Why Did My Stock Just Die?

Your stock just took a nosedive -- but don't panic. First, let's see whether it had good reason to fall. Sometimes, panic-fueled drops can make excellent buying opportunities. Here's the latest crop of cratered stocks that could provide a possibility for profit:

Yesterday the market jumped 148 points, or 1.2%, swearing off concerns about world tensions. Indeed, the indexes hit 30-month highs, and the Dow crossed strongly over the 12,000 mark. Yet stocks that went in the other direction by large percentages are even bigger deals.

The devil's in the details
Just the other day I talked about the FDA keelhauling Arena Pharmaceuticals (Nasdaq: ARNA) when it put impediments in front of its fat-fighting treatment locaserin, but Orexigen at least seemed to have a leg to stand on when its own obesity therapy Contrave got a surprise FDA panel endorsement this month.

What wasn't a surprise was the FDA being contrary and handing Orexigen its own setback, demanding it run a trial measuring cardiovascular events in patients taking its anti-fat drug. VIVUS naturally went down with it, though by not nearly as much since it had given up the ghost last year when it, too, was shot down. It's just as well that it's not going through with the quick resubmission of Qnexa.

So the FDA has effectively taken out all of the leading fat-fighting candidates, though in retrospect, investors should have seen it coming. The FDA was saying all along the drugmakers needed to prove their treatment's safety before they'd be allowed to make more progress.

For that you can thank Wyeth's fen-phen that burned the agency with safety issues. As a result, as soon as Abbott Labs' (NYSE: ABT) Meridia indicated heart problems, it also got yanked. Now in rather quick succession, Arena, VIVUS, and Orexigen have been shot down.

So do investors end up believing as CAPS investor Skyshark29 does that Orexigen's sell-off is overdone (getting hacked 72% does seem excessive), or have these biotechs simply proven themselves to be too risky to bother with -- even if they're eventually able to run the gauntlet? Let us know on the Orexigen CAPS page whether enough fat has been trimmed from its stock.

A coming meltdown
If you want to talk about risk, then you probably need to look no further than any Chinese small-cap stock these days. If you've ever seen the National Debt Clock spinning wildly higher, it's watching the number of Chinese companies getting accused of accounting fraud. China MediaExpress is the latest one to come under the gun, with Citron Research challenging the veracity of what the media company is reporting.

Should investors give up on China until it can get its financials in order? These days, it might not even require proof of wrongdoing -- just an allegation -- to send a stock tumbling. China has such huge potential as it grows into an economic powerhouse that investors want to invest there, even with the inherent risks. That's why we saw them abandoning China MediaExpress and piling into rival outfits Focus Media (Nasdaq: FMCN) and VisionChina Media (Nasdaq: VISN).

Yet highly rated CAPS All-Star member sisula makes a pretty cogent argument that regardless of whether the analysis these short-sellers provide is biased or even wrong, the situation is too volatile to warrant putting any investment dollars there:

I don't say it's not possible to profit from China. No, you can still profit on the short side or you can day-trade. However, this is not my style. Investing is not my job, it's just my hobby. I can't watch stocks from hour to hour or even from minute to minute. I like buy and hold strategy which is in serious conflict with the "China way". That's why I won't buy any other Chinese stocks for a long, long time.

Do you agree U.S. investors should swear off Chinese stocks, particularly small caps, until greater transparency is imposed? Let us know in the comments section below or on the China MediaExpress CAPS page we should putting money into these companies is really investing or is it gambling.

Ready for a resurrection
Just because your stock has taken a beating doesn't mean it's going to roll over and die. Markets are known for overreacting. A closer look at what's happened to your stock can give you an edge over other investors who just react to the market's lead.

That's why it pays to start your own research on these stocks on Motley Fool CAPS where you can read a company's financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made, all from the stock's CAPS page. Then you can decide for yourself whether it's ready to come back from the dead.