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 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 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.
When it comes to big pharma, AstraZeneca represents an intriguing opportunity for both short-sellers and long-term buy-and-hold optimists.
On one hand, AstraZeneca is facing a steep drop-off in sales due to existing product patent expirations over the next couple of years. AstraZeneca already lost its leading drug, Seroquel, for the treatment of schizophrenia in 2011. Even AstraZeneca's own management team has a bleak outlook over the interim, with the company expecting about half of its sales to be exposed to generic competition over the next five years. That alone, without any major wins, would give short sellers plenty of reason to jump on AstraZeneca.
But there's another side to this story as well. AstraZeneca has the potential to see major wins if SGLT2 inhibitor Forxiga, which it co-developed with Bristol-Myers Squibb (NYSE:BMY), is approved in the U.S. for the treatment of type 2 diabetes. This new class of type 2 diabetes drug has a favorable side effect of inducing weight loss, in contrast to DPP-4 inhibitors, which are weight-neutral, and previous-generation diabetes drugs, which can cause weight gain and exacerbate symptoms.
Perhaps even more exciting, AstraZeneca announced that its subsidiary MedImmune agreed to an investment and collaboration with ADC Therapeutics earlier this week. ADC Therapeutics is developing antibody-drug conjugate technology that works very similarly to what ImmunoGen and Seattle Genetics currently possess. It attaches a chemotherapy toxin onto an antibody and releases that toxin once it comes in contact with a signature protein from a targeted cancer cell. Although ADC's compounds are still in preclinical studies, ADC drugs are an exciting area of growth that could swing the pendulum back toward the optimists.
Grupo Simec (NYSEMKT:SIM)
If you were to examine Grupo Simec's earnings reports through the first six months of 2013, you'd probably be shocked to learn that I'm presenting this as a Watchlist candidate with upside potential. Through the first six months, Grupo Simec's total sales dropped 22%, gross profit fell 42%, and sales outside of Mexico plummeted 29%. All told, it's not been pretty for the manufacturer of special bar quality steel.
However, for as bad as things have been for Grupo Simec recently with SBQ steel prices down and Asian demand weaker than expected, we could be very close to an inflection point where its operations rebound to the upside. Specifically, Grupo Simec's opportunity lay in domestic and overseas auto sales. The company is a crucial suppliers of axles, hubs, and crankshafts, and its steel is also commonly used in emerging market regions for non-residential construction purposes – think bridge building and other construction projects.
I'll admit it's a bit difficult to understand why results have been as weak as they've been in recent months, but I don't believe its struggles will last. Europe's car demand has stabilized, China's GDP growth is pacing better than the country's original forecast of 7.5%, and steel supply has fallen from record levels, which should help improve pricing. With costs at Grupo Simec falling, you should expect margins to improve as well. At just 14 times forward earnings and 5.5 times cash flow, I'd certainly say this deserves a closer look for commodity enthusiasts.
Caesars Entertainment (NASDAQ:CZR)
I've got something in my back pocket for short-sellers as well with casino and resort company Caesars Entertainment.
If you had told me in November last year that Caesars would squeeze short-sellers and quintuple in price in less than a year, I'd have laughed hysterically. Unfortunately, I would have been utterly wrong, because that's exactly what Caesars did. Stabilizing gaming revenue in Las Vegas and Atlantic City has helped improve Caesars' outlook enough to keep short-sellers on the run. However, I don't think this sprint higher is meant to last.
What it comes down to is that Caesars is levered to the hilt and, at the moment, it can barely afford to cover its interest payments even with interest rates near a record low. The company is currently boasting $19.5 billion in net debt and needed to offer 10 million shares of common stock last month in order to boost its cash position since its operations aren't providing an adequate amount of cash flow. Blame it on Caesars' lack of push into Asian markets and its reliance on the relatively stagnant U.S. markets, but Caesars options short of doubling its share count are pretty minimal. Its debt makes it being bought out unimaginable and its highly levered balance sheet makes further borrowing for earnings accretive acquisitions almost impossible.
I would suggest looking at Caesars for an attractive short-sale entry point.
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 recommends ImmunoGen and Seattle Genetics. 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.