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.
Aeterna Zentaris
Here's a company for biotech-savvy investors who aren't afraid of taking on a lot of risk for a chance at a big reward. Let's start off with the basics: I own a very, very small position in my personal portfolio in Aeterna Zentaris, so my analysis will be partially biased on that accord, but I've been thinking of a significant add to my position once the Fool's disclosure policy allows for it.
The end of July brought mixed reviews from Aeterna Zentaris' shareholders, with the company initiating a secondary offering of 5.2 million shares in order to raise $7.8 million at a price well below the previous closing value. Having only one compound approved the Food and Drug Administration, Cetrotide, a luteinizing hormone-release hormone antagonist treatment for in-vitro fertilization that doesn't deliver a lot in the revenue department, the downside of owning a micro-cap biotech like this is that dilutive offerings are often needed to raise the cash necessary to keep plugging away at research and clinical studies.
Then again, Aeterna Zentaris also announced, just days later, that the first patient in a phase 3 endometrial cancer trial had been dosed with AEZS-108 -- what I consider to be its most promising drug candidate. Endometrial cancer has few alternatives at the moment, with perhaps Pfizer's contraceptive injection Depo-Provera providing the best risk reduction (about 80% according to one study) to getting this type of cancer in the first place. With an overall response rate of 30.8% and a clinical benefit of 74.4% in mid-stage trials, AEZS-108 was able to receive a special protocol assessment, which should help speed it through the review process if all goes well in late-stage trials.
If you're looking for something in the biotech sector with higher-risk, higher-reward potential, I'd suggest digging a bit deeper into Aeterna Zentaris.
Tower Group (NASDAQ: TWGP)
It may have been a while since I've mentioned Tower Group, a property and casualty insurer and reinsurer for individuals and commercial entities -- but make no mistake, it's not been forgotten. In fact, Tower Group has rebounded in such a big way that I would strongly recommend that it work its way back onto your radar.
The reason Tower Group fell off its perch in the first place was due to a series of catastrophic losses that culminated in Superstorm Sandy last year. Tower, which sells home insurance up and down many states on the East Coast, projected losses of nearly $70 million in November.
However, what shareholders often forget when investing in insurance companies is that, aside from the relatively rare instance of the gross mismanagement of funds, insurance companies are cash cows. Insurance companies actually rely on catastrophes as their justification for boosting premiums. To that end, when the next season goes by without a major disaster, insurance companies like Tower Group are then rolling in profits that are even higher than they were before the last catastrophe.
Another factor to consider here is that some members of the Federal Reserve have been quite vocal about the paring back in its monthly bond-buying program possibly before the year is out. Known as QE3, this bond-buying program has helped to artificially keep lending rates low. When this program is wound down, rates may begin to rise, which would be of great benefit to the investment portfolios of insurance companies which often conservatively invest the bulk of their cash in government-backed Treasuries. To put it another way, a big boost in investment income should be right around the corner for Tower Group.
When you tack on the fact that Tower Group is trading at just 5% more than its book value, just eight times next year's earnings, and pays out a whopping 3.8% yield, I believe you have all the reasons needed to support a continuing rally.
Boeing (BA +1.57%)
Not to disappoint my contrarian thinkers who are always looking for a good short-sale idea, may I suggest America's pride of the skies? That's right, Boeing.
The run in shares of Boeing since the spring has been nothing short of phenomenal and dumbfounding from a skeptic's standpoint. Boeing's second-quarter earnings report released two weeks ago certainly alluded to some positives that optimists could latch onto. Bottom-line profits easily came in higher than expected as the company announced strong orders from Asia and Latin America.
However, I can't help but notice how much of a PR blunder and top-line growth deterrent the 787 continues to be. While I'm not ignorant to the fact that the 787 represents the future of Boeing, and potentially international aviation, the years of blunders and delays have tarnished its reputation. By contrast, the Boeing 737 remains the company's bread-and-butter aircraft and the primary reason it posted such strong results last month.
Another overlooked aspect of Boeing is its military segment, which is expected to struggle over the coming years as the U.S. defense budget is constrained by the sequester. Sales fell 4% year-over-year and represented about 18% of total quarterly revenue.
What this comes down to is a simple case of valuation. I'm sure current shareholders are thrilled to see Boeing over $100 a share, but with expected top-line growth of only 4% this year, the threat of labor union strikes an ongoing threat, and the company now valued at 15 times forward earnings -- Boeing is the most expensive it's been in years. I'm not exactly sure how Boeing improves the image of its 787 or boosts defense/security orders quickly enough to justify the rapid increase in its share price, and I would consider the company an excellent short-sale candidate here.
Foolish roundup
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 Aeterna Zentaris to My Watchlist.
- Add Tower Group to My Watchlist.
- Add Boeing to My Watchlist.
