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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 see 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 that 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.
This week, my focus will be on three potential short-sale candidates.
salesforce.com (NYSE: CRM )
Over the past year I've dished out both praise for Salesforce's CEO, Marc Benioff, who's created a fun and fast-growing work environment, as well as contempt for the cloud company's frothy valuation. Today, I'm ready to again proclaim that investor sentiment has gotten the better of their judgment, and looking at buying puts or short-selling Salesforce might be a prudent trade to consider.
One of the factors pumping up Salesforce's share price is that most of its revenue is recurring, giving the company, and investors, good visibility. Its recurring revenue stream has allowed Salesforce to focus on expanding its business. That's great news for extreme long-term investors who expect cloud-computing dollars to keep flowing to Salesforce, but that's bad news in the near term as expenses are going to weigh on margins and stymie any bottom-line EPS momentum. As an added negative, GAAP EPS is projected at a loss of $2.00 to $2.02 in fiscal 2013, headlined by $379 million in stock-based compensation.
I'd be lying if I said I wasn't also concerned about a slowdown in cloud spending associated with the fiscal cliff and U.S. debt ceiling. I figure many tech companies held back on spending in the fourth quarter, which could wind up hurting tech earnings in the upcoming quarter.
Finally, who in their right mind is paying 34 times free cash flow, 94 times forward earnings, and more than 11 times book for a company whose growth rate is projected to slow to 26.5% in 2014 from 37% in 2012? Not me!
Sprint Nextel (NYSE: S )
There are just some companies that I've admittedly never liked, and no matter how many different ways I try to wrap my head around Sprint and its prospects after it received a $20 billion investment from SoftBank, I still can't figure out how it'll compete with either Verizon Wireless or AT&T.
SoftBank's majority stake in Sprint definitely gives Sprint the ample backing it sorely needed to expand its virtually nonexistent 4G LTE network, and also allowed the company to make a $2.2 billion ($2.97 per share) bid for Clearwire (UNKNOWN: CLWR.DL ) . On the surface, the purchase makes sense because of Clearwire's valuable spectrum, but considering that Sprint's sunk almost $2 billion into Clearwire already and that Clearwire's current network really only supports WiMax devices, which Sprint no longer sells, it becomes sort of a "we had no choice but to do this" transaction.
Furthermore, DISH Networks (NASDAQ: DISH ) made a counterbid for Clearwire totaling $3.30 per share and offering $2.2 billion for 24% of Clearwire's spectrum holdings, which could sway Clearwire completely away from Sprint or force Sprint to spend even more on acquiring a cash-burning business. This made-for-TV soap opera has no happy ending, and Sprint, as far as I can tell, has little chance of turning a profit any time before 2015.
Infinity Pharmaceuticals (NASDAQ: INFI )
To say that the craze over heat shock protein 90 inhibitors, or HSP90, is getting a bit overdone might be an understatement. Conceptually, targeting inhibition of this protein thought to be vital to cancer cell growth should result in cancer cell death. While that sounds great on paper, we're in about the third inning of a nine-inning game, and retaspimycin (formerly IPI-504) is only in mid-stage trials for the treatment of non-small-cell lung cancer, yet investors have priced Infinity as if approval is a certainty and we're on track to hit peak sales of the drug.
Beyond retaspimycin, Infinity has three ongoing trials for its PI3K inhibitor program, covering asthma, rheumatoid arthritis, and blood-borne malignancies, but only one has even reached mid-stage trials. In Infinity's most recent quarterly update, we learned that the company does have ample cash to conduct its trials well into 2015, but we're also staring down cash burn of $115 million to $125 million this year. With no real share-price catalysts until we see retaspimycin's late-stage results, I'm calling Infinity a bloated pig at these levels.
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 salesforce.com to My Watchlist.
- Add Sprint Nextel to My Watchlist.
- Add Infinity Pharmaceuticals to My Watchlist.
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