Short this Swine Flu Killer

This week's WSS Community Portfolio stock recommendation is from the pharmaceutical sector, Oculus Innovative Sciences Inc. (OCLS).

Small Cap stocks once again have been favorites amongst WSS traders in 2009, and the community has been very good in isolating stocks that are undervalued and are due for a correction. Investors who went long on this stock in May amassed gains of approximately 265% through July 3rd as OCLS began attracting capital along with the rest of the sector.

The bio-pharmaceutical company released test results conducted by an independent laboratory at the end of June which indicated that their specific Microcyn Technology formulation reduced infectivity of the swine flu virus after 30-seconds of exposure. It turns out that the company may have confirmed the effectiveness of a virucidal time-kill suspension test as a way of responding to criticism from TheStreet.com's Adam Feuerstein. The stock rose to $3.52 from the report, however, the FDA has stepped in and told OCLS that it cannot make such claims as of yet, and the rumor is that the company is hyping up a new stock issue, which will likely put downward pressure on the stock's price.

Looking at the fundamentals, we see that OCLS has an enterprise value to revenue ratio of 11 times, however EPS is negative at ($1.09) per share. The stock price is 24 times book value, and seems to be looking overvalued in the short-term giving the weak economic recovery that is expected through 2009.

Action to Take: Short OCLS

Investment horizon: 3 months
Price target: $1.50

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