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I follow quite a lot of companies, so the usefulness of a watchlist to me cannot be overstated. Without my watchlist, I'd be unable to keep up on my favorite sectors and what's really moving the market. Even worse, I'd be lost when the time came to choose which stock I'm buying or shorting next.
Today is "Watchlist Wednesday," so I'm discussing three companies that have crossed my radar in the past week -- and at what point I may consider taking action on these calls with my own money. Keep in mind, these aren't concrete buy or sell recommendations, nor do I guarantee I'll take action on the companies being discussed weekly. What I can promise is that you can follow my real-life transactions through my profile, and that I, like everyone else here at The Motley Fool, will continue to hold the integrity of our disclosure policy in the highest regard.
MAKO Surgical (Nasdaq: MAKO )
Health care is a tricky field. It used to be that if you received FDA approval for a new drug or a revolutionary procedure, success was practically guaranteed. We've learned in recent years that this isn't always the case and that product launches are just as important, if not more important, than the research phase itself.
Case in point is MAKO Surgical, which took a long walk off a short plank yesterday after reporting its second earnings disappointment in just a matter of months. The company did see higher usage of its MAKOplasty procedures, which are used to preserve more soft tissue in the joints during knee and hip surgeries, and increased the sale of its interactive robotic arm surgical system, known as RIO, sequentially from the fourth quarter to nine from six. However, that wasn't nearly enough, as it forced the company to lower full-year RIO system sales estimates to a range of just 42 to 48.
In the past I've encouraged investors to look instead toward Intuitive Surgical (Nasdaq: ISRG ) , which will itself eventually face pricing pressures on its da Vinci surgical system but commands the lion's share of the robotic procedures market. What we've learned today from MAKO is that just having an innovative product isn't enough if there aren't buyers for that product.
James River Coal (Nasdaq: JRCC )
Speaking of long walks off a short plank, we finally bid adieu to Patriot Coal on Monday after the coal producer failed to renegotiate its loans with its creditors and filed for Chapter 11 bankruptcy protection. The same fate could be up next for another coal company toward the bottom of my list, James River Coal.
Don't get me wrong: I still advocate that coal stocks are significantly undervalued and that coal will remain a vital part of the U.S. energy picture for decades to come. However, Patriot and James River have never been favorites of mine.
Despite trading at only 26% of book value, James River is anything but a value with $416 million in net debt and just $4 million in positive free cash flow generation over the trailing 12 months. With coal prices depressed, many investors suspect this company could be next to join Patriot in the bankruptcy line. Unfortunately for this sector, Patriot's bankruptcy won't shut its mines. Patriot plans to continue mining even during bankruptcy, so the overcapacity hurting the weakest companies in the sector (like James River Coal) isn't likely to abate anytime soon.
Seagate Technology (Nasdaq: STX )
When is an earnings warning a potential buying opportunity? When the sector in question is the highly commoditized storage space.
For all the attention Chinese small-cap stocks get for their low P/E ratios, have you ever stopped to take a look at how cheap hard-drive makers really are? Yes, margins are subject to pricing pressures and these companies are usually at the whim of the economy, but the current valuation of Seagate is pricing in a major retracement in earnings that just isn't there.
Earlier this week, Seagate warned that its fourth-quarter sales would miss its original forecast by about 10% and that gross margins would be about 100 basis points lower than anticipated. It cited a supply chain disruption and quality control issues tied primarily to the flooding in Thailand that also affected its primary rival Western Digital (NYSE: WDC ) for quite some time. Even with the reduction, sales are expected to rise 50% year over year and the company's valuation is now approaching just three times forward earnings. That's a genuinely cheap company that deserves a closer look.
Is my bullishness or bearishness misplaced? Share your thoughts in the comments section below, and consider following my cue by using these links to add these companies to your free personalized Watchlist to keep up on the latest news with each company:
- Add MAKO Surgical to My Watchlist.
- Add James River Coal to My Watchlist.
- Add Seagate Technology to My Watchlist.
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