3 Stocks to Get on Your Watchlist

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. 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.

Chipotle Mexican Grill (NYSE: CMG  )
Shares of fresh-Mex restaurant chain Chipotle have bounced well off their 52-week lows set in October due to ongoing consumer spending growth in the U.S. and the fact that food inflation has been well under control. However, I feel that may be about to change.

Historically speaking, it's rare for food costs to stay tame for such a long period of time. Chipotle's costs are already a bit higher than most chains because of its "food with integrity" promise that only uses meat from animals that weren't treated with antibiotics. Just as you would see a premium for organic and natural products in the grocery aisle, Chipotle pays a premium cost for this higher quality meat. In addition, custom duties on chicken in general are likely to cause chicken prices to rise in the short term. That's all bad news for Chipotle, which has been holding firm to its pricing in order to not scare customers to its competitors.

The other problem here is one based on valuation. Investors like Chipotle because of its socially conscious choices, but they're completely overlooking the fact that the potential for rising costs and increased competition are gutting its growth rate. Sure, total sales increased by 13.4% in the first-quarter, but that was to be expected with the addition of 48 new stores. Comparable-store sales, a more accurate reflection of growth, rose by a mere 1%. That's appalling considering that Chipotle trades at 29 times forward earnings.

I'd suggest a possible way to trade this is by looking for an appropriate short-sale entry into Chipotle and perhaps hedging it with a long opportunity in one of Chipotle's rivals, such as Buffalo Wild Wings (NASDAQ: BWLD  ) . BWW saw comparable-store sales expand at a slightly faster rate than Chipotle (1.4% for company-owned restaurants and 2.2% for franchised) while expanding its restaurants at a similar pace. Better yet, I feel BWW has more consumer appeal thanks to its catchy advertising and specials.

Allergan (NYSE: AGN  )
In baseball, you get three strikes before you're out; for Allergan it just took a called strike three last week, and I'd just as well consider sending it to the showers.

Allergan's troubles began in mid-April when it received a complete response letter from the Food and Drug Administration for Levadex, the inhaled migraine medication that it acquired when it purchased MAP Pharmaceuticals for close to $1 billion. This was the second CRL for Levadex based on manufacturing process concerns.

In early May, shareholders were delivered their second whammy when Allergan reported that DARPin, its promising vision-loss drug that was expected to be a blockbuster, delivered less-than-expected differentiation from Lucentis in mid-stage results that didn't -- at least for the time being -- merit moving onto a late-stage trial. This was, in turn, great news for shareholders of Regeneron Pharmaceuticals (NASDAQ: REGN  ) , whose lead drug, Eylea, was now free to growth by double digits without the fear of any near-term competition.

The strikeout came last week when Allergan confirmed that the FDA may clear the way for a generic form of its dry-eye treatment, Restasis, to hit pharmacy shelves without the need for human clinical trials. With Restasis amounting to nearly 15% of revenue, and generic competition usually sucking 90% of sales away from branded drugs in a short period of time, shareholders have every right to be concerned.

I wouldn't call Allergan a lost cause, though, as it's still healthfully profitable. Yet, with nearly as much debt as cash on hand and a myriad of weak news in recent months, I'd suggest that further downside may be on its way.

VeriSign (NASDAQ: VRSN  )
With practically all walks of business having moved to a digital and online platform, it's hard to not like a company such as VeriSign, which is primarily a domain registry service. In the first-quarter, VeriSign recorded 15% revenue growth and a 38% increase in net income, presumably on the heels of sizable pricing power. As for me -- and continuing with this week's theme -- I'm much more skeptical.

If you dig a bit deeper, VeriSign's growth isn't as solid as it looks. Domain registrations actually dropped to 8.8 million from 8.9 million in the year-ago period while its registry services added 5.5% more names than it did last year. What we're seeing here is tighter cost controls with sales and marketing expenses down 35% year-over-year and administrative expenses lower by 16%. Coupled with these cost controls, VeriSign repurchased approximately 3 million shares of its common stock, helping to pump up its EPS by reducing the number of outstanding shares.

The concern I have is twofold: one, that VeriSign can't continue to cut costs much further; and two, that a global slowdown could threaten to drastically slowdown registry renewals, which is the heart and soul of VeriSign's business. Although I like VeriSign's cash flow capability, at 18 times forward earnings it's not nearly the value it once was. I'd suggest looking into short-selling opportunities if shares advance much more from their current levels.

Foolish roundup
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:

Curious about a company that could buck any pessimism the market has to offer? The Motley Fool's chief investment officer recently selected his No. 1 stock for this year. Find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.


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