News Analysis date published New: 
Monday, September 10, 2012 - 09:15
New Date created: 
Monday, September 10, 2012 - 09:53
New Date last updated: 
Monday, September 10, 2012 - 09:15

Buy or Sell? Monday's Losers: TITN, GERN

Monday, September 10, 2012 - 9:15am

Among the biggest losers in Monday's early trading are Titan Machinery (Nasdaq: TITN) and Geron (nasdaq: GERN).

The drought of 2012 is just starting to show up in quarterly reports, and investors are in no mood to take the long view: Drought-related profit warnings are being met with sharp sell-offs. Titan Machinery, which sells, rents and services farm and construction equipment at roughly 100 stores is just the latest casualty. Shares are off nearly 18% today as management lowers guidance.

Thanks to a slowdown in demand that will hurt sales and margins, Titan now says it will earn around $2.20 a share in fiscal (January) 2013 -- using the midpoint of guidance -- down from a previous view of $2.65. That's a pretty hefty drop. Many investors saw this coming as shares had already been falling since the drought took hold, from $36 in late April to a recent $25, before today's move down to $20.

Yet this is precisely the set-up that contrarian investors look for. They like to find good companies stuck in a bad year. That previous guidance is a helpful benchmark. We can generally assume that this is a company capable of earnings per share (EPS) in the $2.50 to $3 range when drought conditions are not in evidence. Should investors expect another drought in 2013? Well, the last two major droughts of the modern era were not especially long-lived. The drought of 1980 lasted just one year while the drought of 1988 lasted two years. That means this stock could be right back in the mid-30s next summer -- where it stood in April, if climatic conditions return to normal.

A Phase II casualty
There's a good reason why many biotech investors only focus on a company once its drugs have moved into Phase III clinical trials. The Phase II testing, which greatly expands the size of a drug trial from the smaller samples of Phase I, can really trip a company up. Often, a drug that looks promising in a small controlled Phase I setting shows much weaker results as the trial is expanded to a much bigger population of patients.

That was the hard lesson learned by investors in Geron today, which is seeing its shares lose more than half their value after Imetelstat, which targets the growth of telomerase, an enzyme found in many cancer cells, showed little promise in Phase II trials. The company will now focus its efforts solely on GRN1005, which is used for hard-to-treat brain tumors. Although Geron still has more than $100 million in the bank, that money will likely dwindle in coming quarters as GRN1005 progresses through Phase II trials. The only hope for a rebound hinges on GRN1005 showing great data and moving onto Phase III. For the rest of 2012, at least, this stock is likely dead money, and could drift lower still as cash levels dwindle.

Action to Take --> Titan Machinery has been pursuing a solid expansion strategy in recent years, highlighted by acquiring or opening stores to flesh out its regional footprint. That kind of expansion typically leads to greater pricing concessions in terms of equipment purchases from manufacturers, and more effective regional advertising. Those gains are being masked right now by the current drought conditions, but results are likely to sharply improve in fiscal (January) 2014, assuming weather conditions revert to the norm. Trading at less than eight times "normalized" earnings looks like too much of a bargain to pass up.

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.