Apparently like the passengers on the Titanic, investors are partying despite the eurozone possibly collapsing within days. Sure, there may be a deal in the works, but is it the same refrain we've heard all along? Yet, just because your stock strapped on a rocket pack and went higher, resist the urge to high-five everyone in the cubicles next to you. Smart investors won't celebrate until they know that upward leap was justified. Without a fundamental basis for the bounce, these stocks can quickly make the return trip down.
Is now the time to lock in profits, or is this just the first step toward even higher valuations down the road? Let's examine several stocks that just hit the afterburners and see whether they're truly headed into orbit.
CAPS Rating(out of 5)
Avanir Pharmaceuticals (NAS: AVNR)
Commercial Metals (NYS: CMC)
Neoprobe (ASE: NEOP)
With the markets soaring 291 points on Monday, or 2.6%, stocks that went appreciably higher are pretty big deals.
Shining a light on growth
There was nothing to account for Avanir Pharmaceutical's big surge yesterday, which was led by triple the volume it normally generates and which ought to tell investors the gains may be ephemeral. Easy come, easy go when there's no basis for the bounce.
The stock was down sharply for the month (off by a third since the end of October) as sales of its big marketed drug, Nuedexta -- which treats pseudobulbar affect, or a sudden, uncontrollable onset of laughing or crying -- have proven to be underwhelming. While Avanir estimates quarterly sales will come in around $4.3 million, almost double the $2.2 million it generated last quarter, it seems a far cry from the $500 million in peak revenues that analysts were estimating.
Early on, Avanir generated some negative publicity over the cost of Nuedexta as estimates suggested it cost as much as $600 a month compared to a combination of two generic drugs that run just $20 a month. That was similar to the criticism suffered by KV Pharmaceutical (NYS: KV.A) , which took commonly available drugs priced at $10 to $15 a dose and charged $1,500 for them. KV's stock price never really recovered, even after the company offered significant discounts. Avanir, though, seems to have countered the worst of the buzz even if its stock is still trending down.
Although a few other biotechs were moving higher yesterday including Arena Pharmaceuticals (NAS: ARNA) and Micromet (NAS: MITI) -- driven by buyout rumors, analyst upgrades, and positive mid-stage trial results -- none performed as well as Avanir.
While three-quarters of the CAPS members rating Avanir think it will overcome the obstacles before it, All-Stars are more circumspect, as just 66% think it will beat the Street. Add Avanir Pharmaceuticals to your watchlist to see whether it just needs time to develop sales.
Recycling an idea
There was no doubt as to why Commercial Metals jumped yesterday: Billionaire investor Carl Icahn offered to buy the company outright without any financing or due diligence clauses to muddy the waters. He doesn't trust management or the board to change the company's direction, so he's seeking to put three new members on the board to oversee operations.
Although management says it will consider Icahn's offer, it might turn to a white knight suitor to thwart his efforts. Last year, Gerdau was thought to be interested in buying the scrap metal specialist as a number of industry players were joining forces, but Nucor (NYS: NUE) or Steel Dynamics might be possibilities as well. With the stock closing below Icahn's $15 per share buyout offer, the market doesn't seem fully convinced he'll win the day.
Wall Street itself was already unanimous in its opinion the company would turn things around, and with 95% of the CAPS community supportive as well, there seems an abundance of confidence in a positive outcome regardless of which way the deal goes.
Tell us on the Commercial Metals CAPS page or in the comments section below if you agree, then add it to your watchlist to see whether the deal gets scrapped.
Who's got short shorts?
When it comes to Neoprobe, investors need to keep one eye on its Lymphoseek marker -- which determines the spread of certain solid-tumor cancers into the lymphatic system -- and one on the short-sellers.
Earlier this summer, the short-sellers at hedge fund MSMB Capital not only took a big short position on Neoprobe earning FDA approval for Lymphoseek, but it also filed a "citizens petition" to try to convince the regulatory agency not to approve it. While seemingly an odious practice, it's not all that uncommon, and as I've noted before, even big pharmaceuticals like Johnson & Johnson have filed such petitions to block drugs of rivals.
Last month, however, the FDA upset MSMB's efforts by accepting Neoprobe's application. Now, that doesn't mean it will get approved, but it is a stepping stone in the right direction. With short interest in Neoprobe remaining essentially unchanged, maybe short-sellers are getting antsy about their big bet.
Biopharms are very subjective between data points and filings and FDA rulings can pop the biopharm, or result in sell on the news. I think there is some upside for Neoprobe from here, but I'm less sure that a better entry point might not be lower as the wait period begins for a response sometime next year.
Add your opinion on what the future holds on the Neoprobe CAPS page, then follow the twists and turns by adding the stock to the Fool's free portfolio tracker.
Going into orbit
It pays to start your own research on these stocks on Motley Fool CAPS, where you can read a company's financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made, all from the stock's CAPS page. Then you can decide for yourself whether your stock's headed for reentry, or off to infinity and beyond.
At the time thisarticle was published Fool contributorRich Dupreyholds no position in any company mentioned.Click hereto see his holdings and a short bio. The Motley Fool owns shares of Johnson & Johnson.Motley Fool newsletter serviceshave recommended buying shares of Johnson & Johnson and Nucor; and creating a diagonal call position in Johnson & Johnson. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.