Gritstone Bio and the Calm Before the Storm

I started paying attention to the Russia/Ukraine situation back in 2014 when masked men appeared in Crimea and started occupying strategic locations. The masked invaders were referred to in the media as the “little green men.” At first, Russia denied that these troops were theirs. Of course, that lie unraveled quickly.

At the time, nobody really knew what was happening, and Barack Obama reportedly urged the Ukrainians not to fight back. Russia took the peninsula without any bloodshed. In the eight years that followed, there were some skirmishes, a few major battles, and both sides traded artillery fire on a near daily basis. But it was nothing like what kicked off on February 24th, 2022.

“Okay, cool, but what does this have to do with Gritstone Bio?”

Hold on a minute.

Several times between 2014 and 2022, Russia seemed as though it would launch a full-scale invasion of Ukraine. There was a lot of saber rattling and empty threats. However, under the guise of the ZAPAD exercises, they amassed significant troops along the Ukrainian border.

But each time the tensions escalated, Russia pulled back their troops to the barracks. For each build up, there would be people saying, “Okay this is definitely it,” but it wasn’t it. It wasn’t full-scale war. There weren’t enough signs. Sure, troops massing on the border is a sign. If you’ve ever played the video game Civilization, you know that troops massing on the border is never a good thing. But to be 99.99% sure of something, you need a lot of data.

The Stuff

In the days prior to the full-scale invasion of Ukraine, we saw a lot of stuff. Most western countries abandoned their embassies in Kiev. Most western countries told their citizens to leave the country immediately. The Russians even abandoned their own embassy in Kiev and burned a bunch of paperwork on the way out. There were photos, videos, and rumors of trains filled with tanks and other vehicles heading to Belarus and the occupied Oblasts in west Ukraine. The Russians had deployed field hospitals and stocked them with blood. A reporter asked Joe Biden if Putin was going to invade soon, and Biden said he thought he would and the decision had been made. Then there was the NOTAM. The Notice to Airmen. A warning to all pilots that they should not under any circumstances be flying in Ukrainian airspace.

At that point it was pretty obvious that Russia was going in invade. But the real kicker was when some savvy Twitter users, using the Google traffic maps noticed that there was a traffic jam on multiple highways leading into Ukraine. A traffic jam at four in the morning.

An hour or so later Putin released his pre-recorded broadcast about the special military operation and tanks rolled across the border and missiles started flying.

The difference between February 24th and the military buildups before 2022 was significant. Everything before that was mostly noise. Soldiers on the border can be scary, but without all the other stuff (field hospitals, embassy evacuations, etc) it’s still just noise.

If you want to predict an event, then you need more signal than noise.

Which brings us to Gritstone Bio

There appears to be a significant amount of evidence that points to what might be an epic jump in the stock price.

When I saw the news about the BARDA contract, I was surprised. Gritstone is a company I’ve been following for years, and even traded a bit when it was around $10-$11. I thought, “How can a company with a $110M market cap get a $433M contract with the government? Something doesn’t add up here. They must be sitting on something.”

After the bell, the stock traded as high as $2. Which seemed like steal given the absolutely carnage in the biotech market these past few years. The next morning, the shares opened around around $1.55. Which seemed ridiculously low given the news.

So, dumb as I am, as soon as the market opened, I bought, totally forgetting how corrupt Wall Street is. The stock price quickly dropped to $1.35. Unfazed and without a stop-loss in place, I held it. By the afternoon it had recovered to $1.56 on 22 million shares in volume.

Keep in mind this is a stock with only about 93 million outstanding shares. Yes, 22M is a lot, but it doesn’t mean someone bought that many. With all the algos these days, something like 50% of all stock volume is short selling. Robots trading against each other, shorting the pops and making a few cents here there.

The news sounded good, but I’ve been burned before on pops getting shorted back to nothing, so I held back and waited. The next day the stock jumped about 12%, which was solid. It felt like something was up.

The next day it started to drop so I dumped my position around $1.70 and decided to wait and see what happened. Was this a stop loss raid? Was the stock getting ready to re-trace? I decided to sit back and observe. Patience can be a virtue in this game.

The next day the stock jumped about 20% and it was becoming obvious that this was the real deal. So, I started piling into the options. Gritstone is unique in the microcap biotech space because you can buy options on it. Most tiny companies you can’t.

