We recently started a series called “Penny Stock of the Day”. These ideas are geared towards 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: Evelo Biosciences Inc. (NASDAQ: EVLO)
Today’s penny stock pick is the biotechnology company, Evelo Biosciences Inc. (NASDAQ: EVLO).
Evelo Biosciences Inc. discovers and develops oral biologics for the treatment of inflammatory diseases and cancer. It is developing EDP1815, a whole-microbe candidate for the treatment of inflammatory diseases; and is in Phase 2 clinical trial for the treatment of psoriasis and atopic dermatitis, as well as for the hyperinflammatory response associated with COVID-19.
The company also develops EDP1867, an inactivated investigational oral biologic, which is in Phase 1b for the treatment of inflammatory diseases; EDP2939, an extracellular vesicle investigational oral biologic for the treatment of inflammatory diseases; and EDP1908, a product candidate for oncology.
Website: https://evelobio.com
Latest 10-k report: https://sec.report/Document/0001694665-22-000047
Analyst Consensus: As per TipRanks Analytics, based on 4 Wall Street analysts offering 12-month price targets for EVLO in the last 3 months, the stock has an average price target of $12.67, which is nearly 407% upside from current levels.
Source: TipRanks.com
Analysts | Source: TipRanks.com
Potential Catalysts / Reasons for the Hype:
- Corporate Insiders Bought Shares Worth $40.6M in the Last 3 Months.
Insiders | Source: TipRanks.com
- Rumors of merger and acquisition activities at EVLO.
- The company recently entered into a securities purchase agreement with investors in a registered direct offering of 54,246,358 shares of common stock at a purchase price of $1.46 per share, resulting in gross proceeds of $79.2 million. This is expected to alleviate liquidity concerns.
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.
EVLO – 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 Bullish Stoch: The %K line of the stochastic is above the %D line, and has also moved higher from oversold levels, indicating possible bullishness.
#4 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.
#5 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. This is a possible bullish indication.
EVLO – Weekly Chart
#6 Bullish Stoch: The %K line is above the %D line of the stochastic in the weekly chart as well, indicating possible bullishness.
#7 MACD above Signal Line: In the weekly chart, 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 EVLO is above the price of $2.65.
Target Prices: Our first target is $3.90. If it closes above that level, the second target price is $5.40.
Stop Loss: To limit risk, place a stop loss below $2.00. Note that the stop loss is on a closing basis.
Our target potential upside is 47% to 104%.
For a risk of $0.65, our first target reward is $1.25, and the second target reward is $2.75. This is a nearly 1:2 and 1:4 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. EVLO’s net loss was $122.2 million and $93.7 million for the years ended December 31, 2021, and 2020, respectively. As of December 31, 2021, the company had an accumulated deficit of $414.7 million.
EVLO – Consolidated Statements of Operations
- On February 12, 2021, the European Patent Office issued a Communication of a Notice of Opposition for European patent EP 3223834, which is held by the company.
- Despite being a loss-making company, the executives are being paid significant compensation.
EVLO – Executive Compensation
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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