Trading MannKind: Why Long Investors Trade For Profits

Summary:

Why $5.06 Is The Price Per Share That Makes MannKind Traders A Lot Of Money.

Why $6.06 Is The Price Per Share That Makes MannKind Shorts A Lot Of Money.

One Look Into How To Trade MannKind And Why Traders Trade This Stock.

If an investor bought 10,000 shares of MannKind Corporation (NASDAQ:MNKD) on October 7th, 2013 at $5.06 and sold them when the stock hit $6.06, and then bought another ten thousand shares when the stock fell back to $5.06 again, an investor could have repeated that cycle six times as of July 1st, 2015. That original investment of $50,600 would have earned an additional $10,000 profit every time the stock was sold at that $1 profit per share.

That’s a total of $60,000 cash profit, before taxes, on a $50,600 investment. Or, that investor could have more than doubled the amount of MannKind shares they own with their profit. Instead of 10,000 shares, they would now have an additional 11,881 shares, for a total of 21,881 shares. And, this was done without considering compounding which would have occurred with each buy/sell cycle and have added to profits.

This is the essence of the strategy behind moving with the stock through up and down cycles. Buy low and sell high. Buy the rumor and sell the news. Know that there is plenty of news, positive and negative, to make the cycle continue for a very long time. A company with game changing technology which will require a number of years before that technology breaks through the old paradigm is a perfect candidate for this type of trading strategy. Pick the right pharmaceutical company with the right new drug or delivery system and you have a winner. MannKind Corporation is that winner.

Not only does MannKind have a breakthrough new inhaled insulin, MannKind also owns the patented technology that allows that insulin to be formed into a powder and inhaled by the user. The insulin they call, Afrezza. The technology they call Technosphere. And, Technosphere can be employed as a delivery device for many different needs. MannKind management announced that their next drugs will be oriented towards pain reduction and for pulmonary issues. But, the potential for many other uses is inherent in the potentiality of Technosphere.

Now, please note that this article is not about the pros and cons of Afrezza. It is not about the pros and cons of Technosphere. This article is not about the pros and cons of the partnership with Sanofi. Nor, is it about management, the Direct To Consumer advertising campaign or the coming decision management will make in regard to the convertible bonds coming due in mid August. Nope. This article is about trading MannKind stock, why it exists, and for whom this trading is a benefit.

Traders know that there is a substantial benefit to Afrezza in the diabetic community and that long term holders of the stock will stay with the company through the various up/down cycles. Longs believe that MannKind is a winner, both in Afrezza and in their Technosphere delivery system.

So why doesn’t MannKind stock simply go up in value?

The reason is based on human nature; not the company, not the product, and not the market. Human nature dictates that a certain percentage of investors in the company will eventually lose interest in the stock after the stock continuously falls after reaching some sort of a high. Call it investor frustration. Call it investor fatigue. I call it a lack of patience. It takes fortitude to remain long and focused on a multi year plan. But, traders know that every time the price goes up, the stock will attract new investors, and when it falls, some of those new investors will lose heart and sell at a loss.

Do traders have the power to move a stock up or down?

Think of the market as if it is a water delivery system with the company’s total number of shares being the reservoir and the flow of shares in or out of a stock as the water in the channels connected to the reservoir. Just as the flow of water that comes out of the reservoir is connected to what those channels can accommodate, the more water that flows out through the channels will mean that the reservoir is going down. And, so the price per share goes down.

When water that flows through those channels flows back into the reservoir, that means that the reservoir is going up. And, then the price per share goes up.

Just as a water management service controls the flow of water, there are traders with enough money and experience who know how to control the flow of capital as it effects a stock. Some of these traders own or manage hedge funds. It’s not rocket science but it is monetary management. It’s all about balance.

How do traders control the flow of capital?

When traders pull their shares out of the reservoir and force the price per share down, they do so by allowing their shares to be shorted against the company. They can either short MannKind themselves or they can allow their shares to be shorted for a very high fee, by others.

The former comes with some risk because the short always has to make sure that they are shorting while others are also shorting the stock. If enough shorts attack in coordination, then many weak kneed investors will capitulate, sell for a loss, and their shares eventually get gobbled up when the stock starts to rebound. So, the long investor can also become a trader who shorts the stock, from $6.06 down to $5.06, for example.

Traders will make money as the price per share falls and make money when the price per share rebounds when they return their shorted shares at $5.06. But, if they time incorrectly and short against upward stock movement, they can take losses if they return their shares at a higher price, or they can simply wait until the p/s falls back to $5.06. Critical to shorting is to know when the cycles move up or down. But, critical to all trading is to know when the cycles move up and down.

