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.
Leap Wireless (NASDAQ: LEAP)
I'm not catering specifically to short-sellers this week, but I'm definitely planning to start out with a company tingling every short-selling nerve in my body: Leap Wireless.
The domestic service provider industry has two behemoths in AT&T and Verizon and gets extremely crowded when you add in Sprint-Nextel and T-Mobile. There just simply isn't any room for smaller pay-as-you-go service providers that don't have the ample capital to expand their 3G or 4G LTE networks and boast a cash burn and customer attrition rate that's on pace to put many of them out of business within a matter of years.
Possibly the worst move T-Mobile could have made was the purchase of MetroPCS Communications (TMUS -0.10%), announced last year. However, Leap Wireless shareholders have made an equally big mistake by betting that their company is next on the buyout list. MetroPCS and Leap are both suffering from high attrition rates as they've lacked high-traffic-driving phones until recently (as well as long-term contracts), and it's these phones that typically guarantee consistent cash flow. With T-Mobile's backing, MetroPCS will likely be absorbed into T-Mobile's existing network. As for Leap, it hasn't been cash flow positive since 2005 and has burned through $1.9 billion in cash over that time period. At this rate, it could be out of cash in two or three years, which is enough reason to consider short-selling this company on any pop.
Again, not to be a Debbie Downer, but how exactly do you spin InterMune's fourth-quarter report last month into a positive? InterMune's management seems quite pleased with the company's progress in Europe with Esbriet, the company's idiopathic pulmonary fibrosis drug, which comes with a hefty price tag. For the fourth quarter, InterMune reported revenue of $8.2 million as compared to just $2.7 million in the year-ago quarter as losses for the quarter expanded to $58.6 million, or $0.90 per share, from $44.5 million, or $0.69 per share, last year.
If Esbriet were just hitting the markets, I might have some forgiveness to offer InterMune. However, we're talking about a drug with practically two full years of sales under its belt, treating a disease with few to zero alternatives, and the best it can muster is $26.2 million in total sales for 2012. May I remind everyone that the Street's original estimates in 2012 had called for Esbriet sales of $77.9 million, so it hardly met but a third of that estimate.
Worse yet is InterMune's dire cash flow. Although the company completed a 15.525 million share offering in January that helped raise $145.7 million in cash, InterMune has only $67 million in net cash. That's not very much considering that the company lost $194.6 million from continuing operations last year. At this rate, without continued dilutive offerings, InterMune could go belly-up.
There's still hope that an Esbriet approval in the U.S. will boost sales, but if growth in IPF drug sales is as slow in the U.S. as abroad, it may take 20 years just for the drug to be profitable!
Fifth Third Bancorp (FITB 2.00%)
Even though the Federal Reserves' stress test only delivered a failure in one of the 18 largest banks tested (Ally Financial), many other banks that had been smelling like a rose had their capital allocation plans spoiled. JPMorgan Chase (JPM 0.18%), for example, was a notable weak component following the stress tests. The Fed remained concerned about JPMorgan's ability to estimate losses in a severe economic downturn and the company itself noted it may need to pare back its dividend as early as the third quarter after resubmitting its capital plan to the Fed in a few weeks.
The same can't be said for Fifth Third Bancorp, which passed the stress test with flying colors and was given the all-clear to proceed with its aggressive capital plan. Fifth Third announced it would be boosting its dividend by 10% to $0.11 each quarter and announced a boost in its share repurchase program to 100 million shares. This may sound rather ho-hum when compared to some bigger banks, but the new yield on Fifth Third will be a very respectable 2.7% -- a yield few banks outdo at the moment.
From a valuation perspective, Fifth Third should still have room to head higher at 109% of book value and less than 10 times forward earnings. This is a bank I've got my eye on, and I may consider a position if its share price drops considerably.
Is my bullishness or bearishness misplaced? Share your thoughts in the comments 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: