The allure of penny stocks lies in their potential to deliver massive gains in a short period. However, in exchange for that opportunity, most penny stocks carry tremendous risk. They can be extremely volatile and are susceptible to “pump and dump” schemes and fraud.
Unlike regular stocks, the financial condition of most penny stock companies can be extremely difficult to analyze, as the majority of such stocks are traded on over-the-counter (OTC) exchanges, which are typically less transparent and less regulated than the major exchanges. In fact, in the penny stock space, it’s often easier to spot warning signs and red flags than it is to identify a sound investment.
Although the potential reward may make it worthwhile, choosing the right penny stock is a daunting task. Nevertheless, we’ll do our best to identify short-term trade opportunities in this exciting space.
With this in mind, we’re starting a new series called “Penny Stock of the Day”. These ideas are geared for traders with a high risk appetite.
Our Penny Stock of the Day is chosen by screening for stocks under $5 and then applying technical analysis on the shortlisted set of penny stocks showing unusual volume. When making these trades, please make sure to pay vigilant attention to pricing moves and have a strict stop loss in place to avoid significant losses.
Penny Stock of the Day: NovaBay Pharmaceuticals, Inc. (NYSE: NBY)
Today’s penny stock pick is the clinical-stage biopharmaceutical company, NovaBay Pharmaceuticals, Inc. (NYSE: NBY).
NovaBay Pharmaceuticals Inc is a biopharmaceutical company that develops, manufactures, and markets anti-infective products for a multitude of uses. It is predominantly focused on commercializing prescription Avenova for the domestic eye care market in the United States. Avenova is a solution for cleansing and removing foreign materials from the skin around the eye including the eyelid.
The company also has CelleRx Clinical Reset, NeutroPhase Skin and Wound Cleanser, a facial spray, and many more products. In addition to this, NovaBay offers KN95 masks which have been useful during the COVID-19 pandemic. It has partnerships for NeutroPhase in the United States, as well as in other markets.
Website: www.novabay.com
Latest 10-k report: https://sec.report/Document/0001437749-21-007158/
Potential Catalysts / Reasons for the Hype:
- Approval of NovaBay Hard Nonporous Surface Pro, the company’s proprietary hypochlorous acid solution, by the EPA. It was added to the N-List of approved COVID disinfectants for hard surface cleaning.
- The company announcing a collaboration with ImprimisRx, one of the nation’s leading ophthalmology-focused pharmaceutical businesses, to promote prescription Avenova. Partnering with a larger national distributor is expected to help get more products to market.
- Launching of NovaBay’s i-Chek Illuminated Eye Examination Mirror on Amazon. The company had recently decided to market OTC products for both eye care and beauty, expanding from their Rx-only products.
- The company announcing that they will be entering brick and mortar retail via CVS.
On analyzing the company’s stock charts, there seem to be multiple bullish indications…
Bullish Indications
#1 Falling Wedge Pattern Breakout: The daily chart shows that the stock has currently broken out of the falling wedge pattern with very high volume. This pattern is marked in pink color lines. A breakout from the falling wedge pattern indicates that the stock may move higher. The stock is also trading above its 20-day SMA, indicating that bulls are slowly gaining control.
Daily Chart – NBY
#2 Bullish Stoch: The %K line is above the %D line of the stochastic in the daily chart. It is also moving higher from oversold levels. All these indicate possible bullishness.
#3 Bullish ADX and DI: The ADX indicator shows bullishness because the (+DI) line is greater than the (-DI) line, the ADX and (+DI) lines are above the (-DI) line, and the ADX line is moving up from below the (-DI) and (+DI) lines.
#4 Bullish RSI: The daily chart shows that the RSI is moving higher from oversold levels. It is currently above 50 and moving higher, indicating the strength of the current upmove.
#5 Above Support Area: The weekly chart shows that the stock is currently trading above a long-term support area. This has been marked as a blue color dotted line. This is a possible bullish indication.
Weekly Chart – NBY
#6 Oversold Stoch: The weekly chart shows that the stochastic is moving higher from oversold levels. The %K line is also above the %D line. All these indicate possible bullishness.
#7 Oversold RSI: In the weekly chart as well, the RSI is currently moving higher from oversold levels, indicating bullishness.
Recommended Trade (based on the charts)
Buy Levels: If you want to get in on this trade, the ideal buy level for NBY is above the price of $0.71. This is marked as a green color dotted line in the chart.
Target Prices: Our target prices are $1.20 and $1.50.
Stop Loss: To limit risk, place a stop loss at $0.44. Note that the stop loss is on a closing basis.
Our target potential upside is 69% to 111%. For a risk of $0.27, our first target reward is $0.49, and the second target reward is $0.79. This is a nearly 1:2 and 1:3 risk-reward trade.
In other words, this trade offers 2x to 3x more potential upside than downside.
Potential Risks / Red Flags:
- The company has historically incurred net losses. As of December 31, 2020, the company has a net operating loss carryforward for federal and state income tax purposes of $117.3 million and $96.2 million, respectively. The company had reported a net loss and comprehensive loss of $11,039,000 for the year ended December 31, 2020, which is higher than the net loss and comprehensive loss of $9,658,000 for December 31, 2019.
Annual Report
- The company was formerly known as NovaCal Pharmaceuticals and changed its name to NovaBay Pharmaceuticals in February 2007. NovaCal Pharmaceuticals, Inc. was incorporated under the laws of the State of California on January 19, 2000, but had no operations until July 1, 2002. In August 2007, the company formed two subsidiaries––NovaBay Pharmaceuticals Canada, Inc. and DermaBay, Inc.
- For the three months ended March 31, 2020, the company had a net loss of $1.6 million.
Q1 Report
- On May 16, 2019, the company received notice from the NYSE American LLC that it is not in compliance with Sections 1003(a)(i) and 1003(a)(ii) of the NYSE American Company Guide requiring stockholders’ equity of $2.0 million or more and $4.0 million or more, respectively, if the Company has reported losses from continuing operations and/or net losses in three of the four most recent fiscal years. Although the company had since then announced the regaining of compliance, it could be subject to delisting procedures in the future if stockholders’ equity does not meet the minimum standards of the NYSE.
- The company has a history of failed products. NBY’s impetigo candidate, auriclosene had failed the Phase IIb study, as it did not meet the primary clinical endpoint of the trial.
- The company had recently proposed settlement of class action lawsuit Kozma v. Sieczkarek, No. 16-cv-01254-JF, which had allegations concerning the Amendment to NovaBay’s 2007 Omnibus Shareholder Plan approved by stockholders on May 26, 2016.
- Despite being a loss-making company, in 2019, the CEO was paid $325,720 while the CFO was paid $333,980.
- The company was trading near its 52-week low at $0.52, and the current surge is news-driven. The company’s Avenova product and the pandemic-driven need for the KN95 disposable masks have been the main catalysts for NovaBay. However, there is high competition in the field, with companies like Merz North America, CinnaGen, Vectura Group plc, and Sofar offering alternatives. Therefore, the current surge could be just a short-lived spike.
As you can see, today’s featured penny stock offers big upside potential… but it also comes with a number of risks and red flags. As always, when dealing with penny stocks, we advise caution before entering into such high-risk ventures. Remember to think before you trade… understand the risks… and if you decide to trade, stick to your stop-losses!
Happy Trading!
— Trades of the Day Research Team
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