The latter is the prudent play for control of capital. Allowing one’s shares to be lent for shorting in return for high interest fees is a safe way to remain long in the stock and still make money from the up/down cycles. The longer a trader can trade within these cycles, the more they add to their bottom line.

This trading scenario employs minimum risk to the trader since the trader does not short the stock when they lend their shares. The prominent danger in this scenario is if the company is truly in danger of bankruptcy in which case the long investor could lose all of their investment. But, I do not believe that anyone really thinks MannKind is going to go bankrupt. Not this year, at least. Probably, not ever.

Now, getting back to the trading strategy I outlined at the top of this article, please note that this is only one type of a money management system. It requires inner strength in that the investor has to be secure enough to believe that even if the stock goes up in price after they have sold at $6.06, it will come back down eventually to their base $5.06 price. Also, the investor has to have enough inner fortitude to know that even if the price per share drops below $5.06, it will eventually rise back up again to $6.06.

The chart shows the proof of the success in this strategy. Find the black dot at the left side of the chart, dated Oct. 7, 2013 at a p/s of $5.06. Next, count how many time the p/s rose to or above $6.06 and then fell back to $5.06. I count six up/down cycles.

MannKind Chart

Will the trading pattern change?

It depends. For the most part, the short thesis is likely only a smokescreen for moving the share price of MannKind up or down. Just about every argument against the success of the company has met with failure. Who remembers when shorts argued that the clinical trials were disappointing and that the results would not be enough for FDA approval? Who recalls when the FDA published a negative leaning review of Afrezza and forced ADCOM panelists to discuss those FDA findings?

These short arguments were folly, though at the time they were certainly strong enough to lower MannKind’s share price, especially with the help of those who were shorting the stock. But, every time the price fell, in time, MannKind stock recovered, making more profit for traders.

Eventually, after a certain period of time, MannKind will have to do something that will effectively force the capitulation of those willing to short the company. Otherwise, the cycle will go on and on indefinitely. The company will have a series of positive events. Among others, there will be new product announcements, reduction of capital expenses, positive news from early adopters, and foreign government approvals.

These will probably be catalysts for moving the p/s up but those events may not be strong enough catalysts to keep the shorts from attacking the company and driving the p/s back down. It may be possible that the p/s may go up but the up/down trading cycle may continue, but at higher numbers. Or, the cycle may continue in exactly the same pattern and prices will remain trading where they have been over the last two years.

Nothing is really guaranteed to move the p/s up permanently when traders profit from keeping the up/down cycles in place. However, there is one exception, I believe: profit. A lot of profit. Enough profit to prove that Afrezza is taking significant market share away from the injection insulin manufacturers. So much profit, it will feel like it’s raining money.

Money in MannKind’s bank will prove that Afrezza and Technosphere is a winner. And, then the investors who have been waiting on the sidelines will jump on board and push the stock to new highs. As the company continues to make more and more money and more and more profit, we will then see the price per share respond in kind.

So, what should an investor do in the reality of MannKind’s trading cycles?

It depends on what you want out of your investment and how much time you are willing to hold on to your MannKind shares. Have you thought through this process? You should. You really should set a timeline for yourself based upon what you believe is an acceptable return on your investment. A Taoist will suggest that the journey of a thousand miles will start with the very first step. Patience is implied as necessary for the journey. Fortitude is implied as necessary for the one who is on the journey.

As an investor, I suggest holding onto MannKind stock forever. I really do. Take some profits if you need them but hold onto your core position. MannKind Corporation is one of the most important companies in the world. Afrezza is a superior new insulin and it will save many lives, especially among T2s who are often poorly controlled on needles.

Afrezza will vastly improve the lives of elderly diabetics who are not currently prescribed insulin, until they have dangerously high A1C numbers, because of the problems that seniors have associated with injecting themselves.

So, as an investor, I don’t think much about the share price of the stock. I feel confident that Afrezza will not only find a healthy marketshare, I believe that Afrezza will become a dominant insulin in the marketplace over the next several years. It’s just a matter of time. And, that dominant market share could return the p/s in triple figures.

As a trader, you may want to take a part of your position and trade the up/down cycles. I believe that MannKind will be a huge success, but knowing this and accepting the reality of trading cycles, is to also accept MannKind’s stock as it truly exists and a method for making profits.

Robert Sacher

Image Credit

3 Comments

  1. A Jul 8, 2015
    • Robert Sacher Jul 9, 2015

Add Comment