You saw the headlines. You know your stock made a big move one way or the other over the past month, but what does that portend for its future? If there's not a fundamental basis for a stock's run higher, or its trip to the cellar was fueled by transient, panic-driven selling, those gains and losses might not hold -- and therein lies the potential for investors to profit!
Here we look at one stock that stumbled and one that soared. By pairing the latest news with the collective wisdom of our 180,000-strong Motley Fool CAPS investing community, we might be able to discover whether your stock's latest exploits are a short-term hiccup -- or the start of a much bigger trend.
72 inches down
Supermarket chain Roundy's (Nasdaq: RNDY ) has been roundly excoriated for its failings. Even as it posts disappointing quarterly earnings and provides dour guidance, it looks like it went public simply as a means of providing its private equity owners with a big payday: Within months of the IPO, it was rumored they were already shopping the chain for a sale.
Roundy's serves the Midwest markets, which is quickly becoming attractive to bigger, better-financed rivals. Both Costco (Nasdaq: COST ) and Wal-Mart have a significant presence there and are looking to expand, likely pinching Roundy's margins further. Profits per share fell 28% in the second quarter, and with revenue guidance for next quarter and the full year having been slashed, the promised dividends may be in jeopardy. Its payout may yield 12.8%, but high yields often signal a dividend in trouble.
The supermarket operator was larded with debt in part to pay for a $150 million dividend to its private equity owners who have been forced to hang onto their investment longer than they intended. Having bought the chain in 2002 for $750 million, they were unable to find a buyer when the economy sank. They attempted to sell it again for $1.2 billion last year, but that again came to naught, so the latest rumors of a possible sale are nothing new. In the past, Kroger and Safeway have been mentioned as possible buyers, though no formal bids have ever been made.
At seven times earnings and estimates, Roundy's looks cheap, putting it on par with its rivals, but its enterprise value trades at a rich 26 times its free cash flow suggesting it still carries a high price tag (Kroger and Safeway also carry lofty EV-to-FCF ratios).
CAPS member tmcmill81 finds their "crushing" debt levels untenable, and I agree there seems little in its future aside from a sale. Tell me in the comments section below whether you think Roundy's can find a buyer before the end.
No longer living large?
I've been warning that the bounce being enjoyed by biotech Geron (Nasdaq: GERN ) on the basis of rosy analyst sentiment regarding its cancer therapies was a bit premature. First, an article at Seeking Alpha gave it a positive review, and that was followed by an analyst weighing in with similar views. Both articles caused the biotech's stock to surge 70% over the past month, and it's nearly doubled in value so far in 2012.
Today, however, Geron will break the other way. It announced this morning that it was discontinuing mid-stage breast cancer trials on imetelstat after an unplanned analysis of the data showed that median progression-free survival was shorter than in the comparator arm. In premarket trading, the stock was down nearly 50%.
It was why I urged caution, saying that while the treatments seem to hold a lot of promise, mid-stage trials are not the endgame and we have a lot of time to go before actual outcomes are achieved. It was a bad result like this that I was warning about.
Geron abandoned stem cell research in favor of developing its oncology therapies. While that left the field of stem cell research wide open for the likes of Cytori Therapeutics (Nasdaq: CYTX ) and Osiris Therapeutics (Nasdaq: OSIR ) , the move meant it was an all-in bet on cancer studies, and many other worthy competitors have been broken on the shoals by trying to ride that wave.
The shock of the announcement will wipe away much of the gains Geron has made, but once the first round of fear passes, cooler heads will prevail in judging the merits of imetelstat going forward. Just as investors shouldn't have rushed into the stock based on such an ephemeral basis as feel-good analysis from analysts, so they also shouldn't think imetelstat has no future because of this failure. But let me know in the comments box below if you think Geron will still be a worthy cancer researcher and if imetelstat will prove itself yet.
Stop, look, listen
Investing in biotechs requires assuming a lot of risk, but if you want market-thumping returns, you need to minimize the amount and protect your portfolio. Luckily, Yhe Motley Fool found another stock it's excited about -- excited enough to dub it "The Motley Fool's Top Stock for 2012." There's a special free report for investors to uncover this stock today. The report is 100% free, but it won't be here forever, so click here to access it now.