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With shares of Dendreon Corp. (NASDAQ:DNDN) trading around $4.46, is DNDN a Buy, a Wait and See, or a Stay Away? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:
C = Catalyst for the Stock’s Movement
DNDN is a tricky stock. If you were to relate it to a human condition, you could say it suffers from manic depression. The highs are tremendous, but you will have to pay for them with extreme lows. This shouldn’t come as a surprise for a biotech company, but Dendreon does seem to take it to another level. All of this rollercoaster-like movement has a lot to do with Provenge, which treats (not cures) prostate cancer.
As stated above, Provenge is not a cure, but it has been shown to improve and prolong the lives of those suffering from prostate cancer. Dendreon has been around since 2002, but it really burst onto the scene in 2007, when an FDA panel gave the go ahead for potential approval of Provenge. The stock skyrocketed on this news. It was later revealed the panel was swayed by emotion. At that point, there was much confusion amongst investors. As the stock bounced between $19 and $21, the potential was as high as $60 with FDA approval and as low as $4 without approval.
After suffering a huge decline and hitting $2.77 on March 6, 2009, DNDN peaked at $54.58 on April 29, 2010 after FDA approval for Provenge. This is also when analysts jumped on the bandwagon and began recommending the stock. Analysts tend to be late to the party when it comes to biotech. They fear giving Buy recommendations when there is so much at risk prior to FDA approval.
Currently, DNDN is trading at around $4.46. There are still passionate longs and shorts. In regards to the latter, the Short Percentage of the Float is a whopping 31.30%. A large short position is normal for a biotech stock. The shorts are usually correct, but when they’re incorrect, there will be a huge short squeeze that will lead to massive profits for longs. It’s imperative to reiterate that this is a high risk/high reward investment.
The longs are arguing that Provenge hasn’t met its potential yet, despite a recent decline in sales. Some of this has to do with Europe. If the EMA follows the FDA with approval, which it usually does, then there is an untapped market that can bring great results. Another long argument is that Dendreon could be bought by a larger company because of the potential for Provenge if it was marketed on a grander scale.
The shorts have several arguments. One is that the debt greatly outweighs the cash position and that bankruptcy is a possibility within a few quarters. Another argument for the shorts is that one of three manufacturing facilities has already been closed, which is rarely a good sign. Yet another argument for shorts is that Dendreon has been laying off employees to cut costs. This is another red flag…
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