Whoa! What Just Happened to My Stock?

With 80% of all the stocks on the NYSE and Nasdaq exchanges recording gains on Monday as the Dow Jones Industrial Average (DJINDICES: ^DJI  ) jumped 166 points on hopes a fiscal deal could be reached in Washington, it's still notable that some companies put together double-digit gains, or nearly so. After all, Dow components like DuPont (NYSE: DD  ) and Microsoft (NASDAQ: MSFT  ) were only eking out increases that kept them in positive territory so the three stocks below recorded an achievement of sorts.

But resist the urge to high-five everyone in the cubicles next to you. Smart investors won't celebrate until they know why their stock surged, because without a fundamental basis for the bounce, these stocks could just as quickly make the return trip down.

Company

% Gain

Lexicon Pharmaceuticals (NASDAQ: LXRX  )

15.7%

Herbalife (NYSE: HLF  )

12.1%

Abraxas Petroleum (NASDAQ: AXAS  )

9.5%

On a roll
Drug developer Lexicon Pharmaceuticals continues to ride higher the fast track designation for its experimental drug for irritable bowel syndrome, LX1033, gained from the Food and Drug Administration a few weeks back. While not guaranteeing approval, a fast-track designation accelerates the regulatory review of a drug once it has completed clinical trials. Drugs that receive fast-track status typically serve patients with limited alternative options, treat critical or life-threatening conditions, or meet various other criteria.

As it gets closer to the mark, Lexicon may eventually become a takeover candidate for someone like Eli Lilly (NYSE: LLY  ) , which has a better than 80-year history of treating the disease, but others have gone down the IBS road before and come up short. Several years ago, Novartis (NYSE: NVS  ) had to pull its top IBS drug, Zelnorm, from U.S. markets because of an "imbalance" of cardiovascular events occurring in patients taking the drug.

Yet that's just one of the reasons why Lexicon was able to gain the fast-track designation. Still, it's still early innings and nothing to get too worked up over yet.

Getting to the point
Following a devastating presentation by hedge fund operator and short seller Bill Ackman where he accused the nutritional supplements maker of being a pyramid scheme, shares of Herbalife plummeted 12% in one day and then kept right on falling afterwards. While management contends that Ackman is way off in his assertions and plans to rebut them soon, a cloud of doubt hangs over the stock.

Yet the depressed price is attracting some who no doubt hope that Herbalife's rebuttal will be just as dramatic as the short thesis and they've been buying into the stock ahead of the Jan. 10 presentation. Although shares may seem cheap, the supplements maker has a pretty big wall of doubt to surmount as Ackman isn't the first high-profile short seller to take a look at the stock.

Herbalife's decline began when David Einhorn merely showed up on a conference call. Einhorn had himself offered up a pretty damning presentation against Green Mountain Coffee Roasters (NASDAQ: GMCR  ) last year that was ultimately borne out, and its stock cratered (though it's since doubled in value in the last six months). Until Herbalife can counter the charges against it, though, it's little more than buying on blind faith that multi-level marketing companies are anything but pyramid schemes because the numbers can't hold up to scrutiny.

Say no more
While there was no company-specific news for account for the move, Abraxas Petroleum shot nearly 10% higher on Monday. Abraxas does have an elevated level of shares sold short with days to cover standing at 12 (The Fool considers anything over seven a lot), so perhaps bullish sentiments sent some shorts to cover, a loop which ends up feeding on itself.

Just as Chesapeake Energy (NYSE: CHK  ) and EOG Resources (NYSE: EOG  ) have both done, Abraxas is concentrating on its oil holdings primarily in Texas and in the Williston basin to marshal its resources. It's expecting production to rise as much as 28% in 2013 while also selling off non-core assets making it a very focused play. Michael may just be right about its chances this year, and the shorts could be making the right decision if they're running for the hills.

Over the next two years, Eli Lilly will see nearly $0.40 of every $1.00 in sales exposed to generic competition. How does the company plan to respond to this huge patent cliff? Better yet, what does this mean for investors? In a brand new premium report on Eli Lilly, The Motley Fool's top pharmaceuticals analyst delves into everything investors need to know about the stock today. Simply click here now to claim your copy.


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  • Report this Comment On January 03, 2013, at 2:11 PM, dhuddle wrote:

    @ Rich - Hold on a second -- You say "Until Herbalife can counter the charges against it, though, it's little more than buying on blind faith that multi-level marketing companies are anything but pyramid schemes because the numbers can't hold up to scrutiny." Ask yourself if you have you been brainwashed by a Short Seller who has or had a 20 million share position.

    A company can be based on direct selling without being a Pyramid Scheme that will collapse due to lack of product sales - all they have to do is sell enough products. My company has independent Distributors and many other companies do. We sell to Distributors and don't care who they sell to. Direct selling is an effective way to penetrate emerging economies, especially in countries like Mexico and China where a "partner" is required and it reduces the need for traditional advertising. HLF's advertising is word-of-mouth (the best kind) and from sponsorships of many famous sports teams and athletes around the world (google Herbalife sports sponsorships and you will see). If you have good products that approach works.

    Did you look at the numbers or just listen to the Short Seller Attack?

    Yes, look at the numbers, they prove HLF is NOT a pyramid scheme -- HLF has $3.9 Billion of TTM revenues, bought one of the companies that produced HLF products 2 years ago and is building a new distribution facility (not things a "pyramid scheme" would do). Here is a simple test of whether HLF is a pyramid scheme - assume that 50% of the revenues are from recruiting fees ($1.95 Billion) and that the average of those fees to HLF is $100 per Distributor. That would mean that 19.5 million people paid fees. $100 is a lot of money in many countries. Do you really think they could get 19.5 million people to pay $100 each in a 12 month period? That is equal to the population of the 6 largest US cities (New York, LA, Chicago, etc.) And that only assumes 50% of the revenues are from fees and that the rest is from product sales. Didn't Ackman basically claim they don't have any sales? The math doesn't support that. Plus, HLF has been in business for 30 years.

    More numbers -- Another proof that HLF is NOT a pyramid scheme is that the person who is most knowledgeable about HLF bought $3 million at market in November at $44 per share.That is the COO who was previously the CFO. NO ONE knows more about the actual operations and finances of HLF. This wasn't stock given him by the company - this was his own money at MARKET. He isn't a super-rich guy, so he obviously thought $44 is a bargain. That is why I think the floor price is $44.

    HLF is a company that sells good products at fair prices thru a direct sales approach. If you work out or are health conscious, give them a try. I have used the products and have recommended them to others who use them. I don't sell them - I am just a customer. That is one reason I knew Ackman's claims were untrue.

    Have you ever heard of a Pyramid Scheme that has been in business for 30 years and offers a 12 month buyback on its products? Those 2 facts in themselves prove that HLF is NOT a pyramid scheme.

    I am going to make a lot of money on HLF stock. I hope Ackman does this again, although I thought it was illegal to intentionally manipulate a stock price.

    I am long HLF as of Dec. 24 and expect it to go to $45 within 6 months.

  • Report this Comment On February 02, 2013, at 4:59 PM, nanbob1 wrote:

    I bought into Lexicon Pharmicuetical [ lxrx ] many times between 89 cents and 1.79. LXRX has 4 hot projects going and all are doing just fine.They also have over 100 possible projects their looking at,,,,there is no doubt in my mind this stock will be over 10 by 2014,or be bought out,or partner up,they have just to many things on their plate,and need help,their all of a sudden to small,so grab a handful while their unknown,because shortly it will be expensive to buy........

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