Buy, Sell, or Hold: Geron

When considering any stock for your portfolio, don't be swayed by just the positives. Examine its pros and cons, and decide whether its possible upside outweighs its risks. Let's take a look at the biotech company Geron (Nasdaq: GERN  ) today and see why you might want to buy, sell, or hold it.

Sell
Let's start with the case for selling. Exhibit No. 1 is its 2011 performance, when its stock imploded by 71%. A plunge like that usually reflects some big problems.

But that's not all. Geron sank by 59% in 2002 and 35% in 2007. In 2003 it soared 179%, and last time I checked, it was up 34% so far this year. This kind of volatility is great if you enjoy drinking Pepto-Bismol; otherwise, it's best to keep away if you don't have the stomach for it.

So why, exactly, did the stock fall last year? Well, one issue it had been struggling with was its involvement in stem-cell research. Stem-cell research became a political lightning rod in recent years, with many investors worried that government regulations might present major barriers to development in the area. Late in 2011, Geron announced plans to get out of stem cells, disappointing and surprising many, stating the company's focus on oncology drugs in its pipeline.

Stem cells may be very promising, but they're not big moneymakers yet. (The situation is a bit like the underpants-collecting gnomes on South Park, who hadn't figured out how to monetize their haul.) Stocks involved in stem-cell research have seen their shares surge and plunge -- StemCells (Nasdaq: STEM  ) , for example, has seen its shares range from $9.80 to $0.70 over the past year, while Cytori Therapeutics (Nasdaq: CYTX  ) shares have ranged from $2.32 to $8.44. Both companies are sitting toward the lower end of their trading ranges as Geron's departure has cast a pall over the entire industry.

Buy
After all that, why might you be interested in Geron? Well, think back to its 2011 performance. When a stock falls by 71%, that's clearly a red flag, but in the right circumstances, it can also represent a great buying opportunity.

Stem-cell research was never all that Geron had going for it. Its pipeline of oncology treatments is promising, with one drug alone -- imetelstat -- in several clinical trials. A phase 2 trial for treating breast cancer just concluded enrollment, with results expected by the end of the year.

My colleague Brian Orelli has noted that while Geron has plenty of cash right now (about $140 million), moving drugs through clinical trials can consume a lot of it. That's not necessarily a portent of doom, though, as Geron can do what many biotechs do, selling some of its developments to a deep-pocketed large pharmaceutical company, or simply partnering with one, in order to share the risks and rewards. Indeed, even Geron's stem call business may bring in a lot of money, sold to another entity.

Wall Street analysts are generally bullish on Geron, setting a target price about three times higher than the stock's recent level, although the stock was downgraded late last year to a "speculative buy."

Hold
Holding off on acting on Geron is very reasonable, as much of its promise lies in clinical tests for which there are not yet results. The fact that Geron has several phase 2 trials going on means that even if they yield great results, there will still be costly and time-consuming phase 3 trials to follow. If the company cannot find a partner, it will likely issue a dilutive share offering to raise money.

The verdict
To me, there are enough uncertainties surrounding Geron that I'll steer clear -- for now. It's not like there's a shortage of compelling companies to consider for our portfolios, after all.

Still, if you're dead set on investing in a stem-cell business and are disappointed that Geron exited the arena, you have other options, such as StemCells, Cytori, or newly IPOed Verastem (Nasdaq: VSTM  ) , which aims to kill cancer-causing stem cells. All three carry a fair amount of risk, though, so be cautious. Alternatively, know that big pharma outfits such as Pfizer (NYSE: PFE  ) and GlaxoSmithKline also have stem-cell programs, along with a host of proven, profitable drugs.

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