It always pays to scroll through stocks that have taken a recent
pounding, Most of the time, they've deserved to take a hit. But
sometimes, investors simply over-react to seemingly bad news. And
that creates opportunity.
Let's take a look at four stocks from the Russell 2000, all of
which have shed at least 25% of their value in the past month to
see which one is the most likely to rebound.
MELA Sciences (Nasdaq:
Talk about a false dawn. This biotech lost more than half its value
on November 16 after the FDA issued a preliminary report that threw
doubt on MELA's skin cancer detection device. Skin cancer, or
melanoma, is the fifth-most lethal form of cancer in the United
States. Investors quickly understood that the FDA would be
rejecting a pending application to market the device. Just a few
days later, though, an FDA panel did approve the device, by a very
slim 8-7 vote.Shares nearly doubled on the news.
That would have been a great time to book profits. Investors
seemingly misunderstood that a positive vote from the FDA advisory
panel is not the same thing as FDA approval. It still seems quite
likely that the FDA will ask MELA to conduct further tests, and
that will cost money the company doesn't have and moves any
hoped-for sales ramp out by at least a few years -- that is, if it
gets to market at all.
SWS Group (NYSE:
Executives at this Dallas, TX regional brokerage would like a
"do-over." SWS thought it would be helpful to raise nearly $100
million in a
offering, which would have helped shore up a flagging
that was being weakened by stubbornly high losses on its loan
portfolio. Investors started to dump the stock in late November,
presumably as word circulated that a dilutive stock offering would
soon be announced. That announcement finally came earlier this
week, andshares took another deep hit. Withshares now down nearly
-50% since mid-October, management threw in the towel and announced
on Wednesday evening that the capital-raise would be
cancelled.Shares staged a quick +10% rebound on Thursday, but are
still well below recent levels.
The question now is whether SWS can live without that $95 million.
Yes, although don't be surprised to see a deal for a far smaller
amount, perhaps $30 or $40 million. That means SWS may look to the
PIPE market (private investment in a public equity). These deals
are often done at a -5% or -10% discount to the current share
price, but can be done quietly and quickly. Considering that we are
probably talking about far less
, and also considering that SWSshares are now very cheap in
relation to most other brokers, investors should be quite relieved.
In keeping with the notion of regrettable management decisions,
this developer of software that aids the disabled with typing and
other forms of communication shouldn't have bothered
in 2010. A $15
in April now trades for just $4. By the end of the summer, it
became apparent that sales were slumping badly, reversing
impressive sales trends that had been seen in the quarters heading
into theIPO .
When DynaVox announced on November 11 that fiscal first quarter
sales were -11% below year-ago results, any remaining bullish
investors finally gave up, leading to a -28% one-day plunge. And
that's where we stand a month later.
The sales weakness is fairly obvious -- in hindsight. DynaVox's
customer base largely consists of school systems, and severe budget
pressures have led schools to defer spending on non-essential
items. Investors can now conclude that it will be quite some time
before school systems are in spending mode again.
Even as it's unwise to expect a near-term rebound, DynaVox's cash
burn is likely to be modest. So the company must now sit and wait
for an eventual rebound. For those with a long-term view, this is a
remarkably cheap software stock, now trading for less than half of
sales. Larger software firms that are focused on the educational
market would do well to snag this company on the cheap, as its
products still appear to be held in high regard by educators. Put
this one on your watch list.
Alnylam Pharma (Nasdaq:
I took a look at this company
in late November
, and after chronicling a set of bad news in terms of Big Pharma
partnerships, concluded that "shares still hold long-term promise."
I still think that's the case. The company has a boatload of cash,
and even though its focus on RNA manipulation has yet to pay off in
a big way, it's still considered to be a very intriguing approach
by many scientists. Even though the loss of a relationship with
Roche Holdings really hurts, Alnylam still has three drugs in
clinical trials and alliances with companies like Takeda
Cubist Pharmaceuticals (Nasdaq:
At this point, the onus is on Alnylam to recapture lost buzz by
providing progress reports on clinical trials. That information
should be rolling on over the course of 2011. Soshares may sit in
the penalty box for a few more quarters, but this is certainly an
intriguing name at this point for those who like cash-rich
Action to Take -->
And the winner is...
SWS for a short-term trade asshares rebound from the ill-fated
capital-raising efforts. DynaVox certainly bears a placement on
your watch list, although it could be a number of quarters before
sales pick up. Before then, don't be surprised if the company gets
some interest form strategic buyers. In the long-term, Alnylam
looks to have the greatest potential upside -- that is, if the
clinical data in the next 18 months proves to be impressive.
-- David Sterman
David Sterman started his career in equity research at Smith
Barney, culminating in a position as Senior Analyst covering
European banks. David has also served as Director of Research at
Individual Investor and a Managing Editor at TheStreet.com. Read
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Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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