We Fools strongly believe that buying and holding high-quality stocks is one of the best ways to build wealth over time. Great companies can provide their investors with market-smashing returns, and turn small amounts of money into life-changing fortunes. However, not all companies are created equal, and occasional they throw off red flags that give their investors reasons to reevaluate their original investment theses.
With Halloween coming up, we asked our team of Motley Fool contributors to share the name of a popular stock that currently has them feeling scared. Read below to see the names of the companies that have them spooked.
Brian Feroldi: One stock that certainly would frighten me to own is MannKind Corporation (NASDAQ:56400P706), the maker of the inhaled insulin Afrezza. On the surface, Afrezza looks like it should be a winner. The drug removes the need to take meal-time injections and offers a faster action curve, which has allowed the company to garner a passionate investor base that has stuck with the company through years of non-stop disappointment.
However, actual sales of this medication have been awful thus far, coming in at a paltry $3.3 million in its first 5 months on the market. There certainly appear to be several valid reasons for the slow launch, but the company is currently in such rough financial shape that it's being forced to lay off workers for the third time this year.
Things could get uglier from here as well, as MannKind's marketing partner, Sanofi, has a new CEO looking to shake things up at the company to counteract its lagging diabetes sales. It's certainly possible that if sales of Afrezza do not take off soon Sanofi could cut ties with MannKind, which would send MannKind's shares plummeting.
With that kind of uncertainty in the air, MannKind's stock certainly has me spooked, and even though it's already down big since the start of the year, I for one will be staying far away.
To start, a former junior auditor at the bank recently filed a civil lawsuit against it, claiming he was fired illegally after reporting a long list of alleged wrongs to regulatory bodies. He's trying to claim he was a whistleblower and shouldn't have been fired.
The list of accusations includes everything from minor paperwork errors to fraud and even money laundering by the CEO.
The catch? The regulatory bodies have known about the allegations for more than six months and taken no action. Management at BofI said it's worked with the authorities, and addressed every claim.
Frankly, the lawsuit strikes me as a last-ditch money grab by the accuser, but I'm not 100% convinced. I am, however, concerned that BofI reported a 9% growth in loan originations last quarter, which is significantly lower than the company's historic loan originations growth. Earnings and book value per share increased 43% and 32% respectively, but that's because the bank has grown its loan portfolio at least 30% every quarter for the past few years.
But if loan originations growth is trending down, that won't bode well for growth going forward. One quarter isn't a trend, and the economic outlook should support plenty of growth. But I'm paying very close attention to BofI's loan origination growth going forward.
Sean Williams: With Halloween here, few things have been as spooky for investors as the inquiries by federal regulators into the pricing practices at Valeant Pharmaceuticals (NYSE:BHC). Just two weeks prior, Valeant, a biotech giant known for its growth by acquisition strategy, announced that it had received two subpoenas from U.S. federal prosecutors regarding the drug developer's pricing, distribution, and patient assistance programs.
If you recall, the concern over drug pricing came to a head in September when privately-held Turing Pharmaceuticals boosted the price of a recently-acquired parasite-killing drug by nearly 5,500% overnight. Although Turing backed down on its price hike because of public outcry, it set off a firestorm that Valeant is now caught up in. Valeant itself recently boosted the price of two heart medications by 525% and 212%, respectively. Valeant relies on acquisitions, as well as strong pricing power, to grow its cash flow in order to fuel more acquisitions. Any disruption in this cycle could be disastrous for its stock and shareholders.
It's difficult to say what might happen to Valeant based on the subpoenas because there aren't many instances of regulators cracking down on drug pricing. For what it's worth, Valeant has stated that it doesn't believe it has violated any laws. On a long-term basis Valeant stock does appear cheap, but the potential for a disruption in its growth plan definitely has me and other investors spooked. Until we get some resolution on the active investigation into Valeant's pricing practices, it might be best to stick to the sidelines.
Brian Feroldi owns shares of BofI Holding. Jason Hall owns shares of BofI Holding. Sean Williams has no position in any stocks mentioned. The Motley Fool owns shares of and recommends BofI Holding and Valeant Pharmaceuticals. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.