Do These Factors Support Arena Pharmaceuticals?

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 is a clinical-stage biopharmaceutical company focused on discovering, developing and commercializing oral drugs in four therapeutic areas: cardiovascular, central nervous system, inflammatory and metabolic diseases. The company offers Belviq, a drug candidate approved by the United States food and drug administration for chronic weight management in adults. It is also involved in the development of drugs for the treatment of pulmonary arterial hypertension, thrombotic diseases, autoimmune diseases, pain, and type 2 diabetes. Through its reserach, Arena Pharmaceuticals is working at revolutionized treatments that may see significant demand if tested and approved.

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T = Technicals on the Stock Chart are Weak

Arena Pharmaceuticals stock has seen a consistent downtrend since its initial public offering in 2000. Any significant bounce has been seen as a selling opportunity for many investors. 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 below its declining key averages which signal neutral to bearish price action in the near-term.

ARNA

(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

90.76%

93%

90%

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

May Options

Steep

Average

June 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 Decreasing 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?

2012 Q4

2012 Q3

2012 Q2

2012 Q1

Earnings Growth (Y-O-Y)

-38.46%

-56.25%

-25%

-48.57%

Revenue Growth (Y-O-Y)

-6.74%

-57.07%

-32.56%

-44.23%

Earnings Reaction

-1.79%

-4.73%

-1.22%

0%

Arena Pharmaceuticals has seen decreasing earnings and revenue figures over the last four quarters. From these figures, the markets have been disappointed with Arena Pharmaceuticals’s recent earnings announcements.

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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

-11.97%

15.92%

31.34%

2.96%

24.78%

Arena Pharmaceuticals has been a relative underperformer, year-to-date.

Conclusion

Arena Pharmaceuticals engages in a biotechnology industry that provides promise but still needs to see results. The stock has been in a downtrend over the last few years as any reasonable pop has been met with selling pressure. Earnings and revenue figures have been on a steady decline, over the last four quarters, which has not impressed the markets. Relative to its peers and sector, Arena Pharmaceuticals has trailed, in year-to-date performance, by a wide margin. STAY AWAY from Arena Pharmaceuticals for now.

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