- Created on Wednesday, 17 August 2011 14:49
- Written by Derek Simon, Guest Editor, Taipan Publishing Group
- Hits: 2367
Over the past few weeks, we've been giving you strategies to deal with a turbulent market. But that doesn't mean investors aren't still buying and holding stocks for the long term.
If you're one of these investors, then this week's Smart Investment Strategies edition is just for you, from a guy who knows the stakes...
Derek Simon is a longtime market observer and an expert on investment statistics and analysis. His work has appeared in Forbes, as well as on Motley Fool, Investopedia and a variety of other business and sports gambling websites and magazines, including CBS Sports and ESPN.com.
The real winners in the buy-and-hold market are numbers guys... not the "all in" hopefuls who pin their financial futures on a single stock.
Derek shows you what to watch out for with three simple rules for the stock market.
To prove his point, Derek tells you the tragic story of a biotech juggernaut that lost $3.7 billion in value in a single day that had nothing to do with the volatility of the stock market.
This is a must-read for investors still buying and holding stocks...
How to Avoid Sinking in the Stock Market
Two weeks ago, a funny thing happened on Wall Street, yet no one laughed -- at least no one who held shares in Dendreon Corporation (DNDN:NASDAQ).
That's because, on Aug. 4, the Seattle-based drugmaker saw its share price disintegrate quicker than the plot of a Michael Bay movie. On that Thursday, Dendreon went from $35.84 to $11.69 by market close -- a whopping 67.4% decline.
This equity meltdown (in excess of $3.7 billion) was triggered when Dendreon officials announced, in an after-hours earnings conference, that the company was withdrawing its earlier optimistic sales forecast for Provenge, a drug designed to treat prostate cancer.
"For the remainder of 2011, the launch trajectory will reflect a more gradual adoption of Provenge as physicians gain confidence in this positive reimbursement landscape," said Dendreon President and CEO Dr. Mitchell Gold in a statement.
That's not what was funny -- although the phrase "positive reimbursement landscape," referring to the decision last month by Medicare and Medicaid to pay for the drug, did bring a smile to my face.
What was funny was the way Wall Street "experts" responded to the Dendreon price plunge.
"I took my Dendreon model to the woodshed by cutting my peak Provenge sales estimates by more than 50 percent," ISI Group analyst Mark Schoenebaum said in a research note reported by Reuters.
Baird Equity Research analyst Christopher Raymond was even more aggressive, as he cut his rating on DNDN to "neutral" from "outperform" and "slashed his price target to $20 from $56."
Man, I can't wait for these guys to weigh in on the 1929 stock market crash or, perhaps in a month or two, the '87 crash.
I mean, seriously, what good are any of these amended forecasts after the damage has already been done? It's like cranking up the warning sirens after the tornado has already leveled the town.
Dendreon opened at $12.73 on Thursday, down $23.11 from Wednesday's close, so absolutely nobody benefited from the analysts' revised projections.
But the laughs kept coming...
In a related Bloomberg piece, the aforementioned Raymond said that "We still believe in Provenge long term, but shorter-term, prefer to watch the real trajectory on the sidelines."
Huh? You just cut your price target by 64%, from $56 to $20, Mr. Raymond. If that represents belief in Provenge long term, I shudder to think what would have happened had you lost faith in the drug altogether. Can a stock target be negative?
And what exactly does watching the "real trajectory on the sidelines" entail?
Can investors expect a thumbs-up from Baird once the "positive reimbursement landscape" Dendreon's CEO is waiting for materializes? Or is the plan to wait for DNDN to start trading in the mid-$30 range again before the "buy" signal is given?
Look, I'm not trying to be snarky, nor is it my intention to poke fun at Raymond or other financial analysts and pundits. The point here is that, far too often, the talking heads on Wall Street are a day late and many dollars short in regard to their forecasts.
Were there signs that Dendreon was in trouble even before its day of infamy? Absolutely. And, in fact, the company provides some great examples of what to avoid -- or at least consider avoiding -- when investing in the stock market:
- Be wary of companies that rely on (or are heavily banking on) the success of a single, unproven revenue stream.
For almost 23 months -- from June 1, 2007, to April 13, 2009 -- Dendreon's highest closing price never topped $10.
All that changed, however, when the company told us Provenge passed a "512-patient, multi-center, randomized, double-blind, placebo-controlled IMPACT (IMmunotherapy for Prostate AdenoCarcinoma Treatment) study" with flying colors.
From May of '09 until the implosion two weeks ago, Dendreon always traded above $19 per share, despite the fact that the company was bleeding money. From FY 2008 to FY 2010, Dendreon's losses increased sixfold -- while the stock rose in value by 460%.
- Let a stock's past be a guide to its future.
Yeah, I know, this seems obvious, but remember: We live in a culture that believes historical perspective implies only a (faint) recollection of what happened within the last day or two.
The truth is Dendreon proved to be a very volatile company ever since it went public in 2000.
In fact, from 2001 until Aug. 12 of this year, DNDN posted one-day losses of 18% or greater nine times, or nearly once a year. During that same time period, Microsoft (MSFT:NASDAQ), an obviously more established company with a positive income stream, had no such poor trading days (an 11.7% drop on Jan. 22, 2009, marked MSFT's worst single-day performance).
Incidentally, most of Dendreon's equity slides coincided with bad news (real or perceived) about Provenge (see point one).
- Beware of a stock that responds to a significant spike in volume by recording a lower intraday low than the day before.
This often indicates selling pressure, especially when it is repeated -- as was the case with Dendreon for nearly two months prior to its Aug. 4 collapse.
Dendreon's volume shot up by 30% or more on consecutive trading days 12 times from June 6 to Aug. 3 -- and 10 (83%) times, the low was less than it was the previous day.
What's more, on the Wednesday before the big sell-off, DNDN volume (4.5 million shares) reached its highest level since July 1 (5.4 million shares) and the stock dipped to $33.65, its lowest price in over four months.
Given that DNDN closed at $35.84 that day, an observant investor could have sold his/her holdings and avoided all the pain that was to follow.
Of course, it goes without saying -- although I will anyway -- that the bullet points above are not harbingers of doom and empty wallets in every instance.
Investing in biotech stocks like Dendreon is, has been, and always will be risky. Understanding that risk is crucial.
Sometimes market conditions warrant a more aggressive investment approach; sometimes they do not. Sometimes it pays to employ a buy-and-hold strategy, while sometimes it's best to simply sit on the sidelines... and watch trajectories.
Publisher's Note: If you are looking for more insight on risk control and how to protect yourself from a dangerously volatile market, you need to see if Safe Haven Investor is right for you.
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