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Why Brocade Communications, Loxo Oncology, and Acadia Healthcare Slumped Today

By Dan Caplinger – Jul 14, 2016 at 7:14PM

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These stocks fell even as the market hit new all-time highs. Find out why.

Image source: Brocade Communications.

Thursday was another strong day for the stock market, and the Dow and S&P 500 continued their recent climbs to new record highs. Stocks are generally maintaining a balancing act between greater optimism about the economy and a rising certainty that alternatives like bonds are a losing proposition.

Today's rise in the Producer Price Index supported both halves of that thesis, because higher inflation suggests strong pricing power from businesses, and sent bond prices downward. Despite the overall enthusiasm in the market, however, several stocks lost ground, and Brocade Communications (BRCD), Loxo Oncology (LOXO), and Acadia Healthcare (ACHC 2.26%) were among the weakest performers on Thursday.

Brocade makes a bad connection

Brocade Communications fell 7% after the storage-area and internet-protocol networking specialist got an unfavorable view from industry analysts. Stock watchers at Robert W. Baird gave their opinion on the company, cutting their view on Brocade to underperform, and slashing their price target by three-quarters -- all the way down to $2 per share.

The analysts are concerned that, even if Brocade's overall business picks up, trends in the industry will create a lack of pricing power for its products, and that could result in a net negative movement in revenue in future years. In addition, heightened competition in areas like wireless local-area networking could put further pressure on profits and sales. To avoid its fate, Brocade will have to maintain a disciplined approach to its internal cost structure, and that could prove exceedingly difficult.

Loxo gives back some of its gains

Loxo Oncology dropped 4%, but that represented only a partial pullback from yesterday's sharper move upward in the wake of its receiving breakthrough-therapy status from the U.S. Food and Drug Administration. The LOXO-101 drug is aimed at treating certain types of tumors in both adult and child patients who need systemic therapy, and have either gone through other available treatments, or have no other alternatives available.

Loxo hopes that its tropomyosin receptor kinase inhibitor could have an impact on forms of genetically defined cancers, and the company told investors to expect an update on LOXO-101's phase 2 trial later this year. Wednesday's 6% gain reflected enthusiasm about the move, but today's drop shows that there's further to go before Loxo investors can declare final victory.

Acadia has regulators nervous

Finally, Acadia Healthcare dropped 6%. The healthcare specialist said that the U.K. Competition and Markets Authority would look further into Acadia's completed buyout of Priory Group, a behavioral-healthcare services provider. Concerns include the possibility that the buyout has the potential to hurt the level of competition in the market, and Acadia said that it is looking for ways that it can address any concerns that the regulator has.

A response is due within the next week, but the turnaround time from the regulator will also be quite quick. The stakes are high: If the regulator isn't satisfied by the initial response, an investigation could easily last until the spring of 2017. During that time, Acadia would have to comply with hold-separate provisions, and delay fully integrating its Priory Group purchase.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

Stocks Mentioned

Brocade Communications Systems, Inc. Stock Quote
Brocade Communications Systems, Inc.
Acadia Healthcare Stock Quote
Acadia Healthcare
$83.80 (2.26%) $1.85
Loxo Oncology Stock Quote
Loxo Oncology

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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