Chasing Takeover Rumors Can Be Hazardous To Your Portfolio

Clovis Oncology Inc CLVS shares are trading lower by $1 at $33.83 in Wednesday's session. Not a large loss, but what's noteworthy is the issue is over $3 from the high of the day ($37.60).

Using the term "not to chase" an issue can be ambiguous. One could say that several times during the issue's recent run from $16.61 on August 23 and be dead wrong.

As with many stocks in the pharmaceutical sector, these kind of runs are usually instigated by favorable news on the drug development front. Conversely, disastrous price action can result from unfavorable news on the development front.

For Clovis, the rally was instigated by the FDA acceptance of NDA for priority review of Rucaparib. If an investor had immediately purchased shares off that news, even at the highs of the session from August 23 ($24.97), they're still sitting on new profits.

More favorable news came out on Rucaparib on September 8 and fueled the move higher.

Related Link: Clovis Upgraded At Credit Suisse Following Acquisition Rumor

The rally in the issue got another boost on Tuesday, when the rumor mill began heating up with speculation that Eli Lilly and Co LLY, among others, may be interested in purchasing the company.

Nothing like a takeout rumor to get everyone on board, especially with all the deals being done recently in the sector, it's not that out of question that the issue could acquired. Throw in an upgrade from Credit Suisse and the issue is must-own for everyone.

That certainly was the scenario surrounding the issue off the open, as it opened sharply higher ($37.28 vs. Tuesday's close of $34.83). Unfortunately, for those investors finally convinced to go long the issue, it rallied only another $0.32 to $37.60 and sharply reversed course.

Obviously, with no bid emerging from possible suitors, buyer's remorse set in and the issue began to move lower. Lesson to be learned from this price action is going long an issue off fundamental news is one thing; going long an issue on the premise is going to be taken over is another.