Among the biggest losers in Thursday's early trading are
Pluristem (Nasdaq: PLSTM)
FirstMerit (Nasdaq: FMER).
There's a very good reason why biotech investors are implored to
monitor "cash-burn rates." Many of these companies chew through
their funds at a rapid pace, so they need to keep reloading
thebalance sheet until product sales (orpartnership milestone
payments) start to build. That's why many investors steer clear of
any biotech that has less than six months' worth of cash left. The
closer it gets to crunch time, the greater the likelihood that new
stock will be sold at sharply-discounted prices.
It's not just the cash-starved biotechs you need to worry about,
though. Even companies with ample cash on hand can announce a
sudden capital raise -- if their stock has just taken off. That
lesson is being brought home by Pluristem, which is taking
advantage of a quick recent spike in its stock to raise more cash.
The announcement caught some off guard (though it shouldn't have)
andshares are off nearly 15% in Thursday trading.
The sell-off actually brings a clear opportunity for those that
missed out on earlier gains. That's because Pluristem appears to
hold a great deal of promise with its "PLX" biotechnology. PLX is
being tested to treat various lung diseases, including cystic
fibrosis, which afflicts several million people worldwide. Clinical
testing results thus far have been quite impressive (which explains
why the stock was making a nice upward move before the secondary
publicoffering was announced). This is an example where you may
want to complete your research fairly quickly, as the sharp drop on
Thursday may not last.
FirstMerit capitalizes on the changing banking
While the nation's largest banks wrestle with ongoing regulatory
requirements to build and maintain large cash cushions, they've
largely avoided their traditional growth-through-acquisition
strategies. That's created an opening for regional banks to go on a
shopping spree. They are on the prowl for smaller banks that are
increasingly hard-pressed to stay afloat while capital requirements
get ever stiffer. And history has shown that the acquiring banks
tend to reap significant benefits by boosting their deposit base
through these deals.
In that light, investors should be applauding FirstMerit's move
Citizens Republic Bancorp (Nasdaq: CRBC)
for $950 million in an all-stock deal. On a split-adjusted basis,
shares of Citizens Republic traded for $160 a share five years ago,
so the sub $25-a-share purchase price sure smells like a
So why are shares of FirstMerit selling off sharply in Thursday
trading? Perhaps because it will still have to repay the $345
million that Citizens Republic owed as part of the TARP
(TroubledAsset Relief) program. FirstMerit, with more than $4
billion in in the bank, can easily shoulder that burden. (That also
raises the question of why the deal wasn't just done for cash).
Still, look for analysts to boost their long-term growth forecasts
for FirstMerit, as this industry almost always sees scale
Action to Take -->
Both of these falling stocks look newly appealing -- albeit for
disparate reasons. Pluristem's a speculative play, but has
potentially major upside if PLX continues to perform well in
clinical trials. FirstMerit is smartly capitalizing on industry
trends that tend to favor regional banks.
-- 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.