Let's get one thing clear: The stocks I'm about to talk about are not for the faint of heart. Over the coming months and years, the three companies I'm about to introduce will likely see huge swings in share price.
I can't say with any certainty which way these stocks will swing, but I do have a track record for picking out stocks ripe for volatility.
In March, I singled out five companies that were poised to make big moves based on the fact that many traders were betting against them. If a highly shorted company releases positive news, a short squeeze will be on. If news is bad, shorting could continue indefinitely.
It turns out I was right: The stocks I mentioned moved an average of 16% on their first-quarter-earnings releases.
I did the same thing again this summer, and the results were eerily similar: The average stock moved almost 20% after earnings were announced.
But with these stocks, there's an added element.
With many companies, the "big news" that can send highly shorted stocks up or down is the company's earnings release. Though earnings releases are still important with the three companies I'll be covering here, they aren't the major news event that investors should keep their eye on.
Because all three of these companies are involved in pharmaceuticals, the financial success of the company is highly dependent on approval from the Food and Drug Administration for each company's drugs. Any news about a drug moving from phase 1 to phase 2 to phase 3 to approval will send a stock sky-high. Any news to the contrary can have the opposite effect, sending shares reeling.
Below are the three companies whose stocks could be making big moves, how much they are being shorted, and what major drugs are in their pipeline.
% of Float Short
Afflictions That Drugs Could Treat
||26%||Diabetes, cancer, inflammatory disease|
||29%||Tumors and different types of cancer|
||58%||Cancer, lymphoma, tumors|
Sources: Finviz.com, Yahoo! Finance.
Let's start out with Dendreon. The company currently has several cancer and tumor drugs in the developmental stages. Since clinical trials have yet to start, however, that means that the drugs are a long way off from entering the market. However, any news -- positive or negative -- could effect the stock's price.
One of the company's newly released drugs, however, will likely play a much larger role in the near term. Dendreon released its much-anticipated Provenge, a prostate cancer drug, this year. Results so far, however, have been mixed. Costs have been rising, while sales haven't exactly kept pace.
A potential catalyst for the company could come in the form of approval in Europe, where the company has yet to make any sales. Even if that happens, however, Dendreon will face competition from the likes of Johnson & Johnson
Like Dendreon, MannKind has a number of drugs in its pipeline. Unlike Dendreon, however, the company has a treatment that is much closer to market. Afrezza is a powder that is inhaled as insulin treatment for patients with diabetes.
As fellow Fool Keith Speights has pointed out, though, there are three main obstacles the company must overcome if Afrezza is to be rapidly adopted. First, the company needs more cash, but it will likely fix this through share dilution.
Second, the company will likely have to wait until the second quarter of 2013 to see if the FDA approves its new inhaler.
And finally, to have the capital it takes to manufacture and distribute Afrezza, MannKind will likely need to find a bigger company to partner with. Some Fools have already anointed Pfizer
News on any one of these fronts -- particularly the second and third -- would cause big moves in MannKind's stock.
Finally, we have Spectrum, a company that has many drugs in development, but one to keep your eyes on for now. Belinostat is the company's drug for the treatment of peripheral T-Cell lymphoma.
Recently, Spectrum's Denmark-based development partner Topotarget offered up a press release stating that belinostat had met its primary end point in phase 2 clinical trials. Shortly after, Spectrum put out a release saying that it was too early to make such statements. The company said a definitive statement would be released sometime during November or December.
Obviously, that means that investors should keep their eyes peeled this winter when it comes to news on belinostat.
A less volatile option?
These three stocks have big potential, but with that comes quite a bit of risk. If you're looking to diversify your portfolio with stable companies, I suggest taking a look at The Motley Fool's special free report: "3 Stocks That Will Help You Retire Rich."
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Fool contributor Brian Stoffel owns shares of Johnson & Johnson. The Motley Fool owns shares of Johnson & Johnson and Dendreon. Motley Fool newsletter services have recommended buying shares of and creating a diagonal call position in Johnson & Johnson. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.