When a stock gets red hot, its share price can sometimes soar to unsustainable levels as euphoria ends up taking over. One of the hottest stocks to own this year has undoubtedly been Summit Therapeutics (SMMT 0.50%), and it could very well fall into that category.
Even though the promising biotech doesn't have an approved product in its portfolio and is generating no revenue, the excitement around one of its oncology treatments has investors incredibly bullish.
With the stock recently retreating significantly from its high, is that a sign that it might have finally peaked, or could this make for a good buying opportunity?
Its valuation is rich due to the hopes for one drug
Summit is worth more than $16 billion right now, but where the healthcare stock goes from here will depend heavily on the success of its cancer drug, ivonescimab. In a late-stage trial for advanced non-small cell lung cancer, it outperformed Merck's Keytruda by a wide margin, which led to a wave of bullishness.
By the stock's movements, investors appear to be pricing in this drug to not just be a blockbuster, but for it to also potentially be the next Keytruda, which has been a successful treatment for multiple types of cancers. It's an ambitious outlook, to say the least, especially given that ivonescimab isn't approved for even one indication right now.
Those sky-high expectations make the stock vulnerable to a massive correction should there be any adverse news around either the treatment or the company itself.
What the stock's volatility and short interest say
It's difficult to determine what a company at such an early stage of development should be worth. But the more than $20 billion valuation Summit was trading at earlier did seem a bit rich, even if it does have an incredibly promising treatment in ivonescimab. At that high a valuation, it could be difficult for the stock to rise much higher, and so it might not be all that surprising that it has given back some gains.
Recently, the trading volume has been dying down to more normal levels, suggesting that the hype has been waning and that perhaps the bullishness is cooling.
SMMT Volume data by YCharts.
When excitement around a stock is high, trading volume is also often at elevated levels. And when news around the recent late-stage trial involving ivonescimab came out in early September, the stock surged, with many buyers eager to add it to their portfolios.
But there's also more than a fair share of people in the other camp who are bearish that the stock is simply too expensive, too risky, and overdue for a sell-off. Although short interest has come down of late, it remains incredibly high for Summit.
SMMT percent of float short; data by YCharts.
Short-sellers are putting a lot of pressure on the stock and appear to be pulling Summit's valuation down now that bullish investors have taken a break. This poses a risk to investors that the stock will remain volatile for the foreseeable future as not only does it depend heavily on how ivonescimab performs but also on the effect short-sellers will have.
Should you buy Summit Therapeutics stock right now?
Summit has a lot of potential. Ivonescimab is a promising drug that the business can build around. Sometimes all it takes is one incredibly successful drug that can help fund a business' long-term growth and pave the way to a massive valuation in the future.
But Summit isn't there yet, and the risk is that investors are paying a big premium for the stock, even with its price coming down of late. I do think that at least in the short term, the stock might have hit a peak.
Unless you're a contrarian investor who has a high risk tolerance, you might be better off steering clear of the stock until ivonescimab obtains approval and starts generating revenue. If it's the real deal, there could be a lot of upside in the future -- there's no reason to rush in and buy the stock right now.
