Which High-Flying Stocks Should Investors Avoid?

Our contributors give their take.

Jul 26, 2014 at 2:37PM

With the year a little over half finished, it seemed appropriate to take a look at the highest-flying biotechs and consider which might be best to avoid. We asked our top contributors for their take.

Todd Campbell: Saying that GW Pharma (NASDAQ: GWPH) has been on a run this year is a big-time understatement. Thanks to excitement surrounding its marijuana-derived biotechnology pipeline, GW Pharma's shares have more than doubled since the end of 2013. While the company has an intriguing product line up, including one drug already on the market, the surge to sky-high valuation reminds me more of a bubble than a bargain.

That's because its currently marketed product, Sativex, posted sales of just $13 million in the first quarter, giving it a $50 million annualized run rate that does little to justify a market cap north of $1.5 billion.

And while investors may be excited about a potential U.S. approval in cancer pain and in childhood epilepsy, the market opportunity in those indications seems limited given that Sativex would be relegated to second tier status behind commonly used opioids in cancer pain and the patient population for the type of epilepsy Epidiolex would treat is tiny.

There may already be signs of cracks in shares armor. After jumping more than 50% in June, shares have slipped by almost 20% so far this month. For my money, a perfect-world market value and roller coaster volatility make this stock very risky.

Brian Orelli: While it's pulled back considerably from its post-approval highs, I'm still going to call out MannKind (NASDAQ: MNKD) here, trading up more than 70% year to date.

This isn't to say that MannKind's inhaled insulin Afrezza, doesn't have potential. It does.

But the risk-reward doesn't look particularly good to me at a market cap of $3.5 billion, which is actually considerably higher if you add in all the outstanding warrants and options.

Predicting MannKind's short-term movement is impossible, but long-term it'll ultimately be valued on sales of Afrezza. At a price to sales ratio of five, there's already over $600 million in annual sales priced in. The ratio could expand before hitting a $600 million run rate, pushing up the valuation, but only if the launch is successful.

The risk -- that I don't think is fully appreciated in the current valuation -- is that doctors take a wait-and-see attitude with Afrezza. They prescribe it to a few patients, perhaps someone with fear of needles, but avoid giving it to a wider population because of the new mode of action. With concerns over impairments to lung function and lung cancer, doctors may not want to expose a large number of patients to Afrezza until they have real-life experience with it.

If that situation comes to fruition, like we've seen with the obesity drugs, MannKind's value could drop precipitously.

George Budwell: Shares of Achillion Pharmaceuticals (NASDAQ: ACHN) have bolted higher this quarter by an eye-popping 150%. Achillion's slingshot move higher has been propelled by the acquisition of fellow hepatitis C drugmaker Idenix by Merck for a reported $3.85 billion, the unexpected release of a clinical hold for its hepatitis C clinical candidate sovaprevir, as well as a positive note from Wells Fargo that its early stage study for ACHN-3422 is going well so far. All told, Achillion is riding a wave of good news this quarter, but the stock now looks grossly overvalued, in my opinion.

While investors appear to be betting that Achillion will be bought out at some point for a hefty premium, I have a hard time believing this scenario will come to pass. First off, Merck's acquisition of Idenix probably wasn't the best idea, given that the hepatitis C market is predicted to drop significantly in Western countries that can afford expensive new therapies. As such, Gilead and Johnson & Johnson look like they will benefit greatly from having first-mover advantage in this market. And AbbVie's therapy for genotype 1 patients will be yet another roadblock for new drugs hoping to gain market share. In short, I think Achillion is simply too far behind its competitors and offers little value going forward as a result. 

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George Budwell, Todd Campbell, and Brian Orelli have no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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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