You knew it was coming.
It was inevitable that MannKind (NASDAQ: MNKD) stock's red-hot momentum would come to an end. The biotech's share price more than tripled in less than two weeks. However, MannKind stock dropped by as much as 20% on Wednesday during intra-day trading after the company announced it was selling newly issued stock. This shouldn't have surprised anyone since MannKind needed to raise more cash and recently completed a warrant exchange that cleared the way for the stock offering.
But while it didn't take a Nostradamus to know MannKind's momentum would at least take a breather, the future for MannKind is more difficult to predict. Should you buy the dip -- or stay away? Here are what I think are the best arguments for each option.
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Buy that dip
There are three reasons that I see why investors might want to buy the recent dip in MannKind stock. First, look at the price tag the biotech put on its stock offering -- $6 per share. The sell-off on Wednesday drove MannKind's share price well below that level. If big institutional investors are willing to pay $6 per share, there's a pretty good argument to be made that the stock is at least worth that much (and probably more). That would make the current stock price a bargain.
Second, MannKind is selling around $61 million worth of new shares. This move dilutes existing shares (based on MannKind's market cap on Tuesday) by less than 9%. The stock fell a lot more than 9% on Wednesday. If you believe the fundamentals are still in place for MannKind to be successful, buy that dip.
The third reason is similar to the second, but more fundamental. Forget how many existing shares were diluted and the offering price per share. If you think MannKind has a great product in Afrezza and that sales for the inhaled insulin will increase to, say, at least $150 million or so, buy the stock now -- dip or no dip. The only thing that matters for long-term investors with a positive outlook on MannKind is that the company will now have additional cash to keep operations going while Afrezza picks up steam.
Take the money and run (or just run)
Now, let's take the opposite perspective. Was MannKind's huge stock run-up really warranted in the first place? If you don't think so, take the money and run -- assuming you bought the stock earlier. If you didn't buy the stock, just run.
There's good reason to believe that many of the big gains enjoyed by MannKind shareholders were the result of a classic short squeeze. Nearly 30% of MannKind stock's float was sold short prior to the stock taking off. Short-sellers were no doubt in a tizzy, gobbling down antacids as they feverishly covered their positions, driving MannKind stock even higher in the process.