This High Risk / High Reward Stock Just Broke Out

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: Selecta Biosciences Inc. (NASDAQ: SELB)

Today’s penny stock pick is the clinical-stage biopharmaceutical company, Selecta Biosciences Inc. (NASDAQ: SELB).

Selecta Biosciences Inc. engages in the research and development of nanoparticle immunomodulatory drugs for the treatment and prevention of human diseases. The company’s lead therapeutic gene therapy program is SEL-302 which is in preclinical stage to improve the treatment of methylmalonic acidemia. It is also developing biologic therapies, such as SEL-212 that is in Phase III clinical trials for the treatment of chronic refractory gout; and product candidates to treat IgA-mediated diseases, including IgA nephropathy, linear IgA bullous dermatitis, IgA pemphigus, and Henoch-Schonlein purpura.

In addition, the company is developing gene therapies comprising SEL-313, a product candidate in preclinical stage to treat ornithine transcarbamylase deficiency; SEL-399, a product candidate to evaluate the appropriate dose of ImmTOR in humans to reduce the formation of antibodies to AAV capsids; and products for the treatment of pompe disease, duchenne muscular dystrophy, limb-girdle muscular dystrophy, lysosomal storage disorder, and other autoimmune diseases.

Further, it develops tolerogenic therapies to treat primary biliary cholangitis and other autoimmune diseases. The company has license and collaboration agreements with Takeda Pharmaceuticals USA, Inc.; Swedish Orphan Biovitrum; Sarepta Therapeutics, Inc.; Asklepios Biopharmaceutical, Inc.; Massachusetts Institute of Technology; Shenyang Sunshine Pharmaceutical Co., Ltd.; Ginkgo Bioworks Holdings, Inc.; and IGAN Biosciences, Inc.

Website:  www.selectabio.com

Latest 10-k report:  https://sec.report/Document/0001453687-22-000051

Analyst Consensus: As per TipRanks Analytics, based on 4 Wall Street analysts offering 12-month price targets for SELB in the last 3 months, the stock has an average price target of $7.50, which is nearly 462% upside from current levels.

Source: TipRanks.com

Analysts | Source: TipRanks.com

Potential Catalysts / Reasons for the Hype:

  • The company announced several pipeline advancements and partnership updates. Selecta will receive a $2 million payment for the nine-month extension to both options. Additionally, Selecta is eligible to receive an additional $4 million payment upon the achievement of certain near-term preclinical milestones by Sarepta.
  • Corporate Insiders Bought Shares Worth $188.0K in the Last 3 Months.

    Insiders | Source: TipRanks.co

On analyzing the company’s stock charts, there seem to be multiple bullish indications…

Bullish Indications

#1 Downtrend Channel Breakout: The daily chart shows that the stock has broken out of a downtrend channel, which is shown as purple color lines. This is a possible bullish indication.

SELB – 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 an orange color dotted line. This is a possible bullish indication.

SELB – Weekly Chart

#7 Bullish Stoch: The %K line is above the %D line of the stochastic in the weekly chart as well, indicating possible bullishness.

#8 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 SELB is above the price of $1.40.

Target Prices: Our first target is $2.80. If it closes above that level, the second target price is $4.00.

Stop Loss: To limit risk, place a stop loss at $0.60. Note that the stop loss is on a closing basis.

Our target potential upside is 100% to 186%.

For a risk of $0.80, our first target reward is $1.40, and the second target reward is $2.60. 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:

  1. The company has a history of net losses. SELB’s net losses were $25.7 million for the year ended December 31, 2021, and $68.9 million, and $55.4 million, for each of the years ended December 31, 2020, and 2019, respectively. As of December 31, 2021, the company had an accumulated deficit of $430.3 million.

    SELB – Consolidated Statements of Operations and Comprehensive Loss

  2. On August 3, 2020, a stockholder of Selecta filed a stockholder derivative action against certain current and former members of the Company’s Board of Directors, as well as one affiliated company owned by a current board member, in the Court of Chancery of the State of Delaware, namely Franchi v. Barabe, et al. The complaint alleges that the individual defendants breached their fiduciary duties and committed corporate waste when they authorized a private placement transaction, announced on December 19, 2019, at a price allegedly below fair value. The complaint further alleges that the four defendant directors who participated in the private placement were unjustly enriched in connection with the transaction. On December 31, 2020, SELB received a litigation demand letter from two other putative stockholders relating to the same private placement transaction.
  3. Despite being a loss-making company, the executives are being paid significant compensation.

    SELB – Executive Compensation

  4. The company is reliant on 3SBio in China for obtaining the biologic pegadricase, a component of SEL-212. Product supply disruption and increased costs in the event of changes in the policies, laws, rules, and regulations of the United States or Chinese governments, political unrest or unstable economic conditions in China is a significant risk.
  5. Hedge Funds Decreased Holdings by 590.0K Shares Last Quarter.

    Hedge Funds | Source: TipRanks.com

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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