Talk about unintended consequences. Before the novel coronavirus pandemic, very few rational investors considered putting their capital at risk on biotechnology firm Ocugen (NASDAQ:OCGN). But during the peak of this crisis, the federal government made the decision to support the American people with a (so far) one-off check and unemployment benefits. Likely because of this decision, though, OCGN stock mysteriously shot up.
Perhaps we shouldn’t be so surprised.
When America first began locking down to contain the spread of the new virus, people were left with nothing to do. Thus, use of streaming services like Netflix (NASDAQ:NFLX) shot higher, as did video game usage.
That helped millions cope. However, for millions of others, they didn’t provide enough titillation. Many of these folks turned to the stock market.
This isn’t a new concept. Back in April, the Wall Street Journal noted a dramatic influx of new, particularly young investors. The thesis was that these newcomers wanted to capitalize on the erratic movements of the market. But are we sure that the tail was wagging the dog? How else can you explain the ridiculous momentum surge in OCGN stock?
According to one study, working from home increases productivity because employers receive 1.4 more days of work per month. Whoever spearheaded the study may want to consider that the extra “work” may be “research” toward dumb penny stocks.
At the end of the day, that’s all OCGN stock really is. There’s nothing of substance here. Heck, the underlying company doesn’t even generate revenue. If you look carefully at the financials, management is always teetering on bankruptcy’s edge.
A Fatal Attraction Characterizes OCGN Stock
To be fair, I can understand why some, especially those not well-versed in basic investing concepts, would gravitate toward OCGN stock. As a specialist in rare and underserved eye diseases, Ocugen certainly has a humanitarian tone. Right there, that will appeal to millennials, who are more socially conscious than prior generations.
In addition, the science seemingly makes sense. As RD-360.com wrote, “An overwhelming majority of rare diseases are the result of a single-gene defect, making them a potential target in the hunt for treatment.” Find the solution to the single-gene defect and you open the door to myriad revenue channels. Logically, Ocugen’s stock will skyrocket.
But in that same article, RD-360.com lays out the bear case:
“Despite potentially transforming the way ophthalmologists treat certain diseases, the road to more approvals in this space is hindered by many of the same issues faced by rare disease communities as a whole—extremely small patient populations, a lack of referrals, and questions regarding cost and funding.”
Ordinarily, this would raise red flags for most investors. Sure, there will always be speculative gamblers, pandemic or not. However, I will counter with this: there’s a reason why OCGN stock fell to 20 cents — yes, 20 cents! — before going on its rocket launch.
Unfortunately, there’s also a reason why underserved diseases or conditions are that way. Bluntly, the economics often don’t make sense. Participating companies must invest years and millions of dollars into research and development. Even with governmental support, it’s a brutally tough road. Furthermore, rare diseases may require novel, complex solutions that try the hands of even the biggest life science firms.
You only need to look at the long-term chart of OCGN stock to appreciate the challenges.
Different Name, Same Game
I’m afraid we have the same bubble market dynamic that has long attracted unsophisticated investors, only to spit them out when the bubble invariably collapses.
This time, it’s not a bubble affecting broad sectors, such as technology and internet firms back in the late 1990s to early 2000s. Instead, stocks that have garnered a cult following — think Hertz (NYSE:HTZ) — represent the new bubble. In that sense, this time, it’s different. Entire market segments are not collectively arousing suspicion.
Still, it’s the same game — wild, rampant speculation. While the cult stocks may not have anything to do in common, they do share a cheap price tag. And that should really make you skeptical about the rise of OCGN stock. Investors with any basic knowledge will know that price by itself means nothing. Since we’re not dealing with rational actors, though, I’d stay far away from Ocugen.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now. As of this writing, Matt did not hold a position in any of the aforementioned securities.