Arena: Patience, Prudence And Planning

Feb. 1.13 | About: Arena Pharmaceuticals, (ARNA)

The stock market is an interesting place. It is full of hope, joy, disappointment, frustration, profits and losses. Understanding the market is not an exact science, nor will it ever be. Sometimes the best way to play the market is by exercising patience, prudence, and planning.

With Arena Pharmaceuticals (NASDAQ:ARNA) the ebbs and flows of the market are demonstrated in a stock price that is ranging between about $8 and $10. Essentially what we have in Arena is a company on the cusp of emerging from a speculative play to one that will be based on performance, the numbers, and results. This shift presents investors with an interesting dynamic.

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I recently wrote an article about setting goals and expectations. For the most part readers really liked the piece because it outlined some simple yet key components to being a more successful investor. The point of the article was that investors should outline their expectations in writing for what they consider good performance, great performance or outstanding performance.

As is typical with any article about Arena, there is a passionate crowd that viewed the piece as negative, or a piece designed to get retail investors to sell out of their position. That was not at all the case. I do not make such recommendations, and the essence was that investors simply think a bit more deeply as this equity transitions.

Speculation

Investing based on speculation is quite fine. I do it myself. After all it is always nice to find a diamond in the rough and see it become a shining gem months or even years later. With Arena there are many investors that speculated prior to FDA approval and thus far have been handsomely rewarded. In fact, the very real potential that the reward can increase further still exists. The difference is that the speculation phase is now morphing into one that needs to include actual sales results. That means that the equity will trade differently.

Expectations

When I wrote that investors should outline their expectations I meant it in a very literal way. Outlining expectations acts as checkpoint. It does not mean if expectations are not met that an investor should sell. It means instead that an investor should at least take the time to re-evaluate their position and expectations.

Bear in mind that each investor is going to have their own expectations as it relates to their own investment as well as Arena itself. While personal expectations are important we also need to consider expectations of the street. A good investor keeps a finger on the pulse of the street and knows whether their expectations are above, below, or in line. An equity like Arena can post great numbers on launch and still seem to fail if expectations of the street are too high. In contrast, it could have great numbers that blow away the street and the result would be price appreciation.

The next qualities investors may want to consider are patience, prudence, and Planning.

Patience

Patience is a quality that we all need to refine and work on. Patience when investing in Arena means not expecting massive numbers in too short of a timeframe. It also means not pulling the trigger on buys and sells too quickly. It means being more methodical and less reactionary. My last article was either loved or hated. It was loved by those who saw it for what it really was, a simple strategy that asks investors to set parameters for success. It was hated by investors that are impatient or simply uncomfortable being self accountable and holding themselves to a standard.

A patient person realized that my article was not a call to sell, nor a call to buy. It was a call to know and understand a company better as it shifts from pure speculation to more of a performance based equity. If you set goals and they are not met, it does not mean to sell. It simply means reassess. If you believe that Arena can get 100,000 prescriptions in its first 90 days and it comes in at 50,000 you need to simply think about that. The 50,000 would be better than what Vivus did with Qsymia. The growth curve may not be as steep, but if you are in a profitable position you can see that potential still exists.

At this point Arena is more about the U.S. launch than anything else. We can certainly speculate about Europe, China, Korea and other markets for the future, but the fact of the matter is that the U.S. launch will tell an important story. About a week ago I wrote in "What Is The Bottom For Arena". The article outlined that $8.60 was a key point for the equity and that the possible bottom could be as low as $8. If you were holding onto shares that you bought at $3 you simply need patience. This equity has had several cycles. We are now approaching the date where Arena can launch Belviq in the U.S. That could narrow the wide trading ranges we have been seeing. Patience is needed is seeing what the numbers are so that we can properly assess our next individual strategies.

My patience with Arena was selling half of my equity at a 40% gain. While some may say that I am not patient enough, I feel differently and my goals may well differ from yours. My reason for pulling half of my equity was to lock in a decent gain while remaining invested in order to participate in the potential upside of the U.S. launch and release of numbers. Arena is still not risk free. With very lofty expectations even a good launch could come of bad in terms of the equity. I am patient enough to hold onto half of my shares but prudent enough top lock in some gains.

