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Rapid Gains Run Up DepoMed's Risk/Reward

The drugmaker's long-term prospects are favorable, but wait for a pullback to enter this name.

This alert was originally sent to subscribers of Stocks Under $10 on April 19 at 1:30 p.m. EDT and is being republished as a bonus for readers. For more information on this newsletter, click here.

We are closing our 1,000-share position in



. The stock was recently trading at $6.95, up 3% for the day and 25% up from our cost basis.

DepoMed shares are now trading within 5 cents of our sell target price range of $7 to $8 a share. The stock has added 23% since mid-March, and we believe the near-term risk/reward is now skewed toward the risk side of the equation, given the company's lack of history as a revenue-generating entity and the execution risk associated with bringing new drugs to the market.

We remain positive on DepoMed's 12-month prospects, and would consider rebuilding our stake at some point. The company now has two Food and Drug Administration (FDA)-approved drugs on the market already: Glumetza for diabetes and Proquin for urinary tract infections. Also, the company will soon commence phase III trials for a generic version of Pfizer's pain medication Gabapentin, and positive data in the back half of the year could be a catalyst for the stock.

We will use weakness under $6 a share to consider adding shares of DepoMed back to the model portfolio.

William Gabrielski is a research analyst at In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Gabrielski welcomes your feedback;

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