Shares of Mallinckrodt (MNK) are soaring today, up 12.1% as of 11:30 a.m. EST. This big jump seems to stem from investors' anticipation of better-than-expected results when the drugmaker reports its third-quarter update tomorrow morning, as well as general stock market optimism.
Buying any stock based on a gut feeling for how the company's next quarterly results will turn out isn't a good idea. You might be right, but you could just as easily be wrong. The more important thing to focus on is a company's business prospects.
For Mallinckrodt, those prospects hinge largely on what happens with ongoing opioid-related litigation. The company reached a settlement with two Ohio counties, agreeing to pay $24 million in cash, cover $500,000 for the counties' time and expenses related to the lawsuits, and provide $6 million worth of generic products to the counties. However, many other opioid lawsuits remain unsettled.
As for Mallinckrodt's Q3 results that will be announced on Tuesday, investors do have some reason to be cautiously optimistic. In the second quarter, the company upped its full-year 2019 guidance for adjusted earnings per share.
Investing in stocks, in general, involves plenty of uncertainty. But with Mallinckrodt, the level of uncertainty is unusually high. Depending on what happens with the opioid lawsuits, the company could face an existential crisis or it could emerge in a position to deliver long-term growth. Despite today's nice gains, investors should remain very cautious with all the stocks of companies that focus heavily on the opioid market, including Mallinckrodt.