Cassava Sciences' staggering 84% collapse; Updates on two more stocks to avoid – Icahn Enterprises and Adani Enterprises

1) Boy, you don't see this very often...

I'm talking about a company with a billion-dollar-plus market cap (in this case, $1.3 billion) losing 84% of its value in a single trading day.

But that's exactly what just happened to drug developer Cassava Sciences (SAVA) yesterday after the company reported that its sole drug utterly failed Phase III clinical testing. This article in Investor's Business Daily has more details: Cassava Sciences Plummets 84% After Embattled Alzheimer's Drug Flops. Excerpt:

After a year, patients who received simufilam didn't show a significant reduction in cognitive or functional decline compared to the placebo group...

The company is now shutting down its second Phase 3 study, called ReFocus-ALZ, as well as an ongoing open label extension study. In the latter study, patients are all knowingly receiving simufilam.

The news is a blow to a program that has widely split Wall Street.

Longtime readers will recall that I've been warning about this obvious fraud in more than a dozen of my daily e-mails (the archive is here – search for "Cassava") ever since I flagged the short report published by my friend and former student Gabriel Grego of Quintessential Capital Management in my November 3, 2021 e-mail. In it, I wrote:

The biotech company has a $2.3 billion market cap despite no revenue based on bullish expectations for its sole drug, Simufilam, which it claims will help treat Alzheimer's disease.

Gabriel's report, which you can read here, documents the shady backgrounds of many people associated with the company and concludes that there's no chance that Simufilam will ever be approved by the Food and Drug Administration ("FDA")...

I'm not a biotech expert (to say the least) and haven't independently verified Gabriel's work, but knowing him and his track record, I have no doubt that his report is correct – which is bad news for this high-flying stock and its huge market cap.

As recently as July 18, I shared Gabriel's latest update on Cassava, which he presented at my Value Investing Seminar in Italy on July 5.

But beyond just avoiding a stinker like this, there are also some important lessons here...

When I saw what happened yesterday, my first thought was: Why has it taken more than three years for this obvious fraud to collapse?

This was a long and painful experience for anyone short the stock – just ask Gabriel. Look at this price chart of Cassava from the week before he issued his first report to yesterday, when the stock closed at $4.30 per share:

You can see that the stock briefly more than doubled after Gabriel released his report as traders played the "squeeze the shorts" game. And then on three different occasions, when SAVA shares fell into the $10 to $15 range, management and message-board "hypesters" pumped shares back above $30, $40, even $50.

This is why short selling is so hard: Your investment thesis can be absolutely right, but you can get killed for years.

And buying put options usually doesn't work because they're very expensive for stocks like this... And unless you get the timing exactly right, they expire worthless – meaning you lose 100% of your money.

That's why most of the successful short sellers I know don't hold short positions for extended periods, but instead trade around "catalysts" – an event like an earnings release, a bankruptcy filing (e.g., Spirit Airlines recently), or drug-trial results that could validate their investment thesis and cause the stock to crash.

This might sound obvious and easy, but it's not – it requires guts, skill, and experience.

Very few people have this, which is why I always say that 99% of investors should stay away from short selling/betting against stocks entirely.

Meanwhile, for those who owned SAVA shares...

Any professional investor who still owned the stock right before the news came out about the drug failing clinical testing should be fired for gross incompetence.

As for the retail investors who got obliterated, they should be rethinking whether they should be picking stocks at all... because if you don't know what you're doing in the markets, you're likely to lose a lot of money very quickly.

Without the tools and the "spidey sense" to avoid getting sucked into stocks like SAVA, you're better off sticking to mutual or index funds.

As I wrote in my July 3 e-mail:

The stock market is filled with hype, fads, frauds, and plain old overvaluation. This leads to many wildly overvalued stocks – and huge losses for average investors duped into investing in them.

There are huge forces at work pushing stocks higher than they should be, led by company executives who stand to make millions (if not billions) of dollars if their stocks go up a lot, even briefly and unsustainably.

They, in turn, are almost always cheered on by Wall Street "analysts" (I use that term loosely, as most simply parrot what companies tell them) and the media.

And as I continued, not much is protecting investors:

Regulators can't do anything about hype and overvaluation, just fraud – and are so outmanned and outgunned that they can only address a fraction of it (and even when they do, it's usually long after the stock has crashed).

This is why I've consistently praised activist short sellers like Gabriel and periodically write about them – for four reasons:

• I used to be one, so I know many of them personally...
• I want to warn my readers about stocks to avoid...
• While nearly all investors should avoid short selling, every investor would benefit from developing a short seller's "toolkit": not blindly accepting what company management says, identifying discrepancies in financial statements that are warning flags, etc...
• And the people, stories, and battles between "good guy versus bad guy" are endlessly entertaining.

2) Speaking of stocks targeted by a smart activist short seller...

In my August 21 e-mail, in addition to warning again about SAVA (which was then at $31.21 per share), I also updated my readers on two other stocks that Nate Anderson of Hindenburg Research had published damning reports on:

• Wall Street legend Carl Icahn's public holding, Icahn Enterprises (IEP)
• Adani Enterprises, an Indian conglomerate that trades in India on the BSE (formerly Bombay Stock Exchange)

Regarding Icahn Enterprises, even though shares had crashed from more than $50 to $15.75, I warned my readers:

Don't get seduced by IEP's apparent 25% dividend yield... continue to stay far away from the stock.

It was a good call, as the stock closed yesterday at $11.18 – down another 29% since that August e-mail.

As for Adani, its stock has also fallen by 29% since then – it dropped 23% in a day last week when the U.S. Justice Department brought a massive bribery charge against the company's founder and chairman.

This Wall Street Journal article has more details: Indian Billionaire Gautam Adani Charged in $250 Million Bribery Scheme. Excerpt:

Gautam Adani, the billionaire founder of one of India's biggest business conglomerates, was charged by the Justice Department with orchestrating a massive bribery scheme to pay off Indian government officials to secure lucrative solar-energy supply contracts.

Prosecutors announced a 54-page indictment Wednesday that alleges Adani, the chairman of the Adani Group, personally met with Indian officials to advance the illicit deal and secure contracts worth billions of dollars for a renewable-energy company owned by the conglomerate. Prosecutors also alleged that Gautam Adani, 62 years old, and two Adani Green Energy executives conspired to misrepresent the renewable-energy firm's antibribery and corruption practices to U.S. investors and financial institutions to obtain financing.

In total, eight executives were charged in the scheme. None of the defendants have been arrested and are believed to be at large overseas, according to a spokeswoman for the Brooklyn U.S. attorney's office, which brought the case.

Anderson made a compelling case that Adani is a crook and his empire is a house of cards... So again, any professional investor who owned this stock last week (or today, as the company still has a roughly $30 billion market cap) should be fired for gross incompetence.

Best regards,

Whitney

P.S. I welcome your feedback – send me an e-mail by clicking here.