Stocks that appear to be ridiculously "cheap" based on various valuation metrics -- or potential market opportunities -- all too often turn out to be capital-destroying sinkholes. Fortunately, with a little foresight, these potential landmines can generally be avoided.
With this in mind, we asked our contributors which stocks they think might be tempting for bargain-hunters right now, but are, in fact, probably too risky to chance it. Below, they discuss why they think Trevena (NASDAQ:TRVN), Medical Marijuana, Inc. (NASDAQOTH:MJNA), and Teva Pharmaceutical Industries (NYSE:TEVA) are more likely to be value-traps than bargain buys.
The dream of a morphine replacement is dead
George Budwell (Trevena): Prior to last week's disappointing top line data release for its experimental pain medicine Olinvo (oliceridine), Trevena appeared to have the potential to double -- or perhaps even triple -- in value in rapid fashion. Olinvo, after all, was slated to displace morphine as the go-to acute pain medicine in hospital settings -- a market that could easily generate hundreds of millions in sales if the "right" drug came along.
The problem is that Olinvo no longer appears to be the breakthrough drug Trevena and its shareholders were hoping it would be based on its promising midstage studies.
Long story short, Olinvo did hit its primary endpoints in both late-stage trials (level of pain reduction relative to placebo), but it failed to clearly differentiate itself from morphine in the two studies' secondary endpoints. Even worse, Olinvo was unable to outperform morphine on key safety measures like respiratory burden and nausea at higher doses, lowering its appeal as a safer, more tolerable alternative to morphine.
While Trevena is reportedly planning on filing a New Drug Application for Olinvo with the FDA that may rekindle the market's interest in the near-term, it's hard to see hospitals readily purchasing a more expensive replacement for morphine that doesn't offer a markedly superior clinical profile. In fact, the cost to launch Olinvo could very well exceed its commercial potential at this point -- implying that Trevena may eventually scrap a regulatory filing altogether and simply pivot to its earlier stage product candidates.
Summing up, the value proposition of this clinical-stage biotech stock largely evaporated in the wake of Olinvo's late-stage readout, and there's little reason to think a sustainable rebound is in store anytime soon.
A longtime loser
Cory Renauer (Medical Marijuana, Inc.): Legal marijuana sales in the U.S. surged 34% last year to $6.9 billion, according to cannabis research firm ArcView, and this figure is expected to reach $21.6 billion by 2021. Although the company's name suggests medical and perhaps even recreational marijuana sales, it will not ride this wave to profit town as long as marijuana remains a federally controlled substance. Instead, the company will provide a myriad of services and "legal" cannabis-derived products such as hemp oil, although it does consider itself well positioned for federal legalization.
Unfortunately, the federal government probably won't downgrade marijuana's schedule 1 status during the Trump administration. Recently appointed U.S. Attorney General Jeff Sessions is an outspoken critic of the legalization movement, and there's plenty of reason to believe a long position in Medical Marijuana, Inc. could lead to losses before nationwide legalization has another chance.
Even if you're patient enough to sit on Medical Marijuana stock for four or more years, the odds of coming out ahead look awfully slim. In 2009 it became the first publicly traded cannabis business in America, but nearly eight years later it isn't any closer to generating a profit for its shareholders. The company's operations lost $177,663 in 2009, which widened to $3.65 million in 2015.
And it looks like losses are accelerating fast. During the three months ended September, Medical Marijuana's operations lost another $1.14 million. Consider another $2.92 million spent servicing outstanding debts and an unrealized loss of $4.08 million on equity investments during the three month period and it's no wonder this is still a penny stock traded over the counter instead of a major exchange.
Too many hurdles to jump
Keith Speights (Teva Pharmaceutical): Some investors might look at Teva and see a bargain -- the specialty and generic drugmaker's stock is down well over 30% in the last 12 months. Teva's trading at only seven times forward earnings. Should you jump in while the stock is dirt cheap? I think it's probably best to hold off for now.
For one thing, investors should wait to see who Teva hires as its next CEO. There's been turmoil at the top for Teva recently: former CEO Eroz Vigodman left earlier this month under a dark cloud of dismal stock performance and allegations of corporate bribery in several countries. Yitzhak Peterburg, Teva's chairman of the board, is serving as interim CEO until a replacement for Vigodman is found.
There's also significant uncertainty over Teva's patent protection for Copaxone. In January, a U.S. district court invalidated several key patents for the multiple sclerosis drug. Copaxone generated $4.2 billion for Teva last year, almost one-fifth of the drugmaker's total revenue. Although Teva is appealing the court decision, it's quite possible that the company could soon face a major threat to its financial prospects.
Teva does have some good things going for it -- the company's acquisition of Actavis Generics is already helping boost sales and earnings. However, I'd recommend waiting to see what happens with the CEO search and the Copaxone patent litigation. I'm not so sure that Teva has hit bottom just yet.
Cory Renauer has no position in any stocks mentioned. George Budwell has no position in any stocks mentioned. Keith Speights has no position in any stocks mentioned. The Motley Fool recommends Teva Pharmaceutical Industries. The Motley Fool has a disclosure policy.