market folly

We've posted up notes from the Value Investing Congress in Las Vegas and next up in the series is Richard Pearson, dubbed "The Sleuth of Wall Street" at the conference.  He pitched Organovo (ONVO) as a short.


Richard Pearson's Presentation at the Value Investing Congress

•    Private investor based out of LA and Beijing. Looks at exposing at stocks that have been promoted and trade at excessive valuations.
•    Publish his filings on Seeking Alpha among other websites.
•    He was going to break a big short here. He was contacted by a person from the dream team (IR firm scandal – article recently on Barrons).
•    Asked him if he was interested in writing articles for the Dream Team’s promotions and he would receive $300 per write up.
•    Multiple legal issues – can be viewed as the statements promotions. Very risky proposition for the Company to be in. Richard “agreed” to go along with the scheme and uncover the identities of the authors, companies and firms involved. Of course, CC’ing his lawyer throughout. 
•    He started drafting fake articles with small mistakes – with a goal to see if the Company would make changes- was true as the articles were being EDITED by the Company. Had Microsoft word lock changes reviewed by the Company!
•    Richard notified the SEC in advance and published. Sad story, some of the Company’s were already under investigation while doing this! Galena Pharmaceutical is the prime example
•    200 multiple promotion articles have been taken off since the investigation.
•    How media mentions impact small cap stocks is the topic.


•    Short: Organovo Holdings (ONVO) – was a client of one of the IR firms.
•    In its most recent equity offering – new risk factor disclosed – common stock has trading risk related to media (i.e. seeking alpha articles). 
•    Organovo is making an effort to remove negative articles.
•    Lot78 – LOTE – is an example of how a explosive promotion plays out – went from $1 to $24, purely out of promotions – crashed to five cents after the promotion ended. Lesson learned? No limit to how high prices can rise when stocks are promoted. Another lesson: easy to assume that share price is related to its prospects.
•    Why short Organovo? Heavy dilution likely coming, no revenues, and of course prospect determined by write ups. Organovo assets consist primarily of cash raised. IP is on the books at ~$110K. Only real asset is the $49MM in cash.
•    Organovo 1.0 started a few years ago to acquire IP Related to 3-D bio-printer. There wasn’t a ready market, Organovo 2.0 – attempted to sell a liver toxicology product with only $2 - $4MM total addressable market. Share price fell by 40% (was a $1B company). Revenue model has shifted twice since “2.0”.
•    R&D is only $1MM - $2MM per quarter. Biotechs with similar market capitalizations have spent on average ~$13MM per quarter versus $1-$2MM at Organovo. 
•    Only announcement with substance was there recent stock raise in August. Of course, they have been busy at investor conferences, their favorite is retailinvestors.com.
•    JRP Securities initiated a lackluster initiation, with a “market perform” at $8 and no earnings forecast. 
•    As a key milestone for the CEO’s comp, he was to receive payments if the Company received sell-side initiation
•    148 articles posted on the Company – pure hype articles such as saying the toxicology business has billion dollars or more target market. Writers have also said that companies like McDonalds could buy 3D printed meat using Organovo’s “tech”, or that they could be bought-out at $15 - $16.
•    When there is not much written on the name, the stock drops. When a lot of written, the stock has risen. Purely independent bloggers are influencing the stock price.
•    Insider sales are rampant, they are eager to get out of the stock.
•    Risks to the short: they do have a lot of cash and can possibly raise more through a equity distribution agreement. So a low risk of a cash crunch.
•    Risk once they raise the extra $50MM – they could perhaps purchase a real business.
•    Organovo 5.0 – Pitch a new business concept.

Be sure to check out the rest of the Value Investing Congress presentations.