Markets

Here’s Why Diplomat Pharmacy Stock Bounced Back 14% Today

What happened

Shares of Diplomat Pharmacy (NYSE: DPLO) bounced back 14% on Friday, just days after getting cut in half following the disclosure to investors that the company had lost a big account and was in danger of falling out of favor with its creditors.

So what

The volatility comes from the binary nature of Diplomat's current situation.

On the plus side, if it finds a buyer for all or part of its business, Diplomat is worth more than its value at Thursday's close.

Alternatively, if Diplomat's creditors won't work with it to negotiate on the covenants that are part of its credit agreements, they could foreclose on its assets and force the specialty pharmacy and pharmacy benefit manager into bankruptcy, making it basically worthless.

The current fair market value is a blend of the valuations based on the likelihood of each event occurring. Unfortunately, both extremes are predicated on actions outside the company's hands -- a white-knight acquirer or sympathetic creditors -- so it's hard to know how likely it is that Diplomat Pharmacy will survive. With each investor handicapping the potential outcomes a little differently, the share price has been changing from day to day.

Pharmacist looking in a drawer

Image source: Getty Images.

Now what

Making the distinction between value stocks and value traps is difficult. In retrospect, Diplomat Pharmacy was a short-term value at the lows of Tuesday, but where it goes over the long term will be less dependent on investors' sentiment and more on whether management can guide the company through the sticky situation it's worked itself into.

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Brian Orelli has no position in any of the stocks mentioned. The Motley Fool recommends Diplomat Pharmacy. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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