The markets dropped yesterday as the supercommittee for deficit reduction couldn't reach a compromise and $1.2 trillion in spending cuts kicks in -- in 2013! The politicians punted till after the elections. But just because your stock strapped on a rocket pack and went even higher, resist the urge to high-five everyone in the cubicles next to you. Smart investors won't celebrate until they know that upward leap was justified. Without a fundamental basis for the bounce, these stocks can quickly make the return trip down.
Is now the time to lock in profits, or is this just the first step toward even higher valuations down the road? Let's examine several stocks that just hit the afterburners, and see whether they're truly headed into orbit.
CAPS Rating (out of 5)
With the markets falling almost 250 points yesterday, or 2.1%, stocks that went appreciably higher are pretty big deals.
Shining a light on growth
Treating hepatitis C has quickly become a very hot field. After Roche announced it was buying hep-C therapy developer Anadys Pharmaceuticals, suddenly attention turned to who else might have promising drug candidates and who might have the bucks to buy them. We found out yesterday that Gilead Sciences
There are still plenty of other possibilities to choose from, which was why Inhibitex jumped as well. It recently reported positive mid-stage trials on its INX-189 therapy and with GlaxoSmithKline
Less than half the CAPS members rating Pharmasset thought it would outperform the broad market averages, suggesting that Gilead is overpaying for the purchase. Could be why Gilead's stock tanked after the announcement. But Pharmasset's PSI 7977 is going into phase 3 trials, which makes hitting the market as soon as 2014 possible. It says Gilead sees great potential in Interferon-free therapies.
Inhibitex also wasn't high on the list of drug developers CAPS members expected to perform well, but the thinking may need to change if for no other reason than it now has to be seen as a likely acquisition candidate. While INX-189 is not quite as far along as PSI 7977, so it probably wouldn't command the same premium Pharmasset did, the positive results thus far suggests it would be worth more than what it's currently trading at.
A source of inspiration
There was no takeover news for former stem-cell research outfit Geron. In fact, there was no news at all for the company that should have driven its stock up, particularly on a day the broader market was taking a drubbing. There might be something of a halo effect going on for biotechs in the wake of the Gilead-Pharmasset deal -- the CAPS Biotechnology sector was down much less than the market as a whole yesterday -- but Geron's move could also reflect investors' taking a second glance at the biotech's decision to focus on oncology therapies.
Geron was smacked down the other day after announcing it was abandoning the stem-cell research. With limited money available to it, financing both fields would have been impossible. Since stem-cell research still has some formidable challenges ahead of it, Geron felt it was smarter for it to focus more narrowly on cancer research. As it was the leader in the stem-cell field, though, it was seen as a very significant choice.
The biotech will still retain the research it has already achieved with stem cells and will look for partners in the field that have the capability to carry it forward. So even though it will no longer be doing the research itself, it seems it will still have a finger in the pie. Highly rated CAPS All-Star TSIF expected just this sort of move the other day: "Those investors interested in the Stem Cell play are exiting the building. There may be some bounce back after they exist as those interested in the cancer side may be waiting for the share price to stabilize before increasing their play now that there are more resources at no cost to them."
Overall, he still expects Geron to underperform the market. Tell us on the Geron CAPS page or in the comments section below whether you agree, and then add it to your watchlist to see whether focusing on cancer research was the right choice.
Going into orbit
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 your stock's headed for re-entry or off to infinity and beyond.