Why I Am No Longer Bullish On Chelsea Therapeutics

| About: Chelsea Therapeutics (CHTP)

A few weeks ago, when Chelsea Therapeutics (CHTP) shares were trading at 90 cents, I wrote a bullish article about why investors should consider the oversold stock for a potential surge. In my opinion, investors had overreacted to news that the FDA would delay any chance of approval for this company's lead candidate "Northera". The stock had been trading over $5 per share in early 2012, and plunged to below a buck when the disappointing news was announced. Sure enough, within days, the stock surged to about $1.25 per share, giving investors a major 40% gain for those who bought in at about 90 cents.

As my last article on Chelsea Therapeutics pointed out, investors can see huge gains when buying biotechs after disappointing delays are experienced by companies like Arena Pharmaceuticals (ARNA) which traded down to about $1 late last year, only to rise to over $10 per share in 2012 when its weight-loss drug was approved by the FDA.

The big run in Chelsea Therapeutics stock occurred after a major shareholder, "Josiah Austin" asked the company to consider strategic alternatives. However, shortly thereafter, the company announced that some top level management (even the CEO) and others would be leaving the company in an effort to reduce expenses. I have rarely seen a stock rebound when top management leaves under this type of circumstance, and that is the main reason why I am no longer bullish on the stock. It's hard to imagine a CEO leaving a company (jumping ship) if there was much hope left. For example, when Arena saw delays and major challenges, its CEO remained at the helm.

Another reason why I think the shares are likely to stagnate or even head back down to the 52-week lows is because so many investors have lost money in this stock. Since tax-loss selling often starts in the 4th quarter each year, I expect that this stock will come under heavy selling pressure once again, starting in the next 60 days or so. If the shares get cheap enough later this year, there might be a rally, but for now, I think it is time to take profits and stay on the sidelines.

Key Data Points For Chelsea Therapeutics From Yahoo Finance:
Current Share Price: $1.10
52-Week Range: $.70 to $5.74
Dividend: none
2012 Earnings Estimate: a loss of 76 cents per share
2013 Earnings Estimate: a loss of 60 cents per share
P/E Ratio: n/a due to losses

Data is sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.