Why Did My Stock Just Die?

The markets rallied after Europe's leaders agreed to work on the structural problems that caused their sovereign debt crisis. So even though your stock took a nosedive, don't panic. First, let's see whether it had good reason to fall. Sometimes, panic-fueled drops can make excellent buying opportunities. Here's the latest crop of cratered stocks that could provide a possibility for profit:

Stock

CAPS Rating
(out of 5)

Friday's Change

Pharmacyclics (Nasdaq: PCYC  ) * (15.3%)
Cell Therapeutics (Nasdaq: CTIC  ) ** (14.5%)
OYO Geospace (Nasdaq: OYOG  ) ***** (7.9%)

With the markets rebounding 189 points on Friday, or 1.6%, stocks that went down by even larger percentages are pretty big deals.

That's going to leave a mark
Drug developer Pharmacyclics just signed one of the most important deals for its blood cancer drug PCI-32765, with Johnson & Johnson (NYSE: JNJ  ) agreeing to pay $150 million upfront and the possibility for $825 million more down the road -- and the market sells off the stock?

Let's look at the magnitude of that upfront payment. No one has paid that kind of money for a drug that's only at phase 2 trials since AstraZeneca (NYSE: AZN  ) spent $200 million for Targacept's experimental antidepressant TC-5214 in 2009, and one study by the researchers at EvaluatePharma suggests that the higher the level of confidence shown (as represented by big, upfront payments) the greater chance a drug has of success. So why the sell-off?

Partnering with J&J means the likelihood of Pharmacyclics selling itself to someone and extracting a quick payout for some investors is highly diminished. It also means that with the stock doubling over the past year and up more than 1,400% since it cratered at the end of 2008, it could be a good time to take some profits. There's now a lull in catalysts for some time to come.

Despite the record of success with companies committing to large cash infusions, highly rated CAPS All-Star colddrink73 still thinks it's possible Pharmacyclics will fall into the small percentage that fails:

The main problem is they may never gain FDA approval. The [second] problem is they will not gain approval any time soon.This company has 68.7 Million shares outstanding.2011 Q2 loss of .13 per share2011 Q3 loss of .15 per share2011 Q4 loss of .18 per share2012 Q1 projected loss .21 per shareIn essence they lose money!!!They lose more money each quarter!!!

If you disagree with this thinking, tell us in the comments section below or on the Pharmacyclics CAPS page and then add the drugmaker to your watchlist to see how it turns out.

Crash landing
One of the concerns with Pharmacyclics is that it will dilute shareholders to raise cash since it only has about $110 million in the bank at the end of last quarter. Cell Therapeutics bore the wrath of shareholders for doing exactly that. The biotech agreed to sell $20 million in preferred stock convertible into 870 shares of common stock valued at $1.15 each. That would be an additional 17 million shares, or about 10% of its current float. Considering Cell Therapeutics just got done diluting its shareholders six months ago, they weren't particularly appreciative of management's disregard for their interests.

Unfortunately, it's not uncommon for some executives to use a bump in stock to dilute shares. Cell Therapeutics had just got word the FDA was accepting its application for pixantrone and shares soared 24%. Tapping that goodwill seems to have been management's main concern, so investors ought to decide with care whether the executives will look out for their best interests in the future and make their investment decisions in kind.

Motley Fool biotech guru Brian Orelli thinks that even if approved, pixantrone won't hit the peak valuations that Dendreon (Nasdaq: DNDN  ) and Onyx Pharmaceuticals (Nasdaq: ONXX  ) did after their cancer drugs hit the market because it has such limited use.

With a management team that doesn't seem to have investors' best interests at heart and its lead drug candidate having limited upside, I've marked on CAPS for Cell Therapeutics to continue underperforming the market. You can tell us in the comments section below if you agree, and then follow along by adding it to the Fool's portfolio tracker

Blithely on its merry way
While investing for the long haul requires keeping track of a company's progress quarterly, for some businesses you simply need to ignore the wild gyrations that operations can sometimes take. OYO Geospace is one of those; its business can be awfully lumpy at times, as its fourth-quarter earnings just proved.

Analysts had expected the oil services industry support provider to report almost $42 million in revenues and generate $1.25 per share in profits, but instead, OYO fell well short of the mark at $32.8 million and just $0.56 per share in earnings. While management was disappointed in the results, it also pointed out that its backlog was healthy and it expects to ship to just one customer in the first quarter double the number of GSR wireless channels that it shipped to four customers in the fourth.

With 98% of the more than 1,200 CAPS members rating OYO marking it to outperform the broad indexes, it's clear they're looking at more than just one quarter's stumble. Add the oil services firm to your watchlist and tell us on the OYO Geospace CAPS page if it's a stock worthy of support.

Ready for a resurrection
Just because your stock has taken a beating, that doesn't mean it's going to roll over and die. Markets are known for overreacting. A closer look on Motley Fool CAPS at what's happened to your stock can give you an edge over other investors who just react to the market's lead. With CAPS, you can decide for yourself whether your stock is ready to come back from the dead.

Fool contributor Rich Duprey holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Johnson & Johnson and Dendreon. Motley Fool newsletter services have recommended buying shares of Johnson & Johnson and OYO Geospace. Motley Fool newsletter services have recommended creating a diagonal call position in Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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