Investors are always on the prowl for the next big company capable of providing significant returns in a limited amount of time. Yet in this short-sighted perspective of the market, this popular mindset often boils down to a dependency on shifting market sentiments rather than tangible operational success. After all, enterprises take time to develop and the short-handed impact of rapid market gains aren't often dependent on the cash-generating business changes implemented overnight. Indeed, it is through the proliferation of investor optimism that a company's stock accelerates on the backbone of momentum.
This article takes a look at two particular companies that now find themselves following part of a formula for rapid stock appreciation. These companies are Tesla Motors, Inc. (TSLA) and OPKO Health, Inc. (OPK). In each of these instances, the companies have developed a solid innovation pipeline, the support of a strong financial backer, an unusually large short-interest, and a catalyst for demand. Combined, these attributes appear to design a formula that can lead to rapid stock price appreciation.
Tesla Motors
As a company that has already appreciated in a short amount of time, it remains ideal to look at Tesla as a model. Tesla Motors is a premier innovator behind electric vehicle technology. Outlasting its private company peers such as Fisker Automotive and Coda Holdings, Tesla has made its high-end electric vehicles the envy of the automotive industry. The company has very quickly shown its ability to succeed in its target market where larger public companies such as General Motors (GM) and Ford (F) have failed to gain momentum with their own electric vehicle lines.
Tesla's most popular financial backer remains the company CEO himself. As a co-founder for the company, CEO Elon Musk helped to create a valuation premium through his own financial support. Musk owes fortune as the former founder of PayPal. In June 2011, Musk purchased $40.7 million worth of company shares. In May 2013, Musk reinvigorated investor confidence by putting another $100 million into Tesla despite the fact that the company's stock had already appreciated more than 150% in the two months prior.
Although it would ultimately be seen as a crutch to the company, the Department of Energy also played heavy role in supporting Tesla. In 2010, the company received a $465 million loan to help foster the development of advanced-technology vehicles. The catalyst for Tesla would ultimately come in two noteworthy waves. First, Tesla exceeded sales expectations even as its industry peers failed to impress. Second, the company paid back early its loan from U.S. Government while Musk significantly added to his holdings at a much higher price.
In the last 6 months, Tesla has seen its stock rise 382%. Throughout this time, Tesla's short interest remained unusually high. At the end of March, the company's short interest was 31.3 million shares, reflecting a short ratio of 22.91. Based on an average daily volume of 1.37 million shares, it would take roughly 23 days for investors that were short to cover their positions in an environment in which the company's stock was appreciating. Such artificial selling pressure allowed for a stronger acceleration when the stock began to find momentum.
OPKO Health
While being in a truly different industry than Tesla, OPKO Health still carries several unique similarities to the automotive company. Although it may easily be passed off as a mere pharmaceutical and diagnostics company now under development, OPKO Health has maintained an aggressive acquisition strategy that distinguishes it from its peers. The company's management team has brought together a very large suite of products under development, many of which provide unique synergies and address a diverse range of specialty markets.
In the last year alone, OPKO has conducted six strategic acquisitions. Most of these utilized the company's stock as either a partial or full payment for the acquisitions. The company's pipeline is now looking to address markets ranging from chronic kidney disease, to prostate cancer, to growth hormone deficiency, and even to depression. Seeking Alpha contributor Josh Ginsburg breaks down the possible multi-billion dollar markets the company can address over the short- and long-term in his article found here.
As was the case with Tesla, the company's strong financial backer happens to be the company's Chief Executive Officer. CEO Dr. Phillip Frost also serves as the Chairman of Teva Pharmaceuticals (TEVA), a position he eventually acquired after gaining his fortune in Teva's $7.4 billion acquisition of IVAX Corporation in 2005. Frost had founded IVAX and had served as its CEO.
As a result of his newfound wealth, the entrepreneur was quick to reinvest his money into OPKO Health after being appointed the company's CEO in 2007. On a near daily basis since 2007, Frost purchased company stock. Part of this can be seen in the graphic below. According to the latest Form 4 found here, the CEO indirectly owned 142,453,591 shares of OPKO, a position now worth $1.32 billion according to the last share price of $9.24 as of August 30.
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On August 30, OPKO Health rose 8.83% on more than four times the average daily volume in a rather unexpected swing. What made the climb unique was that shares had traded more than 2% down until the last half hour of the day. At that time, the company rapidly climbed more than 15% at one point to eventually settle down for an 8.83% gain. The apparent catalyst appeared to be a delayed reaction to the finalization of the company's all-stock acquisition of PROLOR Biotech. The announcement was made the day before. The acquisition greatly diversifies OPKO's potential but was initially met with skepticism in light of Frost's conflict of interest. According to the Form 4 found here, Frost owned 9.8 million shares of PROLOR, which accounted for roughly 15% of the shares outstanding.
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What likely contributed to the stock's high volatility is the heavy short interest that now surrounds OPKO Health. As of August 15, there were 31.38 million shares short. With an average 1.91 million shares traded daily, this leads to a short ratio of 16.4 for OPKO. Another catalyst which was sure to complicate the issue was the announcement by OPKO that the conversion right for the company's 3.0% Convertible Senior Notes had been triggered. Because of this trigger, it remains likely that an influx of new share demand set off a wave of investors seeking to cover their short positions.
A Look At The Financial Picture
OPKO Health now trades with a $3.11 billion market capitalization based on its last stock price of $9.24. The company carries a high price-to-sales ratio of 34.35 as its valuation is largely dependent on its future revenue potential. Likewise, the company carried a price-to-book ratio of 9.09. Neglecting its pipeline potential, OPKO may appear overvalued. After all, the company only carries a total shareholder equity of $314.48 million.
However, like Tesla, OPKO has shown no sign of slowing down on the market in light of its future potential. Over the last five years, the company's stock has risen 327%. Above all, it remains adequately capitalized. In all of 2012, the company had a cash outflow from operating activities of only $25.42 million. As of June 30, the company carried roughly $169 million in cash and short-term investments.
The company's markets also remain large and near to being addressed. Some of OPKO's diagnostic products are expected to make an impact this year and the company's pipeline carries multiple Phase 3 products. Seeking Alpha contributor John Ford notes that OPKO's 4KScore diagnostic test could generate over $1.8 billion annually just by addressing the prostate cancer test market alone. This is based on the estimates of outside consultants when asked to determine a fair price for the diagnostics test. Such reoccurring revenue significantly overwhelms the mere $47 million the company realized in 2012 as it continued to develop its existing pipeline.
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Conclusion
When we use Tesla Motors as a model case study for rapid stock price appreciation, there are several distinct similarities that stick out about OPKO Health as well. Both companies are led by well-known individuals in their respective markets. Both CEOs have accumulated a large fortune and have willingly been propping up their company's stock. Both companies have found niche and valuable industries in which they are staged to make a significant impact. Additionally, each of these companies have been accumulating a rather large short-interest despite the fact their share prices have been rising.
Most importantly, each company appears to have found a catalyst that can ignite the demand for stock. For Tesla Motors, this was the sales expectations beat along with the early payment of a federal loan. For OPKO, the completion of its most ambitious acquisition also coincided with the triggered conversion right for its largest long-term debt obligation. By releasing the artificial selling pressure created by a large short interest, these companies are proving the power of shifting market sentiments prior to true operational success.
Disclosure: I am long OPK, TEVA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
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