I follow quite a lot of companies, so the usefulness of a watchlist for 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.
Unless you've been hiding under a rock for the past couple of years, you're probably familiar with SodaStream, the company that developed an in-home carbonated-beverage system that allows consumers to make their own soda. It's a nice alternative to purchasing carbonated beverages from the big two multinationals, Coca-Cola (NYSE:KO) and PepsiCo, and it boosts the convenience factor for a consumer increasingly reluctant to leave his or her house.
Yet for the second time in a span of three years SodaStream's latest quarterly results signaled weakness ahead. In spite of a 26% increase in Q4 revenue, SodaStream reported a 45% decline in EBITDA as adjusted EPS fell by nearly two-thirds to $0.16 from $0.45. The company cited weaker sales of its CO2 refill packages and higher sales of its carbonated beverage system as the reasons why its gross margin dipped 10.6% to 42.4% and caused its EPS to badly miss the mark.
Still, SodaStream's "ugly" quarter should be put into perspective -- and that perspective is that things aren't nearly as bad as they appear.
To begin with, SodaStream's fourth-quarter results always highlight an unfavorable product mix, with more lower-margin beverage systems being sold for the holidays while CO2 refills fall. Investors seem to overreact to this every year, forgetting that SodaStream makes the bulk of its profits from these refill packets throughout the other three quarters.
The collaboration between Coca-Cola and Keurig Green Mountain is also being blown out of proportion as a SodaStream killer. If anything it has demonstrated that SodaStream is a disruptive force in the carbonated-beverage space, one forcing much larger beverage companies like Coke to think outside the box.
With double-digit growth potential and a forward P/E of 18, I believe SodaStream is a disruptive growth stock that investors should have on their watchlists.
Cisco Systems (NASDAQ:CSCO)
OK, so I'm not exactly straying from the herd by telling you to get Cisco Systems on your watchlist, but income-seeking investors and those who prefer less risky investments should seriously consider giving this networking giant a closer look.
Cisco Systems is in the midst of an enormous turnaround effort geared at transforming the networking giant from a supplier of static PC networking devices to a supplier of next-generation cloud-based networks.
On paper Cisco Systems looks like a no-brainer. Businesses from all industries are realizing the operational improvements and cost-efficiencies associated with moving their data into the cloud, and are throwing billions at this relatively young phenomenon. What this means for Cisco is a moat of potential opportunity to develop the hardware that will fuel these enormous data centers.
Of course, this won't happen at the snap of a finger. A number of Cisco's largest corporate customers are dealing with a myriad of external concerns, which is pressuring demand for its products. Note, this doesn't mean Cisco isn't raking in billions in free cash flow annually; but it does mean that Cisco's top-line could contract as much as 5% in fiscal 2014.
In response Cisco has been cutting costs in a big way. Last year Cisco announced that it would be laying off 4,000 employees, which was on top of close to 8,000 employees over the previous two years combined. Coupled with improved efficiency this helps Cisco's margins and boosts EPS, but it can also make it difficult for the company to grow its top-line.
Yet when all is said and done Cisco can crank out profits with the best of the tech sector. In fiscal 2013 it generated a record $11.7 billion in free cash flow, which will allow it to continue to boost EPS through share buybacks and dividend increases. With a forward P/E of just 10 and a current yield of 3.5%, Cisco is looking mighty attractive if you ask me.
Opko Health (NASDAQ:OPK)
Finally, we have hybrid diagnostic and pharmaceutical product developer Opko Health, which offers a great degree of promise thanks to a pipeline that spans a number of indications, but also looks as if its valuation may be way ahead of its potential.
On the bright side Opko has delivered a number of positives in recent months based on its pipeline. For instance rolapitant, an experimental therapy for the prevention of chemotherapy-induced nausea & vomiting, which it licensed to Tesaro (NASDAQ:TSRO) in