Among the biggest losers in Thursday's early trading are Pluristem (Nasdaq: PLSTM) and FirstMerit (Nasdaq: FMER).
There's a very good reason why biotech investors are implored to monitor "cash-burn rates." Many of these companies chew through their funds at a rapid pace, so they need to keep reloading the balance sheet until product sales (or partnership milestone payments) start to build. That's why many investors steer clear of any biotech that has less than six months' worth of cash left. The closer it gets to crunch time, the greater the likelihood that new stock will be sold at sharply-discounted prices.
It's not just the cash-starved biotechs you need to worry about, though. Even companies with ample cash on hand can announce a sudden capital raise -- if their stock has just taken off. That lesson is being brought home by Pluristem, which is taking advantage of a quick recent spike in its stock to raise more cash. The announcement caught some off guard (though it shouldn't have) and shares are off nearly 15% in Thursday trading.
The sell-off actually brings a clear opportunity for those that missed out on earlier gains. That's because Pluristem appears to hold a great deal of promise with its "PLX" biotechnology. PLX is being tested to treat various lung diseases, including cystic fibrosis, which afflicts several million people worldwide. Clinical testing results thus far have been quite impressive (which explains why the stock was making a nice upward move before the secondary public offering was announced). This is an example where you may want to complete your research fairly quickly, as the sharp drop on Thursday may not last.
FirstMerit capitalizes on the changing banking landscape
While the nation's largest banks wrestle with ongoing regulatory requirements to build and maintain large cash cushions, they've largely avoided their traditional growth-through-acquisition strategies. That's created an opening for regional banks to go on a shopping spree. They are on the prowl for smaller banks that are increasingly hard-pressed to stay afloat while capital requirements get ever stiffer. And history has shown that the acquiring banks tend to reap significant benefits by boosting their deposit base through these deals.
In that light, investors should be applauding FirstMerit's move to acquire Citizens Republic Bancorp (Nasdaq: CRBC) for $950 million in an all-stock deal. On a split-adjusted basis, shares of Citizens Republic traded for $160 a share five years ago, so the sub $25-a-share purchase price sure smells like a bargain.
So why are shares of FirstMerit selling off sharply in Thursday trading? Perhaps because it will still have to repay the $345 million that Citizens Republic owed as part of the TARP (Troubled Asset Relief) program. FirstMerit, with more than $4 billion in in the bank, can easily shoulder that burden. (That also raises the question of why the deal wasn't just done for cash). Still, look for analysts to boost their long-term growth forecasts for FirstMerit, as this industry almost always sees scale economies.
Action to Take --> Both of these falling stocks look newly appealing -- albeit for disparate reasons. Pluristem's a speculative play, but has potentially major upside if PLX continues to perform well in clinical trials. FirstMerit is smartly capitalizing on industry trends that tend to favor regional banks.