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3 Stocks to Get on Your Watchlist

By Sean Williams - Sep 18, 2013 at 5:14PM

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A fat-busting company, an integrated circuitry manufacturer jumping for joy at an increase in communications spending, and a Chinese online game developer are this week's must-watch stocks.

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.

This week, I'm devoting my three picks to short sellers looking for high-risk, high-reward ideas.

Arena Pharmaceuticals (ARNA)
For those of you (including me) who thought that anti-obesity pills would come running out of the gate and be an instant success, boy, was that projection wrong!

VIVUS's (VVUS) chronic weight management drug Qsymia made it to market well before Arena's Belviq because the Drug Enforcement Agency needed to schedule Arena's drug, but it largely fell flat on its face. Despite delivering more favorable weight-loss results in terms of overall percentage relative to Belviq in trials, Qsymia has failed to find footing with physicians and found resistance from consumers early on who proved unwilling to pay out-of-pocket costs for the weight-loss pill. With no marketing partner VIVUS has managed just $9.6 million in Qsymia sales through the first six months of the year and delivered a modest 34% sequential revenue growth in the second quarter.

Things haven't been much better for Arena, but sales do appear to be shaping up better for Belviq than Qsymia. Despite a shorter sales period in its quarter since Belviq was launched in early June, Belviq delivered net product sales of $4.1 million (that includes marketing partner Eisai's net sales and Arena's 31.5% royalty). If anything, this demonstrates the advantage of having a marketing partner and the more favorable safety profile of Belviq relative to Qsymia.

Ultimately, we're still a long way from determining which anti-obesity drug, if any, will succeed, but I continue to feel based on its partnership with Eisai and safety profile that Arena's Belviq is the better and more intriguing play of the two. With consumer advertising ready to ramp up for Belviq, I would look for Arena to potentially rebound heading into 2014.

Integrated Silicon Solutions (NASDAQ: ISSI)
There are few sectors that are as cyclical as fabless semiconductors, and Integrated Silicon Solutions is no exception. ISSI, for short, operates in a myriad of sectors, supplying integrated circuitry for the automotive and communications market, as well as the medical field. Specifically, weak DRAM prices have weighed on ISSI in recent months, causing Wall Street to modestly lower estimates and dragging on ISSI's share price while the market rallied. But times look ready to change and this highly cyclical stock could be ready to burst higher.

To begin with, we're seeing a major shift in communications spending with wireless service providers not named Verizon bent on spending cash like water and rolling out their 4G LTE network. This spending has already trickled down the line to fiber-optic equipment providers and should hit networking equipment makers, which include ISSI, sometime later this year or early next year. This is one of the primary reasons I suspect communications revenue was up 5% over the sequential quarter in its most recent quarterly report. 

I've also always been a fan of ISSI because of its conservative balance sheet. Most cyclical businesses understand that they need to maintain a substantial cash balance to sustain them when the next downward cycle hits. ISSI is no slouch with $4.79 in cash per share compared to a share price of just $11.32. That's a nice downside buffer, considering that ISSI is valued at only nine times forward earnings (or 5.5 times forward earnings if you strip out ISSI's cash).

KongZhong (NASDAQ: KONG)
As always, I haven't forgotten you faithful short-sellers, either. This week I give you Chinese Internet and mobile gaming company KongZhong.

I know what you're probably thinking -- either "You're nuts to bet against a rapidly growing Chinese gaming market," or "You're a genius! No one can trust Chinese companies' fundamentals and I'm betting against this company right now." In actuality, the suggestion to short KongZhong relates to neither of these reasons and has everything to do with its rising costs and chronic underperformance relative to its peers.

In KongZhong's most recent quarter, the company delivered a 13% decline in revenue and a 12% decline in income. Although these figures were basically in line with the company's own expectations, how do you manage to see revenue declines in one of the most rapidly growing gaming markets in the world? Furthermore, KongZhong's guidance for the upcoming quarter leaves a lot to be desired. The forecasted $43.5 million to $44.5 million with $0.5 million to $1.5 million in net income was slightly below estimates and points to the rising costs and hit-or-miss nature associated with the gaming industry in China. Yes, KongZhong does have a decent amount of cash on hand, but does it deserve this recent rally? I'd say no.

If you're intent on investing in the Chinese gaming sector, why don't you give Perfect World (NASDAQ: PWRD) a deeper dive? This online game developer is set to grow revenue by 10% this year and 18% the following year, boasts around $300 million in net cash, pays out an annual dividend, and is valued more cheaply on a forward basis than KongZhong.

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:

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 has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.

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Arena Pharmaceuticals, Inc.
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