A Dynamic Shift in SAVA Stock: A Biotechnology Beacon Amidst Short-Selling Pressure

Cassava Sciences (ticker:SAVA) has slogged through phase 2 of drug development with promising outcomes for its candidate, simufilam, an oral drug that is safer than other recent Alzeheimer’s drugs alvailable only as an infusion.

The company’s advancements have not only attracted genuine investor interest but have also led to it being heavily shorted, with institutional investors betting on a stock decline. With a high level of short interest, SAVA’s stock dynamics present a complex scenario that could lead to a potential short squeeze this week.

Do you have a Warrant?

To reward its shareholders, Cassava Sciences is offering warrants to buy shares at $33 each, giving 4 warrant for each 10 shares held on December 22. In addition, if these warrants are executed during the first 30 days or so (there is a longer explanation here that I will not try to describe), these shareholders will also receive 1/2 share as a bonus.

Understanding Stock Warrants and Short-Selling

Stock warrants are financial tools giving the holder the right to buy the company’s stock at a predetermined price before a set date. They are different from options as they are issued directly by the company. While warrants can be a means to attract investment dollars, the context of SAVA’s high short interest adds another layer to this financial strategy.

GameStop Short Squeeze Jan-Feb 2021

Short selling involves investors borrowing shares and selling them, hoping to buy them back at a lower price. If a stock’s price rises instead, short sellers are forced to cover their positions by buying back the shares before the price goes any higher. This is the situation that occurs during a short squeeze, where the stock price is driven up rapidly as occurred during the extreme increase in GameStop (GME) shares in January 2021.

SAVA’s Situation: Between Warrants and Short Interest

For SAVA, the combination of issuing warrants and the existing heavy short interest creates a unique financial environment. The company’s rising stock prices, driven by its promising research, have been accompanied by short selling, with much of it occurring off-exchange, in so-called “dark pools.” This scenario sets the stage for a potential short squeeze, as there will need to be an accounting for each 10 shares as the December 22nd deadline approaches (make purchases by December 20th if you want to be sure that your shares settle within 2 days).

There are a few elements of human behavior at play:

1. People get something FREE = Frenzy: Think about the last time you saw others getting something FREE, you want it too! Also called FOMO (Fear of Missing Out).
2. As more buyers purchase SAVA in order to receive warrants, the share price increases.
3. As the share price increases, so does the value of the warrant.
4. Change in perception: despite negative phony headlines (which we will undoubtedly see, motivated by short sellers), the rapid price increase leads to more confidence in the stock, further increasing price.
5. Low Supply/High Demand: The high level of short interest in SAVA stocks implies a significant risk of a short squeeze. Having a warrant issued means there will be an accounting for all the of shares supposedly owned by each broker. With many shares trading off-exchange and previous high rates of Fails-to-Deliver (FTD), this accounting of shares may escalate the price significantly, as brokers attempt to locate shares that are in relatively small supply. If the company’s stock continues to rise, short sellers may be compelled to cover their positions, buying shares before the price gets too high, pushing the stock price even higher.

Chrysler, a Historical Example

In the early 1980s, when seeking government loans and facing near bankruptcy, Chrysler issued 14.4 million warrants to the government. At that time, Chrysler’s stock was languishing at a low point. To raise funds, the company offerred warrants at a strike price at $13, during a time when their stock was trading at just $5. With many expecting Chrysler to fail, the stock did just the opposite, with its price unexpectedly surging to $30.

The scenario at Chrysler was slightly different, as they were using this mechanism to avoid bankruptcy and warrants were sold to the Federal government (which you can read about in this 1983 NY Times article), rather than given to shareholders. But since offering warrants to US sharehoders is an uncommon occurrence, it’s difficult to find good historical examples.

Week of SAVA Fury

The warrants being given to shareholders is essentially an offer to purchase 1.5 shares for $22 ($33/1.5=$22, when exercising during the bonus period). With a recent price above $29–30, these are like “In the money” call options. With all the factors lining up — a blockbuster drug that is likely to prove effective for Alzheimer’s, high levels of short interest and off-exchange trading, and a time-limited warrant that is already in-the-money, we are seeing the ingredients for a massive short squeeze that could make GameStop’s (GME) look like a mild fluctuation. This week will be very exciting for SAVA investors and should be a profitable one.

The time following Dec. 22nd is likely to show a drop in the stock price, after which time no new warrants will be given. For that reason, as the stock price escalates this week, some may choose to sell some stocks, but certainly call options, to reap short-term rewards. There will continue to be upside in holding shares for the next 2–3 years as the drug completes its FDA approval and subsequent sales in the marketplace, so it is worth keeping these shares. In the near term, since we anticipate a price drop from Dec 22nd to Dec 29th, while the price is high this week, put options will become cheap, allowing investors to profit as the price declines as well.

I’m not an investment advisor, nor an Alzheimer’s/biotech researcher, but these are my predictions for the fascinating week to come.