Acadia Pharmaceuticals: Investing With No Safety Net

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage. NEW YORK (MagicDiligence.com) -- It is one of the fundamental facts of Joel Greenblatt's Magic Formula Investing (MFI) screening methodology: small research pharmaceutical firms almost always show up shortly after receiving one-time windfalls such as hitting development milestones or receiving collaboration payments of some sort. These huge shots of revenue spike profits, causing trailing 12-month returns on capital to skyrocket. At the same time, human investors realize that these payments are non-recurring, keeping the stock price at a reasonable level but creating what looks like a very low valuation (low P/E ratios, or high earnings yields). Bingo, the perfect formula for getting screened by MFI! I believe it is one of the side effects of the simple screening methodology, and it breaks the strategy's core mission of finding "great companies selling at cheap prices."... Click to view a price quote on ACAD. Click to research the Drugs industry.

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