology do? Well it’s an established US-based company that develops and commercialises cancer treatments internationally. Currently Clovis shares trade around $6.88, but had traded up to $100 back in 2015. This element is one reason why some retail investors think it could be similar to GameStop due to the ‘short interest’.
This short interest (that profits if the stock falls) has grown since 2017 due to poor financial performance. This was mostly due to high research and development costs of new treatments, without having the revenue to show for it. For example, in 2018 the business lost $370k, up from a loss of $340k in 2017. Research and development costs for 2018 alone were $231k when revenue was only $95k.
As a result, Clovis shares have tumbled down to the levels they sit at currently. We might wonder why a business of this size can command a market valuation of $718m. From what I can see, this is mostly based on speculation about future approvals for cancer treatments. Last Friday, Clovis shares rallied 48% after positive news from trials of it’s ovarian cancer drug called Rubraca.
Could Clovis shares skyrocket?
There are several reasons why Clovis shares could mirror the explosion seen in GameStop shares earlier this year. To begin with, short interest sits at 41%, which is high. The implications of this are that if the share price starts to rally, people who shorted the stock will need to buy back shares to close out their positions. This will push Clovis shares even higher. This was the same situation that happened with GameStop.
Further, Clovis is gaining more prominence in internet chat sites, just like GameStop. If this continues to increase, it will be on the radar of more investors. This in turn should lead to more people buying the stock. Even if they don’t completely understand the business, the fear of missing out can be a very strong pull!
But am I going to buy Clovis shares right now? No. The share could rocket higher if more positive news on treatments gets released (and I hope that’s the case for the sake of the many people that could benefit from its products). But this has the feeling of an over-inflated penny stock to me. It feels very ‘boom or bust’. As the stock is also still a fairly small company, the price can easily see erratic moves as there aren’t a large amount of shares in circulation.
If I was a high-risk investor then maybe I would buy Clovis shares, as there’s a small chance that they might make high returns. Instead though, I’ll follow The Motley Fool strategy and look to more established, profitable companies to invest in. That way I hope to build my wealth gradually over time without so many scary booms and busts to have to deal with!
