The latest one-day jump in a biotech penny stock came from XOMA Corp. (Nasdaq: XOMA) - another example of why most of these stocks should be avoided...
Investors drove up shares of biotech startup XOMA over 24% Monday after the company announced it was launching phase 2 testing for its flagship drug, XOMA 358.
XOMA is a biotech company located in Berkeley, Calif. It develops antibodies to fight rare endocrine diseases. Its lead-product, XOMA 358, is an antibody that reduces insulin receptor activity.
But as investors, be careful if you jump on the carousel...
In October, XOMA struck a licensing deal with Novartis AG (NYSE ADR: NVS). The deal included a cash payment of $37 million in return for global rights to one of XOMA's antibody programs and a $13.5 payment due to Novartis in September 2020. The exchange helped improve XOMA's cash flow, but it hasn't been enough to make it profitable.
The company's last earnings report was also a disappointment.
XOMA's latest net earnings filed Nov. 6 from Q3 of this year were at a loss of $14 million, compared to a loss of $29.6 million in Q3 2014. The company said it still has enough money to fund its endeavors through 2017.
Monday's huge jump is just another example of XOMA stock's wild run in 2015...
XOMA's 52-week high and low is $5.95 and $0.69, respectively.
XOMA's failed phase 3 testing for its former flagship drug, gevokizumab, sent its stock plummeting from nearly $5 to less than $1 in July. Since then, the company has restructured its research efforts to reduce costs, but it still hasn't diversified its experimental drug offerings.
Now XOMA has a bad case of tunnel vision...
If the clinical testing on XOMA 358 fails, the company won't have many promising drugs left to fall back on, and the stock could enter free fall once again.
Investing in XOMA stock is a gamble. If just one of its drugs pass clinical testing, Wall Street projects between $1 billion and $3 billion per year in sales, according to Motley Fool. Until then, speculators will continue to make bold predictions with their money.
[mmpazkzone name="in-story" network="9794" site="307044" id="137008" type="4"]
More scrupulous investors should weigh the potential costs before they join in. Although they'll miss the initial earnings boost if XOMA has a breakthrough, they'll avoid any fallout if the company discovers another failed antibody.
This is a perfect example of the risks associated with investing in penny stocks.
Penny stocks are stocks that trade for under $5. They are often highly speculative, and XOMA stock is a perfect example of this.
Many of these types of stocks are in the developmental or experimental stages and rarely have any products to market or sell. That's why investors should be careful before putting a large stake in penny stocks. These low-valued stocks might have a huge price increase one day, then experience a large drop in price the following day.
Sometimes scammers encourage investors to buy a penny stock so they drive the price up in what's known as a pump-and-dump scheme. Then the pump-and-dumpers sell their shares for a huge gain, while the victims are left holding nearly worthless stock. Penny stocks are the ideal feeding ground for this type of investing activity.
Some penny stocks, however, push past the developmental stage and turn into valuable investments. Here are three we like now.
Follow me on Twitter @cgsaucier or like Money Morning on Facebook.
