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.
This week, I'm devoting my three picks to short sellers looking for high-risk, high-reward ideas.
Mylan (NASDAQ: MYL )
It's been a really longtime coming Mylan shareholders, but you finally have something to cheer about on the asthma front.
Earlier this week, the Food and Drug Administration released a seven-page document outlining what steps generic drugmakers would need to take to bring a generic version of GlaxoSmithKline's (NYSE: GSK ) blockbuster asthma treatment, Advair, to market . This is relevant because Advair accounted for close to $8 billion in annual sales last year for Glaxo -- or in another context, 28% of its sales . That represents an enormous market opportunity for generic drug producers and a strikingly big loss for Glaxo when these drugs do make it to market.
For Mylan it's a big boost since it's viewed as one of the front-runners to bring a generic Advair to market. Given the nature of the tests to be run, it isn't out of the question that the FDA could be approving a generic version of Advair within three years.
This is what makes Mylan so incredibly attractive. With a portfolio of more than 1,100 generic compounds and only a finite period of protection for branded drugs, Mylan will always have prospective generics ready to add to its top and bottom line. Furthermore, while margins at generic companies tend to be lower due to the low cost of generic drug pricing, its R&D costs are world's lower than brand-name biopharmaceuticals. Estimates for the year peg R&D costs at Mylan of just 6%-7% of revenue. With the company valued at a mere 11 times forward earnings, I feel a hybrid branded and generic drugmaker like Mylan could make for a smart long-term portfolio play.
Tumi Holdings (NYSE: TUMI )
I know, retail-anything seems like investing suicide right now, given how poorly the retail sector has performed early on in the back-to-school season. However, I feel Tumi, a mid-tier travel and business brand, could have more in its back pocket than the market is it giving it credit for.
In the recently reported second-quarter, Tumi delivered a net sales increase of 12.9% to $108.2 million on a 4.6% rise in comparable-store sales. Unfortunately for shareholders, Wall Street had been expecting revenue of approximately $114 million. It's obvious that growth has slowed a bit for Tumi over the past year, but that's no reason to go running for the hills just yet.
For one, direct-to-consumer sales rose by 13.3% for the quarter. That may be down modestly from the previous year, but I'd be perfectly glad if my company cranked out double-digit, high-margin sales in its e-commerce segment quarter after quarter.
Second, Tumi is preparing to enter a new wave of expansion that'll have it opening up stores in better performing markets like the Middle East and Asia by as soon as the fourth-quarter. Emerging markets are the key to Tumi's rapid growth and the Middle East and Asia have shown little signs of slowing growth.
Finally, it's a factor of price point. Tumi's travel products fit right into a perfect niche with consumers of being a brand-name product, but not carrying a brand-name price tag. This bodes well as the business professional tends to be a steady client of Tumi's, and globally they appear to be one of the few groups of individuals still spending. I would suggest taking Tumi's quarterly miss as an opportunity to jump aboard a well-recognized brand-name that I feel has double-digit growth potential on an annual basis throughout the remainder of the decade.
Nationstar Mortgage (NYSE: NSM )
Don't worry, short-sellers, I haven't forgotten about you! Nationstar mortgage, a residential mortgage loan servicer has been literally raking in profits since the housing market bottomed three years ago. Record-low interest rates have allowed consumers to refinance their existing mortgages and purchase new homes at very favorable rates, helping to pump up Nationstar's loan origination fees.
In Nationstar's second-quarter results, reported about five weeks ago, the company delivered a 40% increase in revenue and a 37% jump in adjusted-EBITDA. Furthermore, it reaffirmed its previous EPS forecast for next year of $6.45-$7.50, placing the stock at a forward P/E of just eight at the midpoint. Despite these results, I see serious signs of worry on the horizon.
Mortgage originations since May have fallen in all but two weeks as interest rates have soared about 100 basis points from their lows. Although rates are still historically lower than they've just about ever been, consumers have been spoiled for years by ever-declining rates. With that trend possibly broken, and the Federal Reserve signaling an end to its stimulus program sometimes in the very near future, it seems likely that rates will continue to edge up slowly and squeeze the bullishness out of Nationstar's originations' business.
It's quite possible Nationstar could have one more earnings surprise built in for this upcoming quarter, but after that I'd be looking for short-sellers to take charge.
Is my bullishness or bearishness misplaced? Share your thoughts in the comment 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 Mylan to My Watchlist.
- Add Tumi Holdings to My Watchlist.
- Add Nationstar Mortgage to My Watchlist.
As Tumi is undeniably showing, being innovative and reaching customers overseas has become paramount to its success. Without question, the retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only the most forward-looking and capable companies will survive, and they'll handsomely reward investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.