Technically, Dendreon Is a Buy

Technically, you should buy Dendreon (Nasdaq: DNDN) right now.

We examined the company using moving average convergence-divergence (MACD), which is one of the most popular and long-used technical analysis indicators. Technical analysis is the field of buying and selling stocks not based on the underlying merits of a company, but rather on the patterns and formulas around its price movements.

Signal line crossover is one of the more common ways to interpret MACD. It uses a series of moving averages (in this case, nine, 12, and 26 days) to look for bullish and bearish crossovers that indicate a stock has momentum in one direction or another. Below you can find a current chart of Dendreon's MACD profile:

Confused? Well, that's preposterous! How could you ever be confused by something as simple as a moving average convergence-divergence chart! OK, we jest -- but in all seriousness, this is actually one of the simpler methods for technical analysis.

Still, if you'd strictly followed the rules, seeking out upward and downward momentum, you would have seen the stock move between buy and sell categories a fantastic 23 times in one year!

A better way to size up companies

Here at Fool.com, we're more interested in other measures of company value. When we look at Dendreon and its peers, here are the areas that interest us:

Source: Capital IQ, a division of Standard and Poor's; TTM = trailing 12 months. NM = not meaningful.

We prefer to look at the fundamental drivers of value. Investors should closely watch statistical fields like return on equity as well as qualitative values like competitive advantage and managerial effectiveness. These areas led investors like Warren Buffett and Seth Klarman to decades of outperformance. Buying and holding great companies is the best solution for individual investors to build lasting wealth and achieve their financial goals.

So when you look at Dendreon, don't evaluate it for crossing a momentum line. Buy or sell it because:

• After years of stomach-churning ups and downs, the Food and Drug Administration finally approved Dendreon's Provenge, which treats advanced male prostate cancer, in April . The news of Provenge's approval was greeted warmly by investors, who pushed the stock as high as $57 per share in the following days. Initial optimism has since faded, and the stock is trading about 37% off post-approval highs.
• While the hard part of getting Provenge approved is now over, that hasn't stopped Dendreon from staying in the FDA's crosshairs. The company recently received a letter from the FDA that Dendreon was excessively overstating the benefits and minimizing the risk of Provenge in its marketing materials. Foolish colleague Brian Orelli believes receiving the letter doesn't present much of a threat to the company. However, over the long run, he's concerned about manufacturing complications. Right now the company is producing the complicated treatment at one plant, but is looking to expand to three. There's little doubt the demand for Provenge is there, so the company's greatest risk in the coming months will be effectively meeting that demand without any slip-ups along the way.
• Provenge has few competing products, and it has been shown to work better than those that exist. So the biggest concern for competitors is whether the price is fair, and how well you can accurately gauge Provenge's market size. Treatment costs run at about $93,000, and Dendreon has guided for 2,000 patients treated within the first year Provenge is on the market. That's a pretty sizeable opportunity for a new treatment; however, Dendreon also carries an enterprise value of greater than $4.8 billion, so a lot of optimism for Provenge is already baked into the company's value.

Want to buy Dendreon based on technical merits today? Technically, odds are that you should flip and sell Dendreon sometime very soon. If that sounds like madness to you, well, we here at the Fool agree. In every market decline, technical analysis gets its share of proponents. The cries that "buy-and-hold is dead!" get louder, and individuals race toward schemes that promise greater wealth in a shorter amount of time.

I don't deny that technical analysis could make investors money. In any random short-term transaction, you're essentially playing a 50/50 game of chance. However, at the same time, most technical analysis schemes are a relatively simple science, eliminating the vast complexities of evaluating true company value. However attractive, this theory is ultimately the wrong path for individual investors. Technical analysis relies on long-held beliefs about exploiting momentum and consistent patterns throughout the market.

However, with as much as 75% of market trading now done by Ph.D.-level programmers at massive high-frequency funds, even if opportunities existed, what chance would an individual have to sniff these deals out? With so much volume now driven by these funds, how can you be certain the same rules of patterns still even exist?

I could also point to Massey University's study across 49 countries, which showed that more than 5,000 trading rules add no value. However, the real reason to forget about technical investing is what we mentioned earlier: Dendreon crossed the crossover 23 times across the past year! While traders might not buy and sell with each crossing, cases of high momentum are normally short-lived. The amount of trading in most technical analysis schemes racks up commission fees and short-term capital gains taxes, eating away at profits. More importantly, it takes away from the idea of holding a portfolio of great companies that can accrue wealth over a long time.

That's why, at Fool.com, we recommend that individual investors establish a portfolio of well-managed companies with strong advantages over their competitors. In the end, we find that to be the best contributor to long-term wealth. More importantly, it'll spare you from sitting bleary-eyed in front of a computer with a Big Gulp full of coffee, frantically buying in and out of companies. But hey, if your idea of protecting your future is charting the ups and downs of moving average convergence-divergence charts, then Dendreon looks like a buy right now. Just don't expect to hold it for very long.

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