2 Small-Cap Drug Stocks In Danger

HRTX and ARNA stocks tend to underperform in the fourth quarter

Oct 2, 2017 at 2:49 PM
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Small-cap stocks have been on a quest for record highs, as evidenced by the recent price action of the Russell 2000 Index (RUT). However, while we recently analyzed the best small-cap stocks to buy in October and the fourth quarter, today we decided to look at some of the small-cap stocks that could dip heading into 2018, if history is any indicator. Below are the 25 worst small-cap stocks to own in the fourth quarter, including drug stocks Heron Therapeutics Inc (NASDAQ:HRTX) and Arena Pharmaceuticals, Inc. (NASDAQ:ARNA).

To populate our list, Schaeffer's Senior Quantitative Analyst Rocky White used the following criteria: RUT stocks as of October 2016; optionable stocks; and stocks with at least eight years of data. The data goes back 10 years.

worst RUT stocks fourth quarter

The Only Small-Cap Batting 0.00 in 4Q

Heron Therapeutics stock is the only small-cap that has a 0% win rate in the fourth quarter. Per White, HRTX averages a quarterly loss of 15.17%, looking back a decade. More recently, HRTX shares have been on a tear in 2017, adding 33%. Today, in fact, the equity was last seen 6.8% higher at $17.25. Another 15.17% drop over the next few months would place Heron stock around $14.57 -- home to its 200-day moving average, which contained a pullback in September.

HRTX stock chart

Should the biotech once again suffer a losing fourth quarter, there will be plenty of shorts there to cheer. Short interest represents 23.4% of HRTX's total available float, and would take nearly 23 sessions to buy back, at the security's average daily trading volume.

Analysts, on the other hand, are staunchly bullish. Heron Therapeutics stock boasts seven "strong buys" and one "buy" endorsement, with not a single "sell" in sight. If history repeats, a dismal fourth quarter could leave HRTX shares vulnerable to downgrades.

ARNA Stock Could Pull Back 20%, If Past Is Prologue

Arena Pharmaceuticals stock, meanwhile, has racked up one of the steepest average fourth-quarter losses among optionable small-cap stocks, at 20.39%. Further, ARNA stock has been positive in the last quarter of the year just 20% of the time, looking back 10 years.

However, it's been quite a year for the shares, which have soared roughly 80% in 2017. Today, the stock is up 0.4% at $25.61, within striking distance of its July 11 annual high of $27.86, which came courtesy of upbeat data on Arena's pulmonary arterial hypertension drug. Another 20.39% drop from current levels would place ARNA shares around $20.33 -- near where the stock was trading before the July 11 bull gap, and an area of resistance in 2016. This region also contained ARNA stock's pullback in August.

ARNA stock chart

As with Heron Therapeutics, most analysts are in the bulls' corner when it comes to Arena Pharmaceuticals. The shares boast four "strong buy" ratings, compared to two lukewarm "holds" and not a single "sell." Should ARNA once again pull back over the next three months, some optimistic analysts could change their tune.

Not All Biotechs Are Bad

However, there are quite a few bigger-cap biotech stocks that could rally in the fourth quarter, if history is our guide. In fact, the pharmaceutical sector has been among the best in the quarter over the past 10 years, as evidenced by the historical returns of the SPDR S&P Biotech ETF (XBI).

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