Buy the rumor and sell the news doesn't always work out so well.
Investors who followed the old adage with Novavax (NASDAQ:NVAX) recently learned that lesson the hard way. Shares of the clinical-stage biotech surged after the company announced that it would provide a clinical update for its RSV F vaccine. Many clearly thought that Novavax would deliver some good news for its beleaguered program.
When the update actually happened, though, it was a different story for the stock. Shares gave up all the gains and then some as investors realized the news for the RSV F vaccine didn't justify the previous bounce. With the latest round of drama over, what's the best course of action?
Zig and zag
Prior to Novavax's update on July 24, I wrote that investors probably should brace themselves for bad news. I don't pretend to be in possession of any psychic skills in making that recommendation. It was simply pragmatism. I quoted the late motivational speaker Zig Ziglar, who once stated: "Expect the best. Prepare for the worst. Capitalize on what comes."
Investors who placed big bets on tremendous news for the RSV F vaccine were disappointed. However, those who hoped for good news but were prepared for it to be really bad were in much better shape. The most important advice from Zig Ziglar's statement lies at the heart of what I think is the best reason to buy Novavax stock now: Capitalize on the sell-off from those who were counting on game-changing good news. Pardon the pun, but it could make sense to zig when others zag.
Sure, the story from Novavax didn't generate excitement. Still, though, the news wasn't really bad. The company's phase 2 study evaluating safety and immunogenicity of the RSV F vaccine in older adults was encouraging. Novavax now plans to initiate another phase 2 study in older adults focusing on efficacy next year. Its phase 3 study evaluating the vaccine in infants via maternal immunization appears to be progressing well.
It comes down to your time horizon. If you have a long-term perspective, buying Novavax stock after the recent plunge could make sense. There was no news that should make anyone have a more negative opinion of the RSV F vaccine. The market opportunity if the vaccine ultimately proves to be successful is still huge.
On the other hand
What if you don't have a long-term perspective? Your best bet is probably to stay away from Novavax for now. There are two main reasons why.
First, the biotech doesn't have any major catalysts coming up soon to drive the stock higher. The phase 2 efficacy trial in older adults won't even start until next year. There will be what Novavax refers to as an "informational analysis" of its phase 3 study of the RSV F vaccine in infants via maternal immunization, but it won't happen until near the end of 2017. An interim analysis isn't scheduled until sometime in mid-2018.
Second, Novavax continues to lose money and deplete its cash stockpile. The company reported cash, cash equivalents, and marketable securities totaling $211.2 million at the end of March. That amount could be around $40 million to $50 million lower when Novavax announces its second-quarter results. Although the biotech should be able to fund operations into the first half of 2018, another stock offering is probably in the cards in the not-too-distant future. That would mean more dilution for current shareholders.
The option option
There is another alternative for investors who are somewhat bullish on the prospects for Novavax and its RSV F vaccine but want to reduce their risk exposure. You could buy call options.
If you take this route, probably the best approach would be to go with options with expiration dates well into the future. As already mentioned, there aren't obvious big catalysts coming soon enough to make short-term options worthwhile.
With longer-dated options, though, the informational analysis of the phase 3 study in infants could potentially drive Novavax stock (and options) higher. The interim analysis next year could provide a big boost. There's also always the possibility that Novavax forges a licensing deal with a bigger company or even gets bought out. And if none of this happens, the relatively low price of the option means you won't risk losing nearly as much as you would if you had bought the stock outright.