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.
The biotechnology sector offers a number of wildcard, predominantly clinical-stage stocks that have the potential to double -- or halve -- their value depending on the outcome of a single trial or two. One company that tends to fit the mold here is Novavax.
Novavax is a developer of vaccines designed to treat infectious diseases around the globe. The good news for shareholders is that Novavax is already generating revenue thanks to an influenza vaccine research contract through BARDA, as well as a handful of collaborative partnerships. Although Novavax could be giving up some of its earning potential by partnering up, it can also spread its costs and risks, allowing it more opportunities to find that elusive home run in the biotech sector.
Currently, the most exciting research ongoing for Novavax is a phase 2 study for respiratory syncytial virus, or RSV, a disease that infects a patient's lungs and breathing passages. Most people can recover from RSV infection, but it can be more serious for infants and the elderly. According to the Centers for Disease Control and Prevention, nearly all children will be infected with RSV by age two, hence the need for additional research.
However, investors may also want to consider that even though Novavax's pipeline is still young and predominantly unproven, the company is being valued at more than $1 billion in terms of overall value. It's quite possible that Novavax will continue to burn cash for the foreseeable future as it invests in new development programs and moves forward with its ongoing phase 1 and phase 2 studies. This doesn't necessarily mean the company won't succeed, but it does put downside pressure on a company that has historically produced losses and had a cumulative free-cash outflow of $279 million over the past decade.
It also wouldn't take much for Novavax to be knocked off its high horse if one of its primary studies in either RSV or influenza didn't meet its goals. I would personally guess that more than half of Novavax's current value is built into the success of its RSV and influenza platform, so a disappointment in either of these studies could seriously affect Novavax's share price.
One way or another, this has big-move potential, and risk-friendly investors should have this company on their watchlists.
Capstone Turbine (NASDAQ:CPST)
Speaking of companies with highly volatile hit-and-miss potential, microturbine developer Capstone Turbine has to come to mind.
Shares of Capstone have been extremely volatile lately as anything resembling an alternative energy system has shot through the roof, from fuel-cell systems and ethanol producers to turbine and microturbine developers.
For Capstone, sales growth has been no issue. A week ago today Capstone secured an order for 50 Captsone C65 microturbines for oil and gas shale companies around the country, raising the total number of microturbines in use via its distributor Horizon Power Systems to 550. This order came just one week after securing a 2.6 MW order for two of Capstone's natural gas-powered microturbines from Regatta Solutions to be used in select California hospitals.
For more evidence we can turn to Capstone's third-quarter highlights, released in February, where it delivered record product revenue of $29.9 million, boosted its backlog 7% to $160.4 million, and, more importantly, produced a six percentage point improvement in gross margin to 20%.
Of course, the one monkey on Capstone's back has been that it still hasn't reached breakeven EBITDA despite its rapid top-line growth and cost controls. However, I suspect that could change in either the fourth or first quarter. Although Capstone's profits won't be much to admire for the next year or two, as long as it can continue to push margins healthfully in the 20%-25% range there's a strong possibility that it could head much higher over the long run. Yet again, this isn't a company for the faint of heart -- but it has all the makings of a solid growth candidate.
White Mountains Insurance Group (NYSE:WTM)
The property and casualty reinsurance business is far from glamorous, but if a relatively conservative and nearly rock-steady investment exists within the sector, I would contend that White Mountains Insurance just might be it.
White Mountains is engaged in underwriting property and casualty insurance, as well as reinsuring products through the U.S. As you might imagine, this means that White Mountains can occasionally find itself at the mercy of Mother Nature. Events like Hurricane Sandy have a way of heavily impacting P&C insurers and reinsurers, and there's unfortunately very little these companies can do to predict when and where a natural disaster will strike.
However, one aspect that does work in favor of P&C insurers is that they possess the pricing power to boost premiums for existing customers on an as needed basis to ensure that they cover the catastrophe costs. The past year was incredibly kind to White Mountains, with very little in the way of catastrophe losses. Overall, this helped push the company's book value higher by 9.5% to $642 per share. With White Mountains operating out of four primary segments it noted significant strength from OneBeacon Insurance (NYSE:OB), whose book value grew 17.3% and whose combined ratio (a measure of margin for insurers) came in at a steady 92% compared to this quarter last year.
If I could nitpick one aspect of White Mountains' generally conservative approach to running a business, it's that its dividend is far too conservative. At just $1 annually, yielding less than 0.2%, dividend-seeking investors had best consider looking elsewhere.
That aside, White Mountains is currently valued at around 10% of its book value, which, historically, makes this a good time to buy. Don't expect miraculous growth with a diversified insurance company, but do expect to sleep well at night. I'd suggest giving White Mountains a closer inspection.
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 Novavax to My Watchlist.
- Add Capstone Turbine to My Watchlist.
- Add White Mountains Insurance Group 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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