Why Did My Stock Just Die?

So maybe we're going to go over the fiscal cliff after all. Talks between both sides in Washington have apparently broken down and after two consecutive days of 100-plus gains, the Dow Jones Industrial Average (DJINDICES: ^DJI  ) fell almost 100 points yesterday. While pundits describe the two sides as being in opposition, lately it seems more like they're arguing from the same side of the table, only differing on which tax bracket to gore more deeply.

Although American Express (NYSE: AXP  ) fell by 1.8% and Bank of America (NYSE: BAC  ) was off 1.5%, financial stocks weren't the ones that took the worst hits yesterday. Rather, industrial giants Alcoa (NYSE: AA  ) and General Electric (NYSE: GE  ) , both dropping 3%, were the day's biggest losers.

Yet the three companies below managed to do much worse than the Dow and its lagging components, falling by double-digit percentages.

Company

% Change

Affymax (NASDAQOTH: AFFY  )

(12.5%)

Herbalife (NYSE: HLF  )

(12.1%)

Dolby Labs (NYSE: DLB  )

(11.8%)


Now don't go running over the cliff with them like a bunch of lemmings: it could just be a temporary situation. Let's first see whether they had good reason to fall as panic-fueled routs can sometimes lead to excellent buying opportunities.

To the max
It's hard to pinpoint where the information actually came from, but biotech Affymax plunged after a report said its anemia drug Omontys saw sales plummet 23% in November. The drug, co-developed by Affymax and Takeda Pharmaceuticals, treats anemia in dialysis patients who are suffering from chronic kidney disease. It has a more patient-friendly regimen and a lower price than Epogen, which has been the dominant standard of care for years, generating tens of billions of dollars for Amgen (NASDAQ: AMGN  ) . But after safety concerns suddenly arose last year, sales of Epogen fell 20% to $2 billion. Omontys introduced a once-monthly treatment regimen, which compares favorably to Epogen's twice-weekly schedule. Johnson & Johnson (NYSE: JNJ  ) sells it under the name Procrit.

Yesterday's drop, though, was apparently based on information not readily available to all investors, and if true, would seemingly represent a serious violation. I've previously rated Affymax to outperform the broad indexes on Motley Fool CAPS, the 180,000 member-driven investment community that translates informed opinion into stock ratings of one to five stars. The biotech does carry a low two-star rating, suggesting most investors think there are better places for your money.

Who's got short shorts?
Just as bad as hard-to-find rumors sending your stock lower is having a successful hedge fund manager come out and publicly state he's shorting your stock. That's what caused the stock of supplement seller Herbalife to drop so precipitously. Bill Ackman said his Pershing Square Capital Management hedge fund essentially agrees with the sentiments of another hedge fund operator, David Einhorn, that Herbalife is a pyramid scheme that cannot stand. He's been shorting the stock for months and will soon present his own thesis as to why.

Einhorn created a stir earlier this year when he questioned the company's operations, causing shares to plummet, but Herbalife has asked the SEC to investigate Ackman's comments because the company charges he's trying to manipulate the stock. It's been Herbalife, however, that the SEC has been questioning.

While short-sellers can, and do, cause short-term movements in shares, the old saw "the truth will out" will eventually prove them wrong -- if they are. So management shouldn't care so much what hedge funds say if their business is indeed on the up and up.

Isn't that special?
Investors may have initially got a scare yesterday when Dolby Labs suddenly dropped: There was no rumor to account for it and no short-seller taking aim at the company. Actually, it was just the initial price adjustment to the sound specialist's $4-per-share special dividend it paid out that caused the discrepancy. The price reporting was eventually caught up, and investors who were previously asleep learned that the stock actually only closed down a few pennies on the day.

Dolby, like many companies these days, are rushing to beat an end-of-year deadline to pay dividends to avoid the higher tax rates that could be coming as a result of the failure of politicians to come to an agreement on the fiscal cliff. Of course, even if they do come together, it's likely we're going to face a higher tax bill anyway, since Washington apparently believes it's only the revenue side of the equation that needs addressing, not spending. So, as a result, Dolby paid investors $4, Costco (NASDAQ: COST  ) paid out $7 per share, Whole Foods (NASDAQ: WFM  ) gave away $2 per share, and Las Vegas Sands (NYSE: LVS  )  paid $2.75 a share.

If you weren't paying attention when Dolby and the others paid out the dividends, you may have been initially fearful, but it wasn't any rumor-mongering or short attack that sent your stock lower, just a delay in share price adjustments.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 27, 2012, at 11:33 PM, 123spot wrote:

    Hey, Rich. Your personal political attitude toward raising taxes for the wealthiest among us while the rest of our citizens continue to pay for their breaks as they suffer is duly noted. I don't expect to ever consider your opinion in quite the same neutral mindset again. Best of luck in the new year. Spot

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