N.Y. Exchange Bars Stop Orders for ICN : * Securities: Brokers are forbidden to activate automatic sell orders on Costa Mesa firm’s volatile stock, which then falls 26.5% in heavy trading.
A big surge in trading of ICN Pharmaceuticals Inc. stock over the past two weeks prompted the New York Stock Exchange to take the extraordinary step of forbidding brokers to activate automatic sell orders.
Such orders, known as stop orders, are instructions to brokers to sell a client’s stock automatically when it falls below a certain price. They are often issued by investors to prevent precipitous losses in the event of a sharp decline in a company’s stock.
Even so, ICN stock--which has a history of volatility--fell 26.5%, or $4.375 a share, to $12.125 in heavy trading Friday. It was the Big Board’s biggest percentage loser.
The last ban on stop orders of a New York Stock Exchange stock was in 1989, when it took that action for consumer goods giant RJR, an exchange spokesman said.
The move by the exchange came after two weeks of volatile trading in ICN, a holding company whose units are involved in drug research, testing and marketing. Before Friday’s drop, the company’s stock had doubled in two weeks, to $16.50 a share.
The exchange spokesman would not say what prompted yesterday’s action. The order remains in effect indefinitely.
Other than a couple of positive announcements it has made recently, ICN is unaware of any reason for the stock’s recent activity, said Jack Sholl, a spokesman for the Costa Mesa company.
But stock analysts said investors recently have been selling short on a large number of shares. An investor sells a stock short when he borrows shares, expecting the price to go down. He sells the shares at the current, higher price, then makes a profit by replacing the shares at a lower price when the stock falls.
About 1 million of ICN’s 11.7 million shares outstanding were held by short sellers a few weeks ago. When the price of a stock goes up, these short sellers are forced to buy shares now to limit their potential losses. That surge of buying--called a “short squeeze”-- pushes the price up still more.
That’s what has been happening recently to ICN stock, said Mark Matheson, research director at Newport Beach investment baker Cruttenden & Co., one of the few analysts who follows ICN.
In fact, Matheson touted the stock in a Tuesday report to clients, saying: “There is a large short position that could be squeezed.”
By Thursday, as the stock continued to skyrocket, Matheson was telling investors that they should sell some ICN shares and take a profit.
Investors should wait to see whether the company’s future earnings justified the higher stock prices, he told Dow Jones Professional Investor Report on Thursday. “The stock went too far, too fast,” he said.
By Friday, the short sellers were reassured by a statement from the company that no big developments were imminent, said Rafi Khan, an analyst who follows ICN for the brokerage H.J. Meyers & Co. in Beverly Hills.
“Whenever you have a million short shares out of 12 million shares, the stock is going to go up and down,” Khan said. “That’s part of the game. The fact is the company’s fundamentals remain outstanding.”
Khan last week told his clients to buy ICN and is still recommending it, he said.
ICN recently reported nine-month profits of $7.8 million on revenue of $259 million, contrasted with a loss of $13.5 million on revenue of $197 million in the year-earlier period.
Biotechnology and drug stocks have been hot with investors lately, although ICN is not widely followed on Wall Street.
Some investors who knew little about the company but were attracted by the stock’s rapid rise probably jumped on the bandwagon, said Roger Gewecke of Don C. Whitaker Inc. of Irvine, a specialist in ICN stock on the Pacific Stock Exchange in Los Angeles. (A specialist is an exchange member who maintains an orderly market in a specific stock.)
“When a stock makes a huge move like this, a lot of time people don’t know what they’ve bought,” Gewecke said. “Then, when it goes down, you get a big herd trying to get through a small crack in the door. The fact is, though, this stock has made moves like this before.”
ICN is the parent company of three other publicly traded companies: Viratek Inc., which makes ribavirin, used for treating virus infections; SPI Pharmaceuticals, which makes vitamins, skin products and other drugs, and ICN Biomedicals, which makes research chemicals and other products.
The stocks of those companies have also surged recently before slumping on Friday.
