When considering any stock for your portfolio, don't be swayed by just the positives. Examine its pros and cons and decide whether its possible upside outweighs its risks. Let's look at Navidea Biopharmaceuticals (NYSEMKT:NAVB) today and see why you might want to buy, sell, or hold it.
Founded in 1983 and based in Ohio, Navidea Biopharmaceuticals sports a market capitalization under $300 million, making it a rather small company. It's focused on developing precision diagnostics and radiopharmaceutical agents.
The stock is up only about 7% over the past year, but it has averaged annual gains of 55% over the past five years and 27% over the past decade. As of last year and earlier, you may have known the company as Neoprobe.
One reason to consider buying Navidea Biopharmaceuticals is its business. With the world's population growing, getting older, and living longer, demand for health-care products and services is likely to remain in demand.
Navidea's pipeline features products in development that address conditions such as breast cancer, melanoma, colorectal and ovarian tumors, head and neck cancers, Alzheimer's, and dementia. Its product closest to market is Lymphoseek, a diagnostic tool that maps lymph nodes that may contain cancer. It completed phase 3 trials but has run into a problem with the FDA that will delay an approval decision. The problem seems to involve the manufacturing process, and it might take several months to resolve. Such issues are not unheard of. As my colleague Brian Orelli has noted, MAP Pharmaceuticals (UNKNOWN:MAPP.DL) got whacked by the FDA for manufacturing issues and has resubmitted its drug application.
While the health-care industry is vastly promising, not all health-care companies are equally promising. Navidea's future may be bright, but right now it's not selling lots of products and collecting lots of revenue. Its work is mostly focused on developing its products. There's a lot of potential in that, but also a lot of risk.
One reason to stay away from Navidea and other biotech companies is that most of us know very little about biotechnology and related fields. Thus, it can be especially hard for us to discern which companies are best poised for success and what the risks are for each. It can make a lot of sense to just steer clear, or to invest in a bunch of biotech companies at once, via an ETF. SPDR Biotech (NYSEMKT:XBI), for example, can instantly have you invested in more than 40 companies, such as Exelixis (NASDAQ:EXEL), which just received FDA approval for its thyroid cancer drug, cabozantinib -- which may also get approved to treat prostate cancer.
Then there's this: Navidea's stock price, recently around $2.70 per share, is firmly in penny-stock territory, known for extra-risky companies and many lost fortunes. It's not a definite portent of doom, but it's a red flag to consider.
Finally, a glance at the company's financial statements offers some worries, too. Revenue is negligible, and net losses have been the norm. Shares outstanding have gone from 63 million in 2007 to 96 million recently, reflecting dilution that shrinks the value of older shares. Free cash flow is negative and widening, and with the company's cash level on the low side, cash burn is a problem. One solution might be issuing more shares, but that will just increase the dilution.
Given the reasons to buy or sell Navidea Biopharmaceuticals, it's not unreasonable to decide to just hold off on it. You might want to wait for it to have one or more treatments approved by the FDA and selling briskly, or for the company to post a few quarters featuring growing revenue and earnings.
Alternatively, you might just check out some other interesting biotech or pharmaceutical companies, to see if they inspire more confidence than Navidea Biopharmaceuticals. Spectrum Pharmaceuticals (NASDAQ:SPPI), for example, actually has products on the market, such as its colorectal cancer drug, Fusilev. It's also sporting an attractive valuation, despite some concerns, such as competition.
I'm holding off on Navidea Biopharmaceuticals for now. Everyone's investment calculations are different, though. Do your own digging and see what you think. The company may perform spectacularly in the coming years, but remember that there are plenty of compelling stocks out there.
Longtime Fool contributor Selena Maranjian, whom you can follow on Twitter, has no positions in the stocks mentioned above. The Motley Fool owns shares of Exelixis. Motley Fool newsletter services recommend Exelixis. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.