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.
I'm fairly sure CIGNA shareholders would much prefer to roll back the clock on 2014 after the implementation of the Patient Protection and Affordable Care Act knocked this national insurer off its high horse.
Earlier this month, CIGNA reported its fourth-quarter results that thoroughly underwhelmed Wall Street and investors. For the quarter, CIGNA announced that it had gained only 20,000 members through the Obamacare exchanges, and that it was losing money, thus far, via those exchanges. Furthermore, CIGNA updated its full-year outlook to an EPS range of $6.80-$7.20, which was modestly below the Street's expectations. Investors took this as their cue to duck and cover, but I feel it could be your cue to consider this a buying opportunity.
One of the primary factors investors often overlook when it comes to CIGNA is that a vast majority of its business isn't in the individual market, but in the commercial market. Although select companies have chosen to move their employees to a privatized exchange, a most enterprises still utilize CIGNA and a number of other national insurers for their employee-based health plans. What this means is that Obamacare represents but a minute fraction of total premium revenue and profit/loss for CIGNA when all is said and done.
Also, investors might be forgetting that there are fail-safes built into the new health reform law that protect insurers against hefty losses. It's no surprise the sickest people have signed up for insurance thus far, especially since insurers can no longer reject or deny people with pre-existing conditions. But, if insurers' medical expense ratio exceeds 108% -- in other words, if an insurer pays out 8% more in medical costs than it brought in via premiums -- it will be reimbursed by a reinsurance fund set up by the government. This fund allows plenty of time for Obamacare to gain steam and for more young adults to sign up and offset the higher costs associated with treating terminally ill and elderly patients.
At just 10 times forward earnings, I believe the time could be right to give CIGNA another look.
TransGlobe is an oil and gas exploration and production company currently getting almost all of its production from Egypt, but it also has operations in Yemen. The reason TransGlobe isn't valued nearly as kindly as many of its peers is twofold.
First, TransGlobe has a number of production sharing concessions it's entered into in Egypt in order to even be able to explore for oil. What this means is that TransGlobe has offered the highest bid to explore territories that may or may not contain recoverable assets. In addition, E&P companies like TransGlobe only have a finite amount of time to explore for oil (usually a few years) in these regions before their license expires.
Second, there's always a chance political strife and instability could wreak havoc on TransGlobe's ability to produce and explore in Egypt and Yemen. Investors tend to be unwilling to place a high earnings multiple on select overseas operators for that reason.
However, TransGlobe also offers a number of unique opportunities. Obviously, there are a number of unexplored regions in Egypt and the Middle East that could lead to a bounty of oil. If that were the case, TransGlobe's current forward P/E of less than seven would turn out to be insanely cheap. Not to mention that it's valued at a mere 11% more than its book value.
TransGlobe is also well financed. It's one of just a select handful of E&P operators that boasts more cash than debt, and could practically eliminate all of its existing debt in a year with the amount it can generate through free cash flow.
And finally, there's always a growing need for energy demand around the globe, especially in emerging market economies such as Egypt and its surrounding nations. This will mean TransGlobe won't have to look far if it wants a buyer for its recoverable assets. With the company very capable of crossing the 20,000 barrels of oil production mark per month on a regular basis this year, I'd say TransGlobe is worth some digging.
Synageva BioPharma (NASDAQ:GEVA)
For those of you skeptics looking for a company with possible downside, I'd introduce you to clinical-stage biopharmaceutical bottle rocket Synageva BioPharma, whose shares have nearly tripled since May despite no currently approved FDA drug on the market.
The allure of Synageva is the promise of its lysosomal acid lipase deficiency (LAL deficiency) drug, sebelipase alfa. I certainly wouldn't deny Synageva or its shareholders the right to brag about this drug given that it received the breakthrough therapy designation from the Food and Drug Administration last May. Currently, the company has two ongoing trials -- the phase 3 ARISE trial for children and adults, and a phase 2/3 trial in infants with LAL deficiency. A phase 1/2 extension study announced in June of 2012 noted that sebelipase alfa had a sustained impact on reducing liver transaminase levels, and significantly improved total cholesterol, HDL cholesterol, and triglycerides from patients' original baseline.
But, even considering that there are no FDA-approved LAL deficiency drugs on the market, is this worth $3.4 billion?
Canaccord Genuity, for example, values sebelipase alfa's peak sales potential at $650 million, or approximately 20% of Synageva's current market value assuming everything goes perfect with its phase 3 studies and the drug launch. If Synageva had a deeper pipeline, I could possibly support such a valuation, but that just isn't the case. In fact, the company has only one other compound currently in early stage clinical studies; everything else is preclinical in nature. That's a lot of weight to be placed on one drug.
Furthermore, in order to advance its remaining preclinical studies into clinical trials, it's going to need cash. While its current $435.5 million in cash should sustain the company for a while, I project an annual cash burn rate of $90 million-$110 million could make the company rethink a secondary offering.
All things considered, I see considerably more potential for downside than upside here.
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 CIGNA to My Watchlist.
- Add TransGlobe Energy to My Watchlist.
- Add Synageva BioPharma to My Watchlist.
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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.
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