I follow quite a lot of companies, so the usefulness of a watchlist for me cannot be overstated. Without my watchlist, I'd be unable to keep up with 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 these aren't concrete buy or sell recommendations, and I don't guarantee I'll take action on the companies being discussed. But I promise 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.
Ariad Pharmaceuticals (NASDAQ: ARIA )
Ariad is certainly one of biotech's most controversial little darlings. You might call it a day-traders' dream stock because of its volatility, but for long-term investors, the company is at a crucial crossroad to its long-term viability.
In October, a two-year follow-up study on its leukemia drug Iclusig demonstrated an increase in serious vaso-occlusive events (i.e., blood clots) from the prior safety study, which was conducted at the 11-month mark. This increase eventually prompted the Food and Drug Administration to pull Iclusig from pharmacy shelves for a few weeks while it reassessed the safety of the drug, ending any shot Ariad had at an early indication for treating chronic myeloid leukemia (the Epic trial).
Iclusig has since been returned to pharmacy shelves with a more inclusive safety label, but the PR damage has been done. Earlier this month, I outlined what I suspect could be three roads Ariad could take to rebuild the Iclusig brand, including partnering its drug, testing different doses and drug combinations, and possibly even selling itself or Iclusig to focus on advancing new and non-Iclusig studies.
Ultimately, this is the year when we find out what Ariad's really worth. On one hand, if Ariad can successfully navigate new approvals for Iclusig, even as a last-resort therapy, the fact that it appears to generate superior cytogenic response rates (at least in CML) would indicate that it has a shot at success. On the other hand, the company's current $1.6 billion valuation is extremely lofty, given Iclusig's damaged reputation and last-resort status. I'm personally still struggling to find a scenario where peak sales of Iclusig top $300 million.
It may be a few months before we know the full story on Ariad, as the latter half of the year is when it plans to begin its new dosing studies, but one way or another I suspect Ariad shareholders are in for a wild ride in 2014.
Chevron (NYSE: CVX )
I apologize for the anticlimactic switch between the highly volatile Ariad and the stoic integrated oil and gas company Chevron, but it's difficult not to get excited about this oil giant after its latest tumble.
To put it mildly, Chevron's fourth-quarter results stunk! In early January, the company issued a warning to investors that weaker refining demand was going to hamper its bottom-line results. On Jan. 31, when it finally released those results, we discovered that things were even worse than expected, with refining profits down 58% to just $390 million and oil and exploration profits dipping by $2 billion over the year-ago quarter.
Now here's the really interesting thing about this awful quarter: The company still earned $4.93 billion in profit and generated $35 billion in cash flow during the course of the year. Sure, cash flow was down from $38.8 billion in 2012, but I'd hardly call that much reason to fret.
What makes Chevron so unique is its diversified oil and gas assets around the globe, including a number of key natural-gas finds off the coast of Australia, midstream pipeline assets, and those aforementioned refineries. The bulk of Chevron's profits do come from the E&P side of its business, but weakness in this segment is often countered by higher demand for refined products. In other words, Chevron is perfectly hedged for the future, and it's not as if global energy demand is decreasing.
Looking ahead, Chevron is valued at a mere 10 times forward earnings, is paying out a premium 3.5% yield -- it's dividend has been raised in 26 straight years -- and is trading at just 49% over its book value. These metrics are, in my opinion, incredibly inexpensive. Energy-savvy investors and those who prefer solid dividend income should certainly give Chevron a closer look.
GTT Communications (NYSE: GTT )
Every week I try to throw the skeptics and short-sellers a watchlist bone, and this week, it's small-cap IP and cloud-networking specialist GTT Communications.
Like most cloud-based plays, GTT Communications is growing like wildfire. In the third quarter, the company recorded a 59% increase in revenue to $45.1 million as adjusted EBITDA more than doubled to $7.6 million from $3.7 million in the prior period. Long story short, GTT isn't having any trouble finding new clientele despite a somewhat crowded cloud-networking sector.
What's bothering me with this space, and what GTT Communications perfectly conveys, is that there's little substance behind its top-line growth. Despite revenue advancing 59% and EBITDA more than doubling, GTT's net loss rose more than sevenfold to $4.3 million from $0.5 million in the prior year. The cost to hire more employees and service its existing networks is simply not allowing its bottom line to grow.
To make matters worse for fundamental investors like myself, GTT Communications has completely whiffed on three straight earnings reports, missing Wall Street's EPS estimates by $0.13, $0.13, and $0.10 in that time. What minimal profits were expected in the upcoming fiscal year have long been replaced by more sizable losses. Yet, GTT's share price has tripled since September!
The final nail in the coffin, as I see it, is that it could see revenue growth struggle because of the U.S. government attempting to tighten its federal spending. The bulk of GTT's revenue does not come from the government, but it nonetheless does close off a pathway to "easy money" for the company.
With widening losses and a share price that's gone exponential, this watchlist-worthy stock could be an excellent short-sale opportunity if it heads much higher.
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 Ariad Pharmaceuticals to My Watchlist.
- Add Chevron to My Watchlist.
- Add GTT Communications to My Watchlist.
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