Among the biggest losers in Monday's early trading are
Titan Machinery (Nasdaq: TITN)
Geron (nasdaq: GERN).
The drought of 2012 is just starting to show up in quarterly
reports, and investors are in no mood to take the long view:
Drought-relatedprofit warnings are being met with sharp
, which sells, rents and services farm and construction equipment
at roughly 100 stores is just the latest casualty.Shares are off
nearly 18% today as management lowers guidance.
Thanks to a slowdown in demand that will hurt sales and margins,
Titan now says it will earn around $2.20 a share in fiscal
(January) 2013 -- using the midpoint of guidance -- down from a
previous view of $2.65. That's a pretty hefty drop. Many
investors saw this coming as shares had already been falling since
the drought took hold, from $36 in late April to a recent $25,
before today's move down to $20.
Yet this is precisely the set-up thatcontrarian investors look
for. They like to find good companies stuck in a bad year.
That previous guidance is a helpfulbenchmark . We can
generally assume that this is a company capable ofearnings per
) in the $2.50 to $3 range when drought conditions are not in
evidence. Should investors expect another drought in 2013? Well,
the last two major droughts of the modern era were not especially
long-lived. The drought of 1980 lasted just one year while the
drought of 1988 lasted two years. That means this stock could be
right back in the mid-30s next summer -- where it stood in April,
if climatic conditions return to normal.
A Phase II casualty
There's a good reason why many biotech investors only focus on a
company once its drugs have moved into Phase III clinical trials.
The Phase II testing, which greatly expands the size of a drug
trial from the smaller samples of Phase I, can really trip a
company up. Often, a drug that looks promising in a small
controlled Phase I setting shows much weaker results as the trial
is expanded to a much bigger population of patients.
That was the hard lesson learned by investors in
today, which is seeing its shares lose more than half their value
after Imetelstat, which targets the growth of telomerase, an enzyme
found in many cancer cells, showed little promise in Phase II
trials. The company will now focus its efforts solely on GRN1005,
which is used for hard-to-treat brain tumors. Although Geron still
has more than $100 million in the bank, that money will likely
dwindle in coming quarters as GRN1005 progresses through Phase II
trials. The only hope for a rebound hinges on GRN1005 showing great
data and moving onto Phase III. For the rest of 2012, at
least, this stock is likely dead money, and could drift lower still
as cash levels dwindle.
Action to Take -->
Titan Machinery has been pursuing a solid expansion strategy
in recent years, highlighted by acquiring or opening stores to
flesh out its regional footprint. That kind of expansion typically
leads to greater pricing concessions in terms of equipment
purchases from manufacturers, and more effective regional
advertising. Those gains are being masked right now by the current
drought conditions, but results are likely to sharply improve in
fiscal (January) 2014, assuming weather conditions revert to the
norm. Trading at less than eight times "normalized"earnings looks
like too much of a bargain to pass up.
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.