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Is Delcath Systems, Inc. (OTCMKTS:DCTHD) Gearing Up To A Short Squeeze?

Is Delcath Systems, Inc. (OTCMKTS:DCTHD) Gearing Up To A Short Squeeze?
Written by
Chris Sandburg
Published on
November 10, 2017
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On November 6, 2017, Delcath Systems, Inc. (OTCMKTS:DCTHD) undertook a reverse split.The split, which came in at a ratio of 1:350, comes after six months or more of management trying to get a split enacted but repeatedly failing based on shareholder determination not to allow it to take place.After a couple of special meetings at which shareholders voted in the majority to deny management its request to reverse split the stock, and after a couple of strong share price runs on the back of this seeming display of shareholder power, management went ahead and did it anyway. DCTHD Daily ChartBy issuing some weighted voting power shares the company was able to overrule the numerical majority and push forward with the above-mentioned action.Reverse splits at this end of the market are a bit of an anomaly as compared to similar actions elsewhere. Technically, and on paper, they shouldn't have any impact on proportionate value representation of individual shareholders. However, for a variety of reasons (some will say that the primary reason is rooted in what a reverse split implies about the company's underlying operational strength, others will (and we are in this camp) point to the eagerness of shorts to jump on the back of a reverse split and push the company down below its mathematically accurate post-split price), reverse splits generally result in a weakened overall market capitalization for companies like Delcath.As the last week or so of trading has shown, this is very much the case here. Delcath currently trades for just $2.18 a share despite a post-split price in excess of $10 apiece.Sentiment is weak and understandably so but where do things go from here?The honest answer is, it's tough to say. However, there is a near-term catalyst that, while it's unlikely to serve up a long-term upside revaluation, at least has the potential to inject some short-term volatility into the stock and we think this presents an opportunity for a quick in-and-out trade.There is a large short presence here as illustrated by the action subsequent to the reverse split and yesterday's price action (the company went from $1.80 a share to more than $3.20 share in a couple of hours) demonstrates the potential for a spike (as we see it, driven by a short squeeze) under the right conditions.Of course, a squeeze needs a trigger, so what are we looking for as potentially bringing in some buy volume and pushing some of the shorts out of the market in this stock?Well, Delcath is about to put out its third quarter financials and, alongside the financials, should serve up a standard-issue business update.While the numbers are unlikely to turn sentiment around on their own, the business update and the accompanying conference call do have the potential to allay some of the risk associated with a near-term exposure to Delcath and it's lead program, Chemosat.Specifically, if management can offer some insight into pretty much any major milestone associated with the Chemosat development program (when fresh data is expected, if and when it expects a regulatory approval from the FDA in the US, how patients already treated with the system are responding, etc.,), we think said fresh insight will be enough to attract some of the more risk tolerant operators towards the company, giving them an excuse to pull the trigger on a speculative buy position.It's not going to take much by way of in-flowing volume to force a portion of the shorts to cover and, once the fuse is lit, the magnitude of the short squeeze is anybody's guess.Again, we aren’t saying this is a long-term trade. This is a company that hasn't been good to its shareholders (to put it nicely) and the future of its lead program is very much in the balance right now.With that said, however, we know that many of our readers aren't interested in long-term development potential and prefer the short-term opportunities – of which we think this is one.Check out our previous coverage of this one here. We will be updating our subscribers as soon as we know more. For the latest updates on DCTHD, sign up below!Image courtesy of Derek K. Miller via FlickrDisclosure: We have no position in DCTHD and have not been compensated for this article.

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