Why Prana Biotechnology, Forest Laboratories, and United Fire Group Are Today's 3 Best Stocks

The S&P edges slightly higher on M&A activity as Prana Biotechnology, Forest Laboratories, and United Fire Group all advance by double-digits.

Feb 18, 2014 at 5:15PM

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

Despite weaker than expected economic data, the broad-based S&P 500 (SNPINDEX:^GSPC) on Tuesday picked up right where it left off last week by trudging upward for its fifth close higher in the past six sessions.

The rise was predominantly fueled by merger and acquisition activity, as well as a few strong earnings reports. Investors view M&A activity favorably as the buyer is often paying a premium to acquire the smaller company. This premium is viewed as a risk, so more M&A activity signals that companies are willing to take on risk, which can be construed as a positive for a sector of the economy in general.

Working against the market today was an abysmal reading from the National Association of Home Builders. For February, its Housing Market Index reading of 46 was well below forecasts for a reading of 54 to 56, and markedly weaker than the 56 reported in January. This dip signifies that homebuilders are becoming increasingly worried about their near-term outlook, with the Federal Reserve beginning to taper, and could be in for a rough patch of growth if lending rates begin to rise.

By day's end the S&P 500 had moved modestly higher by 2.13 point (0.12%) to close at 1,840.76, less than 1% away from another all-time closing high.

Leading the pack today was small-cap Prana Biotechnology (NASDAQ:PRAN), which vaulted higher by 39.3% after announcing that its midstage study involving PBT2 for Huntington's disease met its primary endpoint of safety and tolerability, with a statistically significant measure of cognitive function improvement in the 250 mg dose as its secondary endpoint. In total, 95% of those who started the study finished it. Prana also noted that its preliminary evidence would suggest PBT2 reduced the atrophy of tissue in areas of the brain affected by Huntington's disease. However, I'd note that there was only a small improvement in functional capacity overall. I remain hopeful that Huntington's patients will soon have a therapy to help stem the progression of their disease, but I also remain realistic that this is a very difficult to treat disease and suspect Prana could have more downside than upside at this point.

Shares of global pharmaceutical giant Forest Laboratories (NYSE:FRX) roared higher by 27.5% after rival Actavis (NYSE:AGN) announced what amounts to a $25 billion buyout of the company. Under the terms of the deal, Actavis will pay a tad more than $26 in cash and 0.3306 shares of its own common stock to acquire each share of Forest Labs, which equates to $92.65 per share based on today's closing price for Actavis. If the deal is approved, Actavis said it would be immediately accretive to earnings, with double-digit earnings-per-share accretion expected in 2015 and 2016, on top of $1 billion in synergy cost savings and more than $4 billion in annual free cash flow. I believe Actavis brutally overpaid for Forest Labs, considering that its prime revenue-generating drug, Namenda, which is used to treat Alzheimer's disease, will come off patent next year. Actavis had better hope that Forest's new line of respiratory products makes up the difference; otherwise, this deal may turn out to not be as rosy as investors seem to believe it will be.

Finally, United Fire Group (NASDAQ:UFCS) jumped 15.1% after the property and casualty insurer reported better than expected fourth-quarter results. For the quarter, United Fire's operating income per diluted share rose to $1 from just $0.12 in the prior year, trouncing Wall Street's estimates by $0.38! The big boost for United Fire came from its P&C segment which expensed out only $3 million in catastrophe losses compared to a whopping $30.2 million in the year-ago period. United Fire will always be at the mercy of unpredictable weather and natural disasters, but the upside of insurers is they can always boost premium pricing to recover any losses suffered from catastrophes. As long as United Fire remains conservative with the management of its investment portfolio, there's no reason it can't edge even higher.

Prana, Forest, and United Fire are off to the races today, but they likely won't have the ability to keep up with this top stock throughout 2014
There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool recommends United Fire & Casualty. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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