PainReform (NASDAQ: PRFX) stock was up 307% yesterday. PRFX stock is also down 18% since then. It's always possible for a pharma stock to justifiably have this sort of price movement. Something like an unexpected FDA approval of a drug or treatment can cause something like this. Even just good results from a trial which might lead to such approval can cause this. On the other hand, exactly because such price movements can happen at times certain actors try to cause such price moves - because they're believable, at least for a while. When such price moves happen because someone is deliberately trying to cause them we refer to it as a pump and dump.
The actors - bad actors - buy up some stock, start the rumour that there's some pot of gold there and watch the price soar as speculators pile in. That original holding gets sold into this wave of buying at higher prices than it was bought at. Then the stock price collapses back to normal. The rise is the pump, the sale and collapse the dump. Such a tactic if done by just the one person is wholly legal. If it's done by a group acting in concert it's most not legal. But it does happen, often enough.
Precisely because such price movements can happen in low market capitalisation research and development pharma companies this is the sector where the pump and dump tactic is tried. If there's also a low float and a large short position then it's even more effective - the shorts have to cover in the face of the price surge and that redoubles the effect.
PainReform stock price from NASDAQ
All of this means that when we see a low float, small cap, pharma company stock price soaring - like at PRFX - we need to think for a moment. Is there some new result, FDA, or clinical trial news, which justifies the move? For that does happen. Also, we need to wonder whether this is a pump and dump in action. Or even just an outburst of uncoordinated but unjustified speculation?
There's no perfect test here, unfortunately. But a check with Edgar (the SEC's information service) tells us that there's no new corporate news, not for the past couple of weeks. The standard search engines don't throw up any corporate announcements (which should, of course, appear at Edgar first anyway). We don't seem to have a substantive justification for the price move therefore.
We've also got the shape of the price movements themselves - an initial and giddy burst of a rise, followed by a fairly significant fall from the peak. We would, on this information, begin to move toward the idea that this is just speculation. That's without deciding whether it's a pump and dump - that is, being actively driven - or just one of those things that can happen in markets. A small price move drives a momentum trade for example.
But given that we've no substantive evidence for the rise we'd probably conclude that it won't hold. The likely movement is for a continued decline back to somewhere around the starting point. This is not a certainty and we don't pretend that it is. But we'd, rather gently, suggest that trying to chase the PainReform stock price higher is unlikely to be a wealth enhancing move.
