Berko: Never buy stock that has no sales and earnings

Dear Mr. Berko: In January 2014, my adviser had me buy 50 shares of Intercept Pharmaceuticals at $476, and it fell to $305 in February. In March, it began to zoom up, and my adviser had me buy 50 more shares at $422 because he thought it would go to $600. It’s now down to $158, and my adviser wants me to buy 100 shares. He insists that Intercept will get approval on a blockbuster drug this year, which could move the stock higher than $600. Is my adviser giving me the right advice? Please advise by email, because I need your answer right away.

— C.R., Akron, Ohio

Dear C.R.: Cheese and crackers got all muddy, you have to be dumb, deaf and blind to pay more than $400 a share for a company that doesn’t have sales or earnings — and that probably won’t have sales or earnings for three years. Wow! CR, you really take the cupcake!

Intercept Pharmaceuticals (ICPT-$158) came public at $15 in October 2012. Then, with a steady stream of engineered hype and hyperbole, ICPT shares began to rise. The market-makers were able to unload their ICPT in the $40 range to the pros, who took their profits by selling it in the $70s to the hedge funds. Months later, the hedgies booked profits by dumping their ICPT in the $160s to the mutual funds. Months later, the funds took their piece of the pie, selling ICPT to the traders between at $200 and $240. The traders then resold ICPT to the pros when it was about 100 points higher (the mid-$300s), and the pros offloaded their shares to the stupids at $476, banking their gains. So you’re the last man standing.

Investors who paid more than the initial public offering price for this obscure, development-stage pharmaceutical company represent the waxing stupidity of a growing class of American investors called “The Stupids” by Wall Street. Psychologists suspect that this condition, a genetic defect in people’s evolutionary development, is peculiar to a species of investors whose mothers didn’t give them enough attention. What else could account for assigning a $9 billion market value to a company with no earnings or sales? Only a stupid would pay $476 a share for a company with an iffy drug, called obeticholic acid, that won’t get Food and Drug Administration approval until 2018 — maybe! The feckless Financial Industry Regulatory Authority recommends a regimen of waterboarding, electroconvulsive therapy and group prayer sessions for investors who paid 25 percent over the IPO price.

There’s nothing evident to support ICPT’s $158 market price. The company is unlikely to report a centime of earnings until 2018 or 2019. In a small government-funded study in 2013 and 2014, ICPT’s obeticholic acid demonstrated very impressive results. During phase three clinical trials, OCA significantly reduced inflammation and other symptoms in patients with a type of fatty liver disease called nonalcoholic steatohepatitis. And because test results, which were probably leaked accidentally on purpose, demonstrated impressive results, investors entered a feeding frenzy and piled on. But when the National Institutes of Health discovered that OCA dangerously raises cholesterol levels and significantly increases the risk of heart attack, the funding stopped. Still, anxious stupids, fearful of missing the party, pushed ICPT to $497 a share last year.

C.R., I doubt that ICPT will ever return to either of your purchase prices of $476 and $422. I also believe that its current $3.3 billion value at $158 a share is a sucker’s bet. There is nothing on this fertile earth that supports this value. ICPT has $256 million in cash, no revenues except for research grants, 122 employees and high operating costs (rent, utilities, legal, salaries, insurance, accounting, equipment, supplies, etc.), which will burn through cash reserves like thermite. Those two purchases give you a basis of $449 and a loss of $29,000 if you sell at $158. And in my opinion, that price should continue to fall, so sell your ICPT. Then on sheets of notebook paper, write the following sentence 1,000 times: I shall never buy a stock that doesn’t have sales or earnings.