Thursday, April 20, 2006

How Not to Buy a Stock

I've got too much cash, and I can't get rid of it, because everything is too expensive lately. I can't find any short-term income securities with yields significantly higher than cash, I don't want to buy longer term income securities now that the yield curve seems to be righting itself, and the screens which I usually use to find value stocks turn up nothing I want.

Out of exhaustion, when I no longer knew what I was doing, I bought Dendreon Corporation (DNDN). A free teaser by Michael Murphy says that if you buy it "you could easily see a $5,000 investment grow to $7,500 in six months and even triple your money in 2007." (He doesn't mention the name of the company, of course; for that you have to pay for his newsletter.) I bought it because the published Phase III results for Provenge at least show a statistically significant advantage over placebo, and management themselves seem convinced. An insider made a large purchase above recent prices, and the company is gearing up for commercial production.

If I weren't exhausted, though, I wouldn't have bought it. As someone else in a blog points out, a particularly expensive treatment which adds four months to average life expectancy will never be a blockbuster. In fact, I'm not sure that the FDA will approve it at all, although in a very small trial it did increase survival at three years in the relevant form of prostate cancer from 11% to 34%.

At the moment, Dendreon is a speculation on other investors' behavior. There is a way it might become a good investment for you, though, if not for me. If Provenge gets an "approvable letter" from the FDA, the price of DNDN will dive for a day or two, as always happens when a one-trick biotech of this kind gets the disastrous news that its product will very likely be approved. Buy it then. Look at ICOS. Look at Vicuron. If you have any faith in the treatment being developed at all, always buy a biotech after the approvable-letter nosedive.

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