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Longeveron Drops 17% On Private Placing News, What Now?

Tim Worstall
Tim Worstall trader
Updated 1 Dec 2021

Longeveron Inc (NASDAQ:LGVN) stock dropped 17% premarket as it announced a private placing to raise capital for the company. Port of this fall in price is simply that the placing was at a significant discount to the ruling market price. However, a substantial portion of it was that Longeveron is here taking advantage – as it is sensible to do – of the short squeeze on the company’s stock. This harms, if not kills, the short squeeze itself, contributing to the decline in the stock value.   

The future of the stock price and Longeveron depends upon the more general view of its intrinsic, as opposed to merely squeezed, value. This could well lead to significant stock price volatility and therefore trading opportunities.

The recent background is that until a month, or 6 weeks back, few thought anything very much of Longeveron’s prospects. So much so – or so little so – that at one point short positions equal to 100% of the stock existed. At that sort of moment then it only takes a small shock to produce a substantial rise.

That shock arrived when the FDA gave approval to the Longeveron’s treatment for HLHS under the rare pediatric disease program. That was enough to trigger some buying – but with short positions of the size they were there was also a rush to cover by buying in stock. That led to a price jump from the $3 level up to $42 at the peak. A nasty position to be on the wrong end of, delightful to get right. Yes, of course, this was partly powered by StockTwits and WallStreetBets and so on.

By the end of last week, the price had declined again to $31. But here’s the thing about a short squeeze. It’s that very shortage of stock that can be bought that propels the price up so vertiginously. But the hugely higher price is an extremely sensible time for the company, like Longeveron has just done, to issue more stock. Who wouldn’t sell new stock to build the capital in the company when you can do so for 10 times what you could a month back? This, being rather the limit to how long a short squeeze can last and how far that price can go. At some point issuing new stock becomes the obvious thing for the company to do – that issuance of new stock allows the shorts to cover and that’s the end of the squeeze.

Which leads to a slightly absurd outcome. Now the company has significantly more capital it’s worth more on an intrinsic basis. But the end of the short squeeze will drop that stock price all the same. 

Whether a company with just the one approved product for a rare disease is worth that several hundreds of millions capital value is the long-term question to ask. Even with the additional capital just raised it’s not a sure thing. On the other hand, in the short term, how many of the shorts have been covered, and how many still remain to do so? 

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Tim Worstall
Tim Worstall is a freelance writer specialising in economics and the financial markets.