With the recent drop in the market, there are certainly some attractively priced investment opportunities to be found. However, there are several stocks we're staying away from. Here's why three of our analysts think investors should avoid Eli Lilly and Company (LLY 1.66%), New York Community Bancorp (NYCB -0.81%), and MannKind (MNKD -2.45%), even though their shares have become less expensive recently.
Cheryl Swanson: Eli Lilly and Company is one stock whose great performance had investors popping the bubbly in the first half of 2015. But the stock's big run-up also put Lilly's valuation in nosebleed territory, with shares currently priced at 42 times last year's earnings. In addition, investors need to know that Lilly is staking its future on a couple of very risky Phase III programs for Alzheimer's and cardiac disease.
Lilly's twice-failed antibody for Alzheimer's, Solanezumab, will be wrapping up a sizable Phase III do-over later this year. While hopes are high, Alzheimer's drugs have had a 99% failure rate over the past decade. In other words, this project is anything but a sure bet. Meanwhile, Lilly's cardiac candidate (evacetrapid) could easily face the same serious safety concerns that similar treatments from Roche Holding AG (NASDAQOTH: RHHBY) and Pfizer (NYSE: PFE) ran into in late-stage development.
And then there's China. Lilly is heavily invested in China, a country once considered a gold mine for drug makers. However, Lily's China sales shrank by 16% in Q2, amid government cost cuts and a strong dollar. Pressure on pricing is only going to escalate as local companies step up to compete for sales of human insulin. It's not that Lily can't continue to succeed. It's that the stock market's plummet has created enough solid choices that there's no need to overpay for riskier propositions.
Matt Frankel: One bank stock I would avoid this fall is New York Community Bancorp, which I feel has significant obstacles in its path forward.
There are certainly plenty of reasons to love NYCB. It focuses on an extremely profitable niche market, originating and refinancing mortgages on rent-controlled and rent-stabilized apartment buildings in New York City. The loan portfolio is rock-solid, with a 0.04% average charge-off rate throughout the company's history. And, originating and servicing this type of mortgage is rather efficient; NYCB operates an efficiency ratio far superior to the industry average. In fact, the bank's excellent business model has produced unheard-of 20% average annual returns over the bank's 21-year history.
However, the future doesn't look quite as promising as the past. Specifically, there is limited potential for continued growth in the bank's core business, so it has started to diversify its operations. NYCB has started originating traditional mortgage loans and is expanding its branch network into states such as Ohio and Arizona. The problem is that new lending programs and an expanded branch network could compromise the bank's biggest advantage -- its efficiency. In fact, NYCB's efficiency ratio has gone from 40% to 45% over the past five years (lower is better).
Finally, the bank trades at a high valuation, which would make sense if the bank were still as efficient as ever -- but it's not. If the expansion and diversification continues, the bank's efficiency and profitability will begin to resemble that of most other banks -- not a niche leader with tremendous competitive advantages.
Don't get me wrong -- I don't necessarily have a negative outlook for NYCB's future. I just think there are challenges ahead, and several other opportunities in the sector are more attractive.
Sean Williams: As we head into fall, I can't help but remind investors that we've had our first hint of a correction in four years. Corrections have a way of deflating companies that have seen their valuations pumped up on promises, but that haven't actually delivered on their top and/or bottom lines as of yet. One such company that fits the bill and could be worth avoiding is biotech MannKind.
MannKind's only approved product is inhaled diabetes medication Afrezza, which it has licensed to Sanofi (NYSE: SNY). On the surface, Afrezza looks like it should be a winner. It offers the convenience of an inhaled therapy (i.e., no needles), and it leaves the body quicker than previous insulin products, which should reduce instances of hypoglycemia.
Despite these advantages, sales of Afrezza have been nothing short of terrible since its launch in early February. In the second quarter, Sanofi announced that Afrezza contributed a meager $2.2 million in sales and just $3.3 million since it hit the market. Relative to the sales totals of the current standard-of-care, it's not even a blip. Worse yet, MannKind only sees between 31.5% and 37.5% of total sales.
What's wrong with Afrezza? It's tough to say at this early stage, but its higher price point relative to injectable insulin and/or a lack of consumer and physician education concerning the product could be the culprits.
The truly scary component is that MannKind has already received $150 million upfront from Sanofi, another $175 million from Sanofi upfront to cover its portion of Afrezza's expenses, and it's having to borrow money from an affiliate of Sanofi to cover its portion of the loss sharing arrangement.
Instead of being a wonder drug, Afrezza is looking more and more like a nightmare for MannKind and Sanofi, and it's giving investors an obvious reason to avoid MannKind stock this fall.