We recently started a series called “Penny Stock of the Day”. These ideas are geared for traders with an extremely 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: Kala Pharmaceuticals Inc. (NASDAQ: KALA)
Today’s penny stock pick is the biopharmaceutical company, Kala Pharmaceuticals Inc. (NASDAQ: KALA).
Kala Pharmaceuticals Inc. focuses on the discovery, development, and commercialization of therapies using its proprietary nanoparticle-based Mucus Penetrating Particles (MPP) technology for the treatment of eye diseases.
The company’s product candidates include EYSUVIS for the short-term treatment of the signs and symptoms of dry eye disease; and INVELTYS, a topical twice-a-day ocular steroid for the treatment of post-operative inflammation and pain following ocular surgery.
Its preclinical development programs comprise KPI-285/KPI-286, a receptor tyrosine kinase inhibitor program for the treatment of various retinal diseases; SEGRM program, a novel class of compounds designed to regulate gene expression through the transrepression pathway while avoiding the transactivation pathway; and surface targeted steroid program (KPI-333), a new chemical entity as a topical steroid that targets the ocular surface.
Website: www.kalarx.com
Latest 10-k report: https://sec.report/Document/0001558370-21-001797/
Analyst Consensus: As per TipRanks Analytics, based on 1 Wall Street analyst offering 12-month price targets for KALA in the last 3 months, the stock has an average price target of $7.67, which is nearly 354% upside from current levels.
Source: TipRanks.com
Potential Catalysts / Reasons for the Hype:
- C. Wainwright analyst reiterated buy rating for the stock and set a $9 price target.
Analysts | Source: TipRanks.com
- United Healthcare added coverage for EYSUVIS with 13 million lives. The company has also gained approval from Cigan Medicare, which added the treatment as a preferred brand last month. The EYSUVIS platform is now available with ExpressScripts, Prime Therapeutics, and Cigna.
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 been forming a falling wedge pattern for the past several months. These are marked as purple color lines. It has typically taken support at the bottom of the wedge before bouncing back. The stock has currently broken out from the falling wedge pattern. Once the stock breaks out of the falling wedge pattern, it could move higher.
KALA – Daily Chart
#2 Bullish ADX and DI: The ADX indicator shows bullishness as the +DI line is above the -DI line, and the ADX line is currently moving higher from below the +DI and -DI lines.
#3 Price above MA: The stock is currently above its 50-day SMA, indicating that the bulls have currently gained control.
#4 Bullish Stoch: The %K line of the stochastic is above the %D line, and has also moved higher from oversold levels, indicating possible bullishness.
#5 MACD above Signal Line: In the daily chart, the MACD (light blue color) is currently above the MACD signal line (orange color). This indicates a possible bullish setup.
#6 Above Support Area: The weekly chart shows that the stock is currently trading above a support area, which is marked as a pink color dotted line. The stock had bounced higher with a historic high volume. This is a possible bullish indication.
KALA – Weekly Chart
#7 Bullish Stoch: The %K line is above the %D line of the stochastic in the weekly chart as well, and is also moving higher from oversold levels, indicating possible bullishness.
#8 MACD above Signal Line: In the weekly chart as well, the MACD (light blue color) is currently above the MACD signal line (orange color). This indicates a possible bullish setup.
Recommended Trade (based on the charts)
Buy Levels: If you want to get in on this trade, the ideal buy level for KALA is above the price of $3.60. However, you can purchase half the intended quantity of shares of KALA above the price of around $2.40.
Target Prices: Our first target is $5.00. If it closes above that level, the second target price is $7.00.
Stop Loss: To limit risk, place a stop loss at $2.80 (for entry near $3.60) and $1.00 (for entry near $2.40). Note that the stop loss is on a closing basis.
Our target potential upside is 39% to 192%.
- Entry near $3.60: For a risk of $0.80, our first target reward is $1.40, and the second target reward is $3.40. This is a nearly 1:2 and 1:4 risk-reward trade.
- Entry near $2.40: For a risk of $1.40, our first target reward is $2.30, and the second target reward is $4.60. This is a nearly 1:2 and 1:3 risk-reward trade.
In other words, this trade offers 2x to 4x more potential upside than downside.
Potential Risks / Red Flags:
- The company has a history of net losses. KALA’s net losses were $104.3 million for the year ended December 31, 2020, and $94.3 million for the year ended December 31, 2019. As of December 31, 2020, the company had an accumulated deficit of $399.8 million.
KALA – Net Loss
- The company was formerly known as Hanes Newco, Inc. and changed its name to Kala Pharmaceuticals, Inc. in December 2009.
- Despite being a loss-making company, the executives are being paid significant compensation.
KALA – Executive Compensation
- Hedge Funds Decreased Holdings by 80.4K Shares Last Quarter.
KALA – Hedge Funds
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
READ BEFORE TRADING PENNY STOCKS: The allure of penny stocks lies in their potential to deliver massive gains in a short period of time. 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. Nevertheless, we do our best to identify short-term trade opportunities in this exciting space because we know some of our readers are looking for high-risk, high-reward ideas. We just urge you to make sure you fully understand the risks before making any of these trades.
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