Spectrum Pharmaceuticals, Inc. (SPPI): When Being “Long” Backfires!

Yesterday, I published an article titled, “When Being Short Backfires!” So it’s only appropriate to look at the other side of the trade. Strangely enough, this comes as one of my favorite companies of the last five years released guidance that simply left me speechless, providing the perfect example of when being long and optimistic backfires!

Spectrum Pharmaceuticals, Inc. (NASDAQ:SPPI).Staying Long & Optimistic Despite Obvious Problems

In my book, Taking Charge With Value Investing (McGraw-Hill, 2013) I discuss the importance of knowing your own limitations and the personality defects that could cost you money. We all have certain investing tendencies, whether it be buying a stock on large pops, panicking and selling too soon, falling victim to the opinions of every analyst and blogger, or whether it be holding on to a lost cause stock because you don’t want to admit when you are wrong. Personally, I hate to admit when I am wrong. It’s the worst feeling in the world. I have created wealth as a retail investor, and mostly during a flat market. Therefore, overconfidence is a big problem of mine, and when it came to Spectrum Pharmaceuticals, Inc. (NASDAQ:SPPI), I admittedly ignored all of the looming problems that were so evident to the open eye.

Asking the Wrong Questions When You’re Long

As recently as yesterday, I listed all the positives for the company moving forward. I stated, “This is a company that has seen multiple years of growth, has three FDA approved products, 10 drugs in its pipeline, a P/E ratio of 8, yet still has a short ratio of 33.30,” therefore implying it to be undervalued. However, the question should have been, “Why is there a short ratio of 33.30?” With this one particular stock I failed to follow my own rule, which is to first be skeptical and then form an outlook.

Longs Notice Problems, When it’s Too Late

This is a company where sales of its best-selling drug Fusilev were obviously under pressure from generics, and despite the company’s denials, it was just as clear that discounting was being used as a tactic to maintain sales stability. Furthermore, it is always wise to follow the smart money in any investment, and that is of those who know more than you.

According to Thomson Financial, there were 14 insider transactions in the last six months, with 13 being insiders dumping their shares. These insiders sold 767,743 shares and most were from the company’s CEO Rajesh Shrotriya. For the last several months, investors such as myself have defended his actions with excuses such as “it was a preplanned sale” and “he’s 68 years old and probably near retirement,” but the truth is, when a CEO dumps shares to this degree, in a stock that looks to be clearly undervalued, there is probably a bigger problem in the works.

When the Rumored Problems Come to Surface

So what was it that created an afterhour loss of 40%? Obviously, it was regarding sales guidance for Fusilev. However, it wasn’t just weak guidance; it was guidance that could not have been mistaken. There was no way that the company did not see this coming. For example, the company saw sales of $44.6 million and $204 million for Fusilev in Q4 and for 2012. Now, the company is expecting sales of just $10 million-$15 million in Q1 and $80 million-$90 million for 2013. Personally, this is the largest and most significant change in direction that I have ever seen in the 15 years that I have been a retail investor, and covering my own investments and the space.