With shares of Arena Pharmaceuticals (NASDAQ:ARNA) trading around $8, is ARNA an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let's analyze the stock with the relevant sections of our CHEAT SHEET investing framework:
T = Trends for a Stock’s Movement
Arena Pharmaceuticals is a biopharmaceutical company focused on discovering, developing, and commercializing drugs. Its primary focus is on four therapeutic areas: cardiovascular, central nervous system, inflammatory and metabolic diseases. The company’s main product is Belviq, a drug approved by the United States food and drug administration for chronic weight management in adults. Arena Pharmaceuticals is also involved in the development of drugs for the treatment of pulmonary arterial hypertension, thrombotic diseases, autoimmune diseases, pain, and type 2 diabetes. Look for Arena Pharmaceuticals to continue to make progress in their respective research areas and revolutionize treatments of illness and diseases that cause distress among consumers worldwide.
T = Technicals on the Stock Chart are Mixed
Arena Pharmaceuticals stock has seen a downtrend over the last few years. However, the stock saw a powerful run just last year and is currently consolidating the gains from this move. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Arena Pharmaceuticals is trading around its key averages which signal neutral price action in the near-term.
(Source: Thinkorswim)
Taking a look at the implied volatility (red) and implied volatility skew levels of Arena Pharmaceuticals options may help determine if investors are bullish, neutral, or bearish.
| Implied Volatility (IV) | 30-Day IV Percentile | 90-Day IV Percentile | |
| Arena Pharmaceuticals Options | 74.33% | 70% | 68% |
What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.
| Put IV Skew | Call IV Skew | |
| June Options | Steep | Average |
| July Options | Steep | Average |
As of today, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral to bearish over the next two months.
On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.
E = Earnings Are Improving Quarter-Over-Quarter
Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Arena Pharmaceuticals’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Arena Pharmaceuticals look like and more importantly, how did the markets like these numbers?
| 2013 Q1 | 2012 Q4 | 2012 Q3 | 2012 Q2 | |
| Earnings Growth (Y-O-Y) | 50% | 39.61% | 56.25% | 25% |
| Revenue Growth (Y-O-Y) | 8.41% | -6.74% | -57.07% | 574.3% |
| Earnings Reaction | -0.12% | -1.79% | -4.73% | -1.22% |
Arena Pharmaceuticals has seen improving earnings and mixed revenue figures over the last four quarters. From these numbers, the markets have been fairly disappointed with Arena Pharmaceuticals’s recent earnings announcements.
P = Poor Relative Performance Versus Peers and Sector
How has Arena Pharmaceuticals stock done relative to its peers, GlaxoSmithKline (NYSE:GSK), Biomarin Pharmaceutical (NASDAQ:BMRN), NuPathe (NASDAQ:PATH), and sector?
| Arena Pharmaceuticals | GlaxoSmithKline | Biomarin Pharmaceutical | NuPathe | Sector | |
| Year-to-Date Return | -3.22% | 20.06% | 17.66% | -8.28% | 20.31% |
Arena Pharmaceuticals has been a poor relative performer, year-to-date.
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Arena Pharmaceuticals is involved in the research and development of valuable pharmaceuticals that may help consumers live better lives. The stock saw a powerful move just last year and is still in the process of digesting its gains. Over the last four quarters, earnings have been improving while revenue figures have been mixed, which has disappointed investors in the stock. Relative to its peers and sector, Arena Pharmaceuticals has been a poor year-to-date performer. WAIT AND SEE what Arena Pharmaceuticals does in coming quarters.
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