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Small-Cap Standout: Arena Pharmaceuticals, Inc. (ARNA)

Low expectations circle outperforming ARNA, and why that's good

by 1/23/2014 10:47:59 AM
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Small-caps have started 2014 off on a better footing than their mid- and large-cap counterparts. Three underappreciated names in this outperforming sector that could offer up potential contrarian plays include biopharmaceutical concerns Arena Pharmaceuticals, Inc. (NASDAQ:ARNA) and BioCryst Pharmaceuticals, Inc. (NASDAQ:BCRX), as well as investment firm Main Street Capital Corporation (NYSE:MAIN). At Wednesday's close, the market capitalizations for these three firms stood at $1.64 billion, $693.49 million, and $1.30 billion, respectively.

BioCryst Pharmaceuticals, Inc. (NASDAQ:BCRX) has grown more than sevenfold over the past 52 weeks, yet the consensus 12-month price target of $11 stands at a discount to its current perch at $11.75. In other words, there is ample room for a round of price-target hikes, which could help push the shares higher. On Tuesday, in fact, Roth started the stock with a "buy" rating and an optimistic price target of $18, and BCRX responded by tacking on 7.8% that day.

Since hitting an annual low of $25.52 last June, Main Street Capital Corporation (NYSE:MAIN) has added 36% to linger near $34.79. Short interest, however, climbed 16.4% during the latest reporting period, and is now hovering near its loftiest perch since mid-August. MAIN's ability to march to a record peak in the midst of this selling pressure speaks volumes to its underlying strength. Plus, it would take about eight sessions to cover these shorted shares, leaving the door wide open for a potential short-covering rally.

After being in a steady downtrend from May through October of 2013, Arena Pharmaceuticals, Inc. has been making a solid case for technical redemption over the past few months. In fact, since slumping to its most recent low of $4.05 in early November, the stock has tacked on an impressive 82% to trade at $7.38. This momentum recently pulled the stock north of its 10-week moving average, and a quick bounce off this rising trendline earlier this month helped send the shares to levels not seen since late June.

In the options pits, though, speculators have been initiating long puts over calls at an accelerated clip of late. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 50-day put/call volume ratio of 0.38 ranks in the 95th percentile of its annual range. Simply stated, puts have been bought to open over calls with more rapidity just 5% of the time within the past year.

In the front-month series, specifically, option bears have targeted the February 7 put, where roughly 5,900 contracts reside -- the majority of which were bought to open. Going forward, this out-of-the-money strike could serve as an options-related foothold for ARNA, as the contracts begin to unwind over the next four-plus weeks.

Elsewhere, short interest accounts for nearly 30% of the stock's available float, equating to more than 16 days' worth of pent-up buying demand. In fact, ARNA was one of the most heavily shorted names in 2013. During the latest reporting period, though, short interest dropped 2.8%, and a continued capitulation from these bearish bettors could help fuel the stock's fire.

In today's session, the equity has succumbed to the bearish broad-market bias. Considering Arena Pharmaceuticals, Inc.'s (NASDAQ:ARNA) Relative Strength Index (RSI) of 71 is sitting solidly in overbought territory, though, a near-term pullback may have been in the works.

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