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.
Let me preface this by saying that I like GameStop as a company, and I even added it as a great dividend you can buy right now back in February. However, my opinion at that time was based on GameStop in the low $20s. Now, at nearly $44 per share, GameStop is beginning to look like a more intriguing short-sell candidate each day.
GameStop definitely has a lot of factors that are working in its favor right now, including the imminent debut of both the Sony (NYSE:SNE) PlayStation 4 and the Microsoft Xbox One, which is hyping up longtime gamers, and GameStop's steady cash flow, which has been a saving factor to its delectable dividend. But, just as there are positives, I believe the risks could outweigh the rewards.
To begin with, video game console cycles are very drawn out. It took more than six years between the launch of Sony's PlayStation 3, and what will be the eventual debut of the PlayStation 4. Those types of drawn-out tech cycles can wreak havoc on GameStop's bottom line, which depends on gaming excitement to drive sales. It also hasn't helped that Sony's encountering numerous problems with its other business segments, such as TVs, which is causing it to spend cautiously on future research and development. For the last two years, few gaming enthusiasts appear very excited about the state of the gaming industry, and it's affected GameStop's top-line results.
The other worry here would be the effect that digital subscriptions are having on GameStop's sales. Although GameStop is working on boosting its digital revenue, it's still far behind its competitors in this field.
Sometimes, we need to remind ourselves not to fall in love with companies. I certainly like GameStop and its cash flow, but the valuation no longer makes sense here, and could open up a near-term short-sale opportunity.
Alexion Pharmaceuticals (NASDAQ:ALXN)
Shares of Alexion Pharmaceuticals have been on fire over the past week, as rumors are again swirling on Wall Street that it may be a takeover candidate. This time, it's suspected that Roche is gathering the financing needed to make a bid for the orphan drug juggernaut.
In some respects, Alexion's valuation can be understood. The company's only FDA-approved drug, and the most expensive drug in the world, Soliris, is approved to treat two rare diseases, and stands ready to potentially gain more indications. Soliris alone is expected to bring in $1.5 billion in revenue for Alexion this year. The advantage here is that orphan drugs have little-to-no competition, meaning Soliris has room to run, unopposed, for years.
As for me, I feel Alexion's run higher in the wake of the Roche rumors gives investors an intriguing short-sale opportunity. I'm certainly not going to argue against Alexion's performance up until now, but with peak sales estimates for Soliris of approximately $3.5 billion, according to Morningstar, Alexion is valued at more than six times peak sales of its lone drug -- far and away pricier than any buyout I've witnessed recently.
In addition, even though Soliris has demonstrated no significant adverse events in trials, I'm always leery of a biotech company whose entire product and clinical pipeline is made up of one compound – in this case Soliris. Earlier this year, we witnessed Affymax implode on the Omontys recall, and it should provide more-than-enough reason for investors to cautiously approach Alexion at these heights.
Apartment Investment & Management Co. (NYSE:AIV)
When long-term lending rates began rising dramatically just a few weeks ago, anything related to the housing sector dove, including apartment rental community operator Apartment Investment & Management, better known as AIMCO. Investors who sold may have made a big mistake, as rental communities look to be stronger than ever as the housing sector gets caught in a nasty catch-22.
Rising interest rates may be bad news for many consumers looking to refinance, but it's great news for the rental sector. The reason is that higher mortgage rates will dissuade consumers who are on the cusp of buying a home to wait things out for the potential of lower rates. It's also a big negative for the homebuilding sector, which is counting on historically low mortgage rates to drive home sales.
On the other end of the spectrum, even if interest rates again fall back near historically low levels, homebuilders -- sensing that a rise in interest rates is imminent when the Federal Reserve's quantitative easing known as QE3 ends – may boost production and, thus, flood the market with inventory and kill whatever pricing power they had.
In every aspect, rental communities, which already have few vacancies, are in prime position to utilize their pricing power to kick rents higher, and drive up their funds from operations. Even with a slight drop in occupancy rates in the first-quarter of 60 basis points, AIMCO still delivered 95.4% overall occupancy -- more than enough to drive up rental prices by 3.9% in the first-quarter.
In my opinion, AIMCO, with it's 3.1% yield and ample pricing power, will continue to deliver for shareholders.
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:
Fool contributor 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 owns shares of GameStop and Microsoft, and recommends Morningstar. 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.