AVEO Pharmaceuticals Popped: What You Need to Know

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Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: When is it good news for a company to lose $0.16 per share? When the company was expected to lose $0.75 per share -- and when its name is AVEO Pharmaceuticals (NAS: AVEO) .

So what: In the second quarter of 2010, this little biotech start-up lost $0.50 per share, and it was expected to do even worse in Q2 2011. Instead, the cancer researcher cut its losses dramatically, and is enjoying a 10% spike in its share price as a result. Better still, management confirmed that thanks to a recent share issuance, AVEO will end this year with $230 million worth of cash in the bank. Even at the company's current $50 million-plus annual burn-rate, that should be more than enough fuel to keep AVEO's cash furnace burning through 2012 and beyond.

Now what: That's absolutely key to the buy thesis on AVEO. Why? Because AVEO isn't expected to earn a profit this year, or next year either. Like so many biotech startups, though, that's not its objective. Its objective is to attract Big Pharma partners, announce positive clinical trial results, and -- pardon my French -- sucker investors into buying successive rounds of dilutive stock issuances. All this is in furtherance of a goal to stay solvent until the day when it obtains FDA approval and begins selling a blockbuster drug -- generating consistent, profitable revenues from its business.

As such, AVEO is today and will remain for some time a "news-driven" stock. Gamble on it, or gamble against it. Win, or lose. Just make sure to remember that with AVEO, you're gambling -- not investing.

Keeping abreast of the news is key to owning stocks like these.Add AVEO Pharmaceuticals to your Watchlistand make sure you're first to hear the news that moves the stock.

At the time this article was published Fool contributorRich Smithdoes not gamble on stocks, and he does not own (or short) shares of AVEO. The Motley Fool has adisclosure policy. Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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