Two Ways to Approach Verenium Corporation (VRNM)

08/08/2008 12:00 am EST


Nick Perry

Equity Options Trader, Schaeffer's Investment Research

By Nick Perry of Schaeffer’s Trading Floor Blog

I was looking over my quote screen, which is roughly grouped by sector, and noticed some activity in the biofuels area. In particular, I saw that shares of Verenium Corporation (VRNM) were up nearly 50%. I usually don't focus on low priced stocks but I thought this one had an interesting story to discuss.

First off, I have to say that this is a highly volatile stock. A glance at the weekly chart below shows what I am talking about. Since its highs in early 2007, the stock has dropped from 12 to 1 and then bounced to the current price of 3. In other words, the shares lost more than 90% of their value and then "surged" 200% from their lows. This sort of volatility can be rewarding to nimble traders but timing is everything.


With the painfully obvious now stated, let's talk about what caught my eye. Of particular interest is the short interest data. The chart to the right shows that there has been a dramatic decrease in the number of shares sold short. We have more or less seen a 50% drop in the last 4 months. The stock has been weak so some of this could be simple profit taking, but more on that in a minute.

What is worth pointing out though is that even though there has been a dramatic drop, there is still a fairly heavy level of short interest. Data collected by our Quantified Analysis group shows that 15% of the stock's float is still sold short.

So, we have a situation where the shorts have begun to back off and then we get word that BP is backing the company. This sets the stage for a buying scramble and helps to explain today's surge.

The question here is whether that news is enough to change the mindset of shorts. As alluded to above, it is not unreasonable to expect some short covering as the stock neared $1. Today's news then spurs some quick short covering to salvage profits or cut losses. However, the question is whether the shorts will then look to re-establish their previous short positions now that the stock once again has "room to fall" back to its lows.

Given the longer-term decline shown below, I think there are two ways to approach this stock. The first is to try to ride the short-term momentum. In this case being nimble will be the key. The second is to take a longer-term approach and wait for signs of a stable turnaround. The primary ingredient to that would likely be a basing period followed by a sustained push above the resistance shown. In this case being patient will be the key.


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