Is Dendreon Undervalued?

With shares of Dendreon (NASDAQ:DNDN) trading around $4, is DNDN 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

Dendreon is a biotechnology company focused on the discovery, development and commercialization of therapeutics that may significantly improve cancer treatment options for patients. The company’s product portfolio includes active cellular immunotherapies and a small molecule product candidate that could be applicable to treating multiple types of cancers. Provenge, is the Dendreon’s first commercialized product approved by the United States Food and Drug Administration, and is a treatment for prostate cancer. Breakthroughs in cancer treatment can produce significant profits for company’s like Dendreon.

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T = Technicals on the Stock Chart are Weak

Since its initial public offering, Dendreon stock has seen its fair share of volatility. The stock has gone from lows near $2 per share to highs near $60 per share. Currently, the stock is trading near the low end of a multi-year range. 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, Dendreon is trading below its declining key averages which signal bearish price action in the near-term.

DNDN

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Dendreon options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Dendreon Options

101.78%

96%

94%

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 Mixed 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 Dendreon’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Dendreon 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)

-200%

-4%

17.72%

10.26%

Revenue Growth (Y-O-Y)

-57.71%

21.28%

66.09%

203.74%

Earnings Reaction

-4.4%

-6.71%

-22.97%

-25.14%

Dendreon has seen mixed earnings and revenue figures over the last four quarters. From these figures, the markets have expected more from Dendreon’s last four earnings announcements.

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P = Poor Relative Performance Versus Peers and Sector

How has Dendreon stock done relative to its peers, Northwest Biotherapeutics (NASDAQ:NWBO), Progenics Pharmaceuticals (NASDAQ:PGNX), Sanofi (NYSE:SNY), and sector?

Dendreon

Northwest Biotherapeutics

Progenics Pharmaceuticals

Sanofi

Sector

Year-to-Date Return

-22.68%

24.68%

42.62%

12.17%

17.03%

Dendreon has trailed its peers and sector by a wide margin, year-to-date.

Conclusion

Dendreon participates in a sector that can have significant impacts on consumers around the world, well into the future. If appropriate pharmaceuticals can be discovered, the company can potentially see amazing profits. The stock has not done well lately as earnings and revenue figures are disappointed investors. Relative to its peers and sector, Dendreon stock has trailed in performance by an extremely wide margin. STAY AWAY from Dendreon stock for now.

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