Is it too risky to buy Cassava Sciences as Quintessential says the stock is worthless?

On Wednesday, Cassava Sciences Inc. (NASDAQ:SAVA) shares plunged more than 7% after Quintessential Capital management released a report saying the stock is worthless. The firm called for shorts to swoop in claiming its Alzheimer’s drug Simufilam seems to be based on forged research.

Cassava Sciences shares are still up more than 660% this year despite Wednesday’s sharp pullback. Quintessential also claimed that Cassava cherry-picked patients for its drug study.

Is it safe to invest in Cassava shares?

From an investment perspective, Cassava Sciences shares trade at a steep price-book value of about 8.13, making the stock too expensive for value investors. 

In addition, although investors seem to be betting on the success of its Simufilam drug, analysts expect the bottom line to improve just by 8.80% this year, before recovering further by 25.40% next year.

Therefore, given the doubt placed on the success of its Alzheimer’s drug after Quintessential asked investors to short the stock, it could be best to monitor developments before betting on the company’s outlook.

Technically, Cassava Sciences shares seem to have recently bounced off the key support at $42.89 to surge above $53 within a descending channel formation. However, Wednesday’s pullback prevented the stock from reaching the overbought conditions of the 14-day RSI.

Therefore, with shares still far from the oversold conditions, investors could target extended declines at about $42.89, or lower at $32.12. On the other hand, if the stock bounces back, it could find solid resistance at about $64.88, or higher at $74.40.

It could be time to sell

In summary, until Cassava Sciences issues a comment refuting Quintessential Capital’s claims, investors could continue to short the stock thus pushing the price lower.

Therefore, given this year’s gains and the steep valuation of the stock, it could be a good time to take some profits off Cassava Sciences shares.