Just as Shakespeare's plays remind us about important truths of life, the stories behind stocks can remind us about important truths of investing. Questcor (NASDAQ: QCOR) is one company that experienced twists and turns throughout 2012. Let's look back at some investing lessons that the events of the past year reinforce.
1. Don't put all your eggs in one basket.
This is one lesson we can't hear too often. I imagine that some investors in Questcor probably wished that all of their portfolio was in the stock earlier this year. Who could blame them? Shares were up for the year by 45% on July 9.
That was then. Questcor is now down 26% year-to-date. No one would want all of their money riding in this one stock now.
Questcor itself essentially has all of its eggs in one basket: Acthar gel. That's not uncommon in rising pharma companies. Even a company like Santarus (NASDAQ: SNTS), which includes four drugs in its product lineup, depends on one (Glumetza) for 70% of its revenue.
While companies might not have much of a choice in having few eggs in the basket, investors certainly do have choices. Regardless of what you think about the prospects for Questcor or any other stock, there are three important rules to remember: diversify, diversify, and diversify.
2. Perception can be more important than reality -- in the short term.
Questcor faced two different blog attacks in 2012. In January, The Street Sweeper questioned the efficacy of Acthar and the promotional practices used by Questcor. Shares sank by as much as 18% over several weeks as the controversy swirled.
Questcor faced two different blog attacks in 2012. In January, The Street Sweeper questioned the efficacy of Acthar and the promotional practices used by Questcor. Shares sank by as much as 18% over several weeks as the controversy swirled.
In July, Citron Research echoed those allegations. However, this time the stock plunged 22% in one day. Citron kept the heat on Questcor over the next few months, pointing out any reimbursement change that could negatively impact the company.
Some see groups like these as heroes protecting individual investors from companies with something to hide. Others see them as vultures, only interested in profiting from negative attacks. Regardless of your viewpoint, the lessons from Questcor over the past 12 months can serve as a reminder of an important truth: Perception can be more important than reality in the stock market, at least in the short term.
In the long run, reality catches up. For example, The Street Sweeper slammed Bio-Reference Laboratories (BRLI +0.00%) in November 2011. The stock tanked by nearly 40% after the first article ran. However, Bio-Reference shares now trade more than 50% higher than levels prior to the controversy.
The allegations made by the short-sellers could turn out to be accurate, or they could prove to be entirely false. Either way, investors should remember what Benjamin Graham once said: "In the short run, the market is a voting machine but in the long run it is a weighing machine."
3. Dividends and share buybacks aren't always great.
Many investors love when companies buy back shares or pay dividends. Questcor did both in 2012. The company doubled its share buyback program and initiated a dividend with a current forward yield of nearly 3%.
Many investors love when companies buy back shares or pay dividends. Questcor did both in 2012. The company doubled its share buyback program and initiated a dividend with a current forward yield of nearly 3%.
Some make the mistake, though, of chasing stocks under the assumption that repurchases will automatically drive up shares. Others like the thought of a nice dividend payment every quarter. However, share buybacks don't always help stocks increase, and dividend payments mean nothing if the stock tanks.
Earlier this year, fellow Fool Matt Koppenheffer wrote about several fascinating facts about share buybacks. One that investors certainly should note is that only 36% of companies that repurchased shares had annual returns of 7% or better.
As for dividends, few companies pay a higher yield than PDL BioPharma's (PDLI +0.00%) 8%. Why shouldn't every investor jump on board? The company could very well go out of business within the next few years as its patents expire. By the same token, if the bears are right about Questcor, its dividend and share repurchases are meaningless.
4. Nobody knows for sure what will happen with any stock.
Questcor stirs up strong feelings on both sides of the fence. However, the strength of a person's conviction for or against a stock doesn't necessarily correlate to the accuracy of that conviction.
Throughout 2012, short interest in Questcor grew. Currently, the longs and shorts for Questcor are split down the middle, with a short interest of 50.4%. Both sides can't be right. Which side is correct? I don't know. Unless you have inside information, you probably don't know for sure, either.
Remembering that you don't know can help you invest more successfully. It can keep you from being too exposed to one stock (see No. 1 above) and be more selective in the stocks that you do buy.
Much ado about nothing?
Many investors don't need these reminders, but some do. And it doesn't hurt any of us to mull over them from time to time. Take heed or not -- as you like it.
