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 with 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 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.
Exelixis (EXEL 0.52%)
The tricky thing with oncology-focused biopharmaceutical companies is that you can occasionally enter lull periods where clinical trials are being run and data is hard to come by. That pretty much sums up 2013 for Exelixis, which was primarily on autopilot throughout the year in anticipation of late-stage data from its dual COMET trials utilizing Cometriq (cabozantinib) for the treatment of metastatic castration-resistant prostate cancer, or mCRPC, in 2014.
There's obviously a lot of excitement surrounding Cometriq given how much of an improvement it provided to metastatic medullary thyroid cancer (MTC) patients. In the study that led to Cometriq's approval in the U.S., Cometriq improved progression-free survival to 11.2 months from just four months for the control arm. With Cometriq delivering a near-tripling in progression-free survival over AstraZeneca's (AZN +0.00%) Caprelsa, the only other FDA-approved drug for MTC, it's safe to assume that Cometriq will take nearly all of the U.S.-based market share away from AstraZeneca.
In 2014, the two factors that will really build the Exelixis excitement are the potential for Cometriq's approval in the EU -- which would double its target number of patients and thus its revenue potential -- and the possibility of boosting its indications for Cometriq with the mCRPC indication. The initial data on Cometriq in phase 2 studies was solid but not overwhelming: Median overall survival was 10.8 months, which deserves further examination in a larger phase 3 examination. However, it would ultimately be a weaker median overall survival than what existing therapies offer, were it approved right now based on its mid-stage data.
My contention has long been that Cometriq's MTC improvement was too substantial not to be successful in at least a few other indications. This is the year we're going to find out exactly how useful Cometriq might be! I'm certainly inclined to believe that Exelixis has considerably more upside than downside at this point, but its COMET studies will tell the tale of how the company ultimately performs this year.
Seadrill (SDRL +0.00%)
Speaking of impending battles that are likely to be settled in 2014, we have deepwater driller Seadrill butting heads against practically every larger deepsea driller in the sector with its move to flood the market with new drilling rigs over the coming years.
On one hand, Seadrill sees a world of opportunity to take advantage of recovering assets that just decades ago were practically impossible to get. With worldwide oil and natural-gas prices remaining encouragingly high (or at least high enough to encourage recovery) and the Obama administration pushing for American energy independence domestically, Seadrill anticipates that demand in the Gulf of Mexico and around the world will easily absorb new rigs in the coming years, with the potential for a rig shortage by 2020, according to Foolish contributor Mark Holder.
The bear case, however, points to the eerie similarities between the deepsea drilling sector and the dry bulk shipping sector, which is currently mired in a deep recession after rivals flooded the market with new tankers. The fear of charter dayrates plummeting and rigs being unable to find work has actually come true, at least partially, with Transocean (RIG 0.15%) noting in November that one-third of its rigs were currently looking for work in 2014.
So who's right? I'm more inclined to think there's more upside in deepsea drillers than downside as the transition to new rigs and the retirement of old drilling rigs can occur more swiftly than the transition we're witnessing in the dry bulk sector. In addition, it's not as if energy demand is likely to see any major negative shifts unless oil and gas prices drop considerably. This means Seadrill's double-digit yield and potentially single-digit forward P/E could represent an intriguing opportunity for investors willing to hold for five or more years.
Zynga (ZNGA +0.00%)
I really, really thought we had gotten past touting "less bad" results in Zynga by now -- apparently I was wrong.
On Friday, Zynga shares flew after the company reported what can't be seen as anything other than dismal fourth-quarter results. For the quarter in question, revenue tumbled 43% to $176.4 million and EBITDA was practically nonexistent at just $2.6 million from $45 million in the year-ago period.
However, Zynga shares caught fire after it was revealed that its adjusted loss was halved to just $0.03 per share, that it would be laying off 15% of its workforce in order to save $33 million to $35 million annually, and that it would purchase privately held NaturalMotion for $527 million.
In other words, here we go again with Zynga trying to remedy losses by letting go of employees and failing to drive organic growth. Instead, Zynga is turning toward buying growth, which runs a high risk of being a bad move in the online-gaming sector, as gamers' interests can change on a dime (ahem, OMGPOP!).
What we have with Zynga is a lack of genuine catalysts. With the exception of Farmville, what has Zynga really brought to the table recently? It's not as if it holds key business relationships or offers any differentiable "must-have" gaming titles from the rest of the online game sector. Truly, I see nothing special about it, other than the fact that it has rallied nearly 50% despite reporting an awful decline in revenue. I'd suggest that if Zynga heads much higher, it could make for an intriguing short-sale idea.
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:
