What happened

Shares of Diplomat Pharmacy (NYSE:DPLO) bounced back 14% on Friday, just days after getting cut in half following the disclosure to investors that the company had lost a big account and was in danger of falling out of favor with its creditors.

So what

The volatility comes from the binary nature of Diplomat's current situation.

On the plus side, if it finds a buyer for all or part of its business, Diplomat is worth more than its value at Thursday's close.

Alternatively, if Diplomat's creditors won't work with it to negotiate on the covenants that are part of its credit agreements, they could foreclose on its assets and force the specialty pharmacy and pharmacy benefit manager into bankruptcy, making it basically worthless.

The current fair market value is a blend of the valuations based on the likelihood of each event occurring. Unfortunately, both extremes are predicated on actions outside the company's hands -- a white-knight acquirer or sympathetic creditors -- so it's hard to know how likely it is that Diplomat Pharmacy will survive. With each investor handicapping the potential outcomes a little differently, the share price has been changing from day to day.

Pharmacist looking in a drawer

Image source: Getty Images.

Now what

Making the distinction between value stocks and value traps is difficult. In retrospect, Diplomat Pharmacy was a short-term value at the lows of Tuesday, but where it goes over the long term will be less dependent on investors' sentiment and more on whether management can guide the company through the sticky situation it's worked itself into.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.