How do you tell the difference between a broken stock and a broken company?
That was the question Jim Cramer sought to answer on Thursday’s “Mad Money.” He pointed to Celgene, a biotechnology firm that makes an array of cancer drugs. Celgene has long been one of Cramer’s fave growth stocks, but it fell sharply last week.
On Thursday, analysts were disappointed to learn the company was withdrawing a European application for wider use of its big-selling Revlimid blood cancer drug. Nineteen firms that follow Celgene cut their earnings estimates for 2013 by an average of 27 cents a share. Fifteen firms cut their numbers for 2014 by an average of 42 cents a share off a $6.93 cent basis. In turn, Celgene’s stock slumped around 11.5 percent on Thursday to $59.45 a share.
“Celgene’s a growth stock, so any time the company encounters any kind of hurdle, that's a big deal,” Cramer said. “And this European fiasco was especially problematic because management had seemed so self-assured about the approval, treating it as more of a ‘when’ than an ‘if.’ That it hurt the company’s credibility with many investors.”
After spending a week reflecting on all of this, Cramer thinks Celgene is a “classic example” of a broken stock. In other words, he thinks the underlying business is not as bad as its stock suggests.
In Cramer’s opinion, Celgene’s business is doing just fine and the reaction to the Revlimid news was overblown. The approval process was just pushed back by 12 to 18 months, he noted, so it’s not a franchise killer. Besides, the company has several other important drugs in the pipeline, he said. Also, despite concerns over the company’s credibility, Cramer thinks management deserves the benefit of the doubt. He praised CEO Bob Hugin and its management team for producing a great long-term track record overall.
Cramer thinks the selling is actually overdone, creating an opportunity for investors to buy shares of Celgene at discount. He would only buy half of one’s desired position now, though, because it is likely investors will continue selling into the end of the quarter. Investors can buy the rest after the company reports earnings on July 23, he recommended.
Is Bed Bath & Beyond a broken stock or a broken company? Read on for Cramer's thoughts.
—Reuters contributed to this report
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