Whoa! What Just Happened to My Stock?

With 80% of all the stocks on the NYSE and Nasdaq exchanges recording gains on Monday as the Dow Jones Industrial Average jumped 166 points on hopes a fiscal deal could be reached in Washington, it's still notable that some companies put together double-digit gains, or nearly so. After all, Dow components like DuPont and Microsoft were only eking out increases that kept them in positive territory so the three stocks below recorded an achievement of sorts.

But resist the urge to high-five everyone in the cubicles next to you. Smart investors won't celebrate until they know why their stock surged, because without a fundamental basis for the bounce, these stocks could just as quickly make the return trip down.

Company

% Gain

Lexicon Pharmaceuticals

15.7%

Herbalife

12.1%

Abraxas Petroleum

9.5%

On a roll
Drug developer Lexicon Pharmaceuticals continues to ride higher the fast track designation for its experimental drug for irritable bowel syndrome, LX1033, gained from the Food and Drug Administration a few weeks back. While not guaranteeing approval, a fast-track designation accelerates the regulatory review of a drug once it has completed clinical trials. Drugs that receive fast-track status typically serve patients with limited alternative options, treat critical or life-threatening conditions, or meet various other criteria.


As it gets closer to the mark, Lexicon may eventually become a takeover candidate for someone like Eli Lilly , which has a better than 80-year history of treating the disease, but others have gone down the IBS road before and come up short. Several years ago, Novartis had to pull its top IBS drug, Zelnorm, from U.S. markets because of an "imbalance" of cardiovascular events occurring in patients taking the drug.

Yet that's just one of the reasons why Lexicon was able to gain the fast-track designation. Still, it's still early innings and nothing to get too worked up over yet.

Getting to the point
Following a devastating presentation by hedge fund operator and short seller Bill Ackman where he accused the nutritional supplements maker of being a pyramid scheme, shares of Herbalife plummeted 12% in one day and then kept right on falling afterwards. While management contends that Ackman is way off in his assertions and plans to rebut them soon, a cloud of doubt hangs over the stock.

Yet the depressed price is attracting some who no doubt hope that Herbalife's rebuttal will be just as dramatic as the short thesis and they've been buying into the stock ahead of the Jan. 10 presentation. Although shares may seem cheap, the supplements maker has a pretty big wall of doubt to surmount as Ackman isn't the first high-profile short seller to take a look at the stock.

Herbalife's decline began when David Einhorn merely showed up on a conference call. Einhorn had himself offered up a pretty damning presentation against Green Mountain Coffee Roasters last year that was ultimately borne out, and its stock cratered (though it's since doubled in value in the last six months). Until Herbalife can counter the charges against it, though, it's little more than buying on blind faith that multi-level marketing companies are anything but pyramid schemes because the numbers can't hold up to scrutiny.

Say no more
While there was no company-specific news for account for the move, Abraxas Petroleum shot nearly 10% higher on Monday. Abraxas does have an elevated level of shares sold short with days to cover standing at 12 (The Fool considers anything over seven a lot), so perhaps bullish sentiments sent some shorts to cover, a loop which ends up feeding on itself.

Just as Chesapeake Energy and EOG Resources have both done, Abraxas is concentrating on its oil holdings primarily in Texas and in the Williston basin to marshal its resources. It's expecting production to rise as much as 28% in 2013 while also selling off non-core assets making it a very focused play. Michael may just be right about its chances this year, and the shorts could be making the right decision if they're running for the hills.

Over the next two years, Eli Lilly will see nearly $0.40 of every $1.00 in sales exposed to generic competition. How does the company plan to respond to this huge patent cliff? Better yet, what does this mean for investors? In a brand new premium report on Eli Lilly, The Motley Fool's top pharmaceuticals analyst delves into everything investors need to know about the stock today. Simply click here now to claim your copy.

The article Whoa! What Just Happened to My Stock? originally appeared on Fool.com.

Fool contributor Rich Duprey has no positions in the stocks mentioned above. The Motley Fool owns shares of Microsoft and has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, long JAN 2014 $30.00 calls on Chesapeake Energy, and short JAN 2014 $15.00 puts on Chesapeake Energy. Motley Fool newsletter services recommend Green Mountain Coffee Roasters and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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