Analyst: This Overbought Drug Stock Can Still Double

Nomura iniated coverage on Sucampo Pharmaceuticals with a "buy"

Dec 19, 2017 at 11:33 AM
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Nomura initiated coverage on Sucampo Pharmaceuticals, Inc. (NASDAQ:SCMP) with a "buy" rating and a $43 price target -- representing expected upside of 150% to the stock's current perch at $17.10, up 2.1% so far today. The brokerage firm said the current valuation doesn't price in SCMP's Niemann-Pick disease type C1 (NPC1) treatment -- an extremely rare metabolic disorder -- and other products in the pipeline.

Today's positive price action echoes the stock's recent trajectory, with SCMP stock up nearly 34% so far in December -- on track for its best monthly performance since November 2016. In fact, since skimming lows near $9.45 in late October and early November, the shares have surged more than 82%, and topped out at a two-year high of $17.70 on Dec. 7.

This notable milestone came after Bloomberg reported the Maryland-based biotech was exploring strategic options, including a potential sale of the business. Securities and Exchange (SEC) filings released in subsequent sessions revealed passive stakes from Linden Capital and ING Groep NV -- which created bigger tailwinds for the drug stock.

Against this backdrop, options traders have been extremely call-skewed in recent weeks. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), speculators have bought to open 3,784 calls in the past 10 sessions, compared to 149 puts. According to Trade-Alert, most of this action occurred at the March 20 call.

While it's possible some of this activity is a result of traditional options bulls betting on a bigger breakout, it's also likely short sellers are using the out-of-the-money calls to hedge against any additional upside risk. Since mid-October, short interest on SCMP is up almost 10% to 4.69 million shares -- the most since early July.

And considering it would take more than six sessions to cover these bearish bets at the average pace of trading, some of the recent upside could be the result of a short squeeze. Nevertheless, SCMP stock could be at risk of a near-term retreat, considering its 14-day Relative Strength Index (RSI) was last seen at 87.17, deep into overbought territory.

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