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: Cyclerion Therapeutics Inc. (NASDAQ: CYCN)
Today’s penny stock pick is the clinical-stage biopharmaceutical company, Cyclerion Therapeutics Inc. (NASDAQ: CYCN).
Cyclerion Therapeutics Inc. engages in the discovering, development, and commercialization of medicines for serious central nervous system (CNS) diseases.
Its product candidates include CY6463, a CNS-penetrant, soluble guanylate cyclase (sGC) stimulator that is in Phase II trials for the treatment of mitochondrial encephalomyopathy, lactic acidosis, and stroke-like episodes (MELAS) and Alzheimer’s disease with vascular pathology (ADv); Olinciguat, an orally administered vascular soluble guanylate cyclase stimulator that is in Phase II studies for the treatment of sickle cell disease (SCD); Praliciguat, an orally administered systemic sGC stimulator that is in Phase II trials for the treatment of diabetic nephropathy and heart failure with preserved ejection fraction.
Website: www.cyclerion.com
Latest 10-k report: https://sec.report/Document/0001564590-21-008434/
Analyst Consensus: According to TipRanks analytics, Credit Suisse analyst Martin Auster had set a price target of $5.00 for CYCN, marking a 21% upside from where the shares last closed.
Potential Catalysts / Reasons for the Hype:
- The news about Beacon Biosignals and Cyclerion extending and expanding partnership on data collection and analytics strategy to facilitate the development of Cyclerion investigational therapeutics for neurological diseases associated with cognitive impairment.
- The company’s partnership with Akebia Therapeutics, Inc. for the development and commercialization of praliciguat, an oral sGC stimulator.
- Overall positive insider sentiment based on 3 informative insider transactions by 3 unique insiders during the past 3 months. Between April and June 2021, the company’s CEO, Peter Hecht had bought 10,00,001 shares of CYCN for a total price of $2,427,803.
Latest Insider Transactions – CYCN
- CYCN adding in institutional ownership from biotech funds like EcoR1.
- News about the study to assess the safety and pharmacokinetics of CY6463 in participants with stable Schizophrenia.
- Trial enrolment for the study to evaluate the safety and tolerability of CY6463 when administered to participants with Alzheimer’s disease with vascular pathology (ADv).
On analyzing the company’s stock charts, there seem to be multiple bullish indications…
Bullish Indications
#1 Symmetrical Triangle Pattern Breakout: The daily chart shows that the stock has currently broken out of a Symmetrical Triangle pattern. This is a continuation pattern characterized by two converging trend lines connecting a series of sequential peaks and troughs. This pattern is marked on the chart as purple color lines. A breakout from a symmetrical triangle pattern usually signifies the start of a bullish move.
Daily Chart – CYCN
#2 Price above MAs: The price is currently above the short-term moving average of 50-day SMA as well as the longer-term moving average of 200-day SMA. This usually implies a possible bullish bias for the stock.
#3 Bullish Stoch: The %K line is above the %D line of the stochastic in the daily chart, indicating possible bullishness.
#4 Bullish ADX and DI: The ADX indicator shows bullishness because the (+DI) line is greater than the (-DI) line, and the ADX line has currently started to move up from below the (-DI) and (+DI) lines.
#5 Double Bottom Pattern: The stock’s weekly chart shows that the stock is currently forming a double bottom pattern. This is marked on the weekly chart in pink color. Once the stock breaks out of the double bottom pattern, it is generally a bullish sign. The breakout level of the double bottom pattern also generally acts as a good support level. The stock is also trading above its 50-week SMA, implying that the bulls are currently in control.
Weekly Chart – CYCN
#5 MACD above Signal Line: As you can see from the weekly chart, the MACD line (blue color) is currently above the signal line (orange color). This indicates a possible bullish bias.
Recommended Trade (based on the charts)
Buy Levels: If you want to get in on this trade, the ideal buy level for CYCN is above the near-term resistance area, which translates to a price of $4.35. This is marked as a green color dotted line in the chart.
Target Prices: Our first target price is $8.50. If it breaks above that level, the next target price is $14.00.
Stop Loss: To limit risk, place a stop loss at $2.60. Note that the stop loss is on a closing basis.
Our target potential upside is 95% to 221%.
For a risk of $1.76, our first target reward is $4.14, and the second target reward is $9.64. This is a nearly 1:2 and 1:6 risk-reward trade.
In other words, this trade offers 2x to 6x more potential upside than downside.
Potential Risks / Red Flags:
- CYCN has been a loss-making company. The net losses for the years ended December 31, 2019, and 2020 were $123.0 million, and $77.8 million, respectively.
Annual Report – CYCN
- The company’s recent upmove was based on the news of its presentation at the Alzheimer’s Association International Conference 2021. However, the presentation subject was the clinical trial design for a Phase 2a study of its lead development candidate, CY6463, in participants with Alzheimer’s disease with vascular pathology. No new clinical data were included at the conference, just the trial design. It may be noted that the trial has not yet commenced.
- Despite being a loss-making company, the company executives were compensated well for 2019 and 2020.
Executive Compensation – CYCN
- The company has a history of failed drugs. CYCN had discontinuing its Sickle Cell Disease drug program (olinciguat) following disappointing data from its STRONG-SCD study.
- CYCN’s sGC stimulator drug praliciguat, developed to tackle heart failure and a diabetes complication had also proved ineffective. The drug failed two clinical trials as a treatment for heart failure and diabetic kidney disease. Praliciguat failed to meet the main goal of a Phase 2 trial, the reduction of protein in patients’ urine, which is a symptom of nerve damage that can accompany diabetes.
- Currently, the company is investing heavily in CY6463 and testing its effect on Alzheimer’s disease and a mitochondrial disorder. Any negative result could result in a significant drop in the stock price.
- Cyclerion was spun out of CEO Peter Hecht’s previous company, Ironwood Pharmaceuticals’ (Nasdaq: IRWD) in April 2020. CEO Peter Hecht previously cited the strength of the sGC stimulator science as the reason for spinning out Cyclerion from Ironwood. This does not seem like a logical move, as focusing solely on sGC stimulators rather than multiple, more proven technologies, generally increases the risks for the startup.
- In late 2020, the company had enlisted Jeffries LLC’s help to raise $50 million in a stock sale.
- The company had reported a net loss of $13.40 million for the three months ended March 31, 2021.
Quarterly Report – CYCN
- The bottom line remains that CYCN is a company with a limited operating history and no products approved for commercial sale. The business has already incurred significant losses and is anticipated to continue for the foreseeable future, making it a high-risk venture.
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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