Access Update- #34

Since when did a small cap biotech with no approved products become a safe haven?

Of course, I’m being facetious, but shares of Synta Pharmaceuticals (Nasdaq: SNTA) are up over 11% on the week. Meanwhile, the S&P 500 and the Nasdaq are down nearly 7% each.

I spoke with the company and they have not made any statements that would be responsible for the jump in price. Here’s what I suspect is going on:

With regulators declaring a war on short sellers, the SEC is cracking down on naked shorts. While that may sound like a creepy neighbor, naked shorts are actually short sellers that do not borrow the shares they sell. Typically, when an investor shorts a stock, they need to borrow it in order to sell it. Naked shorts are selling something they don’t have.

The SEC is ordering shorts to deliver their borrowed shares in three days or close out their positions. As of August, almost 11% of SNTA’s float was sold short. How many of those shares sold short were naked is unknown. But SNTA appears on the Nasdaq’s Regulation SHO Threshold list. This is a list of stocks that have had large number of naked shorts.

So either naked shorts are actually buying back the shares in order to deliver them or there is a perception that they will in the next couple of days, causing a short squeeze.

Cytori Therapeutics (Nasdaq: CYTX) is also on that list and is enjoying a big day as well.

By the way, guess who the lead banks were for SNTA’s IPO – Lehman Brothers and Bear Stearns. Don’t worry, that’s not an omen.

As far as this meltdown is concerned, I’m sure you’re reading plenty of other opinions, so I’ll spare you mine other than how it will impact our portfolio.

If there is real panic and fear, small caps and speculative names tend to get hit. However, what’s unusual about this panic is that the perceived safe havens to park money, such as banks and money markets, are what people are afraid of. So perhaps the typical fear of staying in a small cap name will be avoided.

If this meltdown continues, it could be difficult for some companies to raise capital. But I’m not especially worried about that with our portfolio. Our companies have healthy balance sheets and solid partnerships, so I don’t see any of them running out of money any time soon.

Healthcare and particularly novel devices and medicines will remain a vital necessity going forward. We expect to be able to continue picking the elite companies in this sector and rewarding you with profits.

Have a great weekend.

Marc Lichtenfeld
Director of Research
Access Research Group

Stock
Symbol
Current Price
Comments

Synta Pharmaceuticals

SNTA

$9.88

Buy up to $13.00

ViroPharma

VPHM

$13.35

Buy up to $12.50

Cytori Therapeutics

CYTX

$6.29

Buy up to $8.00

Electro-Optical Sciences

MELA

$6.38

Buy up to $5.75