Something has lit a fire beneath Geron Corporation (GERN -5.53%) stock. The biotech's share price has shot up by more than 35% this week. At the time of this writing, it looks like Geron could move even higher.
The big question, though, is what is the catalyst driving Geron stock up so much? There hasn't been any major news from the biotech over the past few days. However, I think there are several possibilities for Geron's big jump. Here are three likely reasons the stock is sizzling hot right now.
1. Some investors are scared out of their shorts
Well over 20% of Geron's float -- the number of shares available for trading -- were sold short prior to this week. For short-sellers, everything's wonderful as long as the stock goes down. That's been the general trend for Geron since late March.
However, it's a much different story when the stock price begins to increase. Short-sellers at first tell themselves that it's just a temporary improvement. But investors who are less confident in their pessimism are the first to begin covering their short positions by buying shares. If enough of them cover their short positions, it helps create upward price momentum. And that makes more short-sellers become fearful and decide to cover their short positions.
Literally, investors can be scared out of their shorts. This phenomenon is called a short squeeze. I suspect we're seeing a serious short squeeze in progress with Geron right now. A similar story unfolded in March when Geron stock soared close to 150% before giving up some of its gains.
2. A big move by an institutional investor
What initiated the short squeeze this time? It's hard to say for sure. One realistic possibility is that an institutional investor began to scoop up lots of shares.
Around 35% of Geron stock is already held by institutional investors, with two of them -- FMR and Blackrock -- together owning roughly 20% of the biotech's shares. When big investment firms buy a stock, it's more likely to cause shares to move higher than when retail investors do because of the larger volumes of shares purchased.
We're definitely seeing significantly higher trading volume for Geron. The stock's average daily trading volume is around 7.5 million shares. On Wednesday, 13.5 million shares of Geron were bought and sold. Although it won't be known which investment firms bought the stock until they file disclosures for the second quarter to the SEC a few months from now, my hunch is that one or more institutional investors are moving more heavily into Geron stock.
3. Anticipation of good news from a big partner
That leads to the question of why institutional investors (and retail investors, too) would want to buy Geron stock right now. One theory is that the biotech could report better-than-expected data for imetelstat at the European Hematology Association (EHA) Congress on June 17. The EHA presentation will only include updated results from the ongoing IMerge phase 2/3 clinical study. Geron presented early results in December at the American Society of Hematology (ASH) Annual Meeting.
I think expectations of good news at the EHA event could be part of the reason behind Geron's recent momentum. However, my hunch is the bigger story is that there is increased anticipation that Johnson & Johnson (JNJ -2.07%) will decide to continue funding development of imetelstat. J&J's decision is expected by the end of the third quarter of 2018.
Trying to predict what J&J might do is somewhat like reading tea leaves. The company's executives didn't mention imetelstat during J&J's first-quarter earnings conference call. However, they didn't bring up several other pipeline candidates, either. Perhaps most important is that imetelstat was prominently listed among J&J's planned regulatory filings between 2018 and 2021 in the company's April 17, 2018, pipeline update document.
High risk, high reward
My best guess is that the above three factors combined to send Geron stock on a merry ride up. Anticipation of a positive decision by J&J led to increased buying by one or more institutional investors, which in turn led to short-sellers running scared, which led to a short squeeze. That's my story, and I'm sticking to it.
Despite the great run we're seeing right now, Geron remains a very risky stock. Short squeezes typically end with a sell-off. If that's what is happening -- and I think it is, a sell-off of Geron could happen in the not-too-distant future.
However, with high risk comes the potential for high rewards. If imetelstat delivers the goods in clinical studies and J&J throws its full weight behind the drug, Geron stock could go a lot higher than it has over the last few days. This week could be a fluke, but it could also be just a taste of the success that's down the road.