Prudence

Prudence simply means having common sense and being careful. These are important attributes for investors to have. There is a time for speculation. It is part of the market. Everyone has a bit of a slush aspect to their portfolio where they can afford to take a risk, speculate, and seek out that diamond in the rough. Prudence comes into play when you have made that speculative decision and now have real money on the table.

Did you buy Arena for a couple of bucks? If so you are in a great position. You can even absorb a bit more risk than the guy that bought at $10 last week. The more a person gets positive in an investment the more they seem to throw caution to the wind. Prudence keeps you in control. This is where writing down goals and expectations as well as self accountability come into play.

When an equity reaches my own goals it does not mean I sell. For me it is a time of assessment. I ask myself what the expectations of the street are. Whether or not the company can meet those expectations. I ask what is in the pipeline. I ask what the downside risk is. Most importantly I ask whether the remaining upside is higher by staying in, or higher somewhere else. I may trim some profits. I may add to my stake. I may even sell. The bottom line is that I am prudent with my decisions because it is my money on the line.

For me prudence with Arena is in not getting overly excited. Sure talk of China and Korea are exciting, but there is a lot of water that will go under the bridge between now and then. I want to see some initial results now. I made 40% when I sold half and that is not a bad return for 6 months. It was prudent of me to lock in some of those gains.

Lets assume that Arena has a great U.S. launch. It is very likely that even before the numbers are announced that we will have some indication as to how the numbers will look. I can get back in at any time. If the launch is a success and I miss the first 5% of the pop it is not the end of the word. It is giving up 5% for more concrete data. I like that deal. Everyone will have different levels of prudence. Bear that in mind.

Planning

Planning is not as simple as it sounds. We all have some sort of initial plan. Sometimes it is as simple as throwing some discretionary money at an equity that you think is novel. Where we often drift astray is when we fail to develop a more comprehensive plan.

Saying, "I am not selling this equity until it reaches $30 is not a plan". Neither is panicking and selling because an equity takes a 10% dip. A comprehensive plan involves gaining an understanding of a company and what it will taken to get to $30. It is understanding the company well enough to see that a dip is possible and whether or not substantial action is warranted.

Plans can be adjusted and should be. My initial plan for Arena was to get a double out of it and then sell. Shortly after FDA approval there was an excitement around this equity. There was a lot of speculation. The market for Belviq is potentially big and I felt that this equity could see a double for me when the equity launched. As time went by and the DEA process dragged along I began to feel that the double might be too aggressive.

The biggest change in my plan happened when competitor Vivus (NASDAQ:VVUS) launched its drug Qsymia and the early numbers disappointed the street. I am well aware of the dynamics, similarities, and differences between Vivus' Qsymia and Arena's Belviq. I am also well aware that as an Arena investor I expect a more successful launch of Belviq, but need to temper my thoughts on the potential market based on what Qsymia did. If the market was full of obese people that are all desperate for a prescription product that is used in conjunction with a proper reduced calorie diet and exercise, then these people would have perhaps given Qsymia a shot. Simply stated, people did not seem to be knocking down the door for these products. Is the likely market smaller than we may have thought? This is a question any prudent person would ask. We can certainly speculate, but time for that is running short. Arena's Belviq could hit the market as early as March. I adjusted my plan, took half of my investment off of the table and locked in a gain.

My plan now is to wait to see the numbers and assess from there. I could buy more stock, I could stand where I am, or I could be a seller. I have outlined specific numbers for my expectations. I gave a range of good, great, and outstanding. If the launch is good by my criteria I will likely hold. If it is great I may add some. If it is outstanding I will add even more. If it is less than good I am not an immediate seller, but want to know why it was soft and what the plans of the company are. With that data in hand I will make my decision.

Contrary to the opinions of some that have commented on my articles I am not a bear on the equity. I am simply a prudent person with outlined expectations and a plan.

Disclosure: I am long ARNA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I have no position in Vivus