Neurocrine Biosciences: Lessons From Its Collapse (NBIX)

Roger Nusbaum submits: I saw that both Lehman and Jeffries downgraded Neurocrine Biosciences Inc. (NBIX) after that company had FDA trouble that hit the market yesterday. This is a two day chart of the stock and it does not get any worse from one day to the next for a stock than this:

Based on the reaction yesterday, I am guessing this was unexpected but since I don't follow the stock I don't know. There is, however, something interesting in the chart that I think we can learn from.

In the last two months, before the FDA news, the stock had already started to go down at a faster rate than the rest of the sector, as measured by (client holding) iShares Nasdaq Biotech (IBB). NBIX was down about 25% from its March high, while IBB was down about 12% in the same time period.

If the FDA problem was unlikely (again I don't know) it is tough for me to blame an analyst for that, but according to Yahoo Finance there were no analyst ratings changes between January 11 (a downgrade) and May 5 (initiate with a buy - oops!).

The significant lag in the stock over the last two months was a warning from the market that no one in the analyst community heeded. I looked through the headlines and saw that losses widened -- but that was reported in April, a month after the high was put in.

This ties into the buy and hold discussion from yesterday. A high octane stock goes down a lot more than its peers. That is a reason to try to do some detective work in an attempt to figure out what's wrong. If you can't figure it out, at that point you should probably sell. Even if the stock goes up a lot after you sell, owning a stock you don't understand is a bad idea more often than not.

Related: Neurocrine’s Implosion: Let The Dust Settle Before Buying (NBIX)