The Stuff Part 2

After seven trading sessions since the BARDA contract was announced, I am almost certain there is enough evidence to predict a major upcoming movement in the stock price. Yes, the stock is up more than 100%, but I don’t think we’re done here yet.

Here are some data points.

1. Before the BARDA contract, about 60% of the outstanding shares were owned by insiders and institutions. This leaves only about 37M shares for retail or other institutions to buy.

2. Over the last seven trading sessions, the stock has done about 58.5M in volume. If you assume 70% of that is short selling and day trading nonsense, then almost half (17.5M) of the available shares have already been gobbled up.

3. Usually when a stock pops, the volume is highest the first day, and falls off a cliff very quickly. Stocks almost never have sustained volume after a good news release unless there is rampant accumulation.

4. Next Wednesday, Gritstone will be releasing their 12-month antibody data for the samRNA Covid-19 vaccine. BARDA has almost certainly seen this data prior to signing the $433M contract.

What’s hilarious about this situation is this is how markets are supposed to operate. When they aren’t being manipulated, markets fall perfectly in sync with supply and demand. The demand for Gritstone shares is extremely high, and the supply is dwindling. Just look at the chart. When’s the last time you saw green candles like that with massive volume off an all-time low? In more than two decades of trading, I have never seen such a setup.

I prefer options to equities because most of my investments are based on a thesis. X is probably going to happen, which will drive the price to Y in the short term. If you were an omnipotent being, you would only trade options because they are hyper leveraged bets on a certain outcome. Most people avoid options because they expire, and most people don’t have a solid thesis when they make an investment.

Another use for options, probably the most popular use, is hedging your bets. People with lots of money invested in the market don’t want to lose it, so they use options as a type of insurance. If you own a ton of stock, and there’s an important catalyst on the horizon, you can buy put options to protect yourself in case of disaster.

If you look at the options market for Gritstone, you can see that nobody is buying puts. Total open interest on puts across all strikes and expiries is less than 1K. That’s only protecting about 100,000 shares.

Tens of millions of dollars in shares have been accumulated in the past seven days, and there are several major catalysts for Gritstone coming up soon. On October 11th, the abstracts from ID Week will be released and we’ll see the 12-month antibody data from the CORAL program. In Q1 of 2024 we’ll see some of their cancer data.

So where are the puts? Why isn’t big money hedging their bets?

Probably because they don’t need to.

This isn’t quite the traffic jam at 4AM on the highways leading into Ukraine, but it’s an interesting signal.

What I’m saying about Gritstone is there is a lot of stuff going on. Call it evidence, call it data points, call it anything you want. But there is a lot of it. This stock is not slowing down. It appears that people with a lot of money are frantically accumulating as much as they can at whatever the price.

We have massive volume, massive price increase, a massive contract, a catalyst around the corner, price upgrades, new analyst coverage, and no insurance being purchased in case the catalyst is a disaster. And why would it be? Gritstone released the six-month antibody data last April and it was great. We know they have the 12-month data because they’re presenting it at ID Week. It’s possible that BARDA hasn’t seen this data, but let’s be real. They must have. If BARDA was going to fund the study without seeing the 12-month data, they would have done it months ago.

This is likely why the stock has seen such a surge in price and volume. It’s reasonable to expect this data will be good. It might even be ridiculous. Imagine the antibodies last for more than 12 months. I’ve talked about this in previous articles, but the upside for everyone is huge. Current mRNA vaccine antibodies fade quickly and are basically worthless at preventing non-severe infections after a few months.

If samRNA works the way we hope it does, and the way that BARDA probably knows it does, then Gritstone is going to make a killing in vaccine sales. Even if Gritstone only carves out 15% of the vaccine market, that’s still billions in sales. Not bad for a company currently worth $265M. And that’s totally discounting the rest of their pipeline.

Once the data is released, then news organizations will be reporting on it. The CEO will be on TV. We might even see a licensing agreement with big pharma in a few weeks. The stock price could roar past $5, and it will trend on Stocktwits. Mutual funds and institutional investors with rules about investing in penny stocks will be allowed to buy Gritstone.

Where could it go? Good question.

I’m hoping to see $20 sooner rather than later. Although you never know these days. It’s the age of meme stocks and short squeezes. I wouldn’t be surprised if this hits $100 when the mania sets in.

Just like in the days leading up to February 24th, all the pieces are in place. Every indicator of an impending major event is evident. All that’s left is for the man at the top to say “Go.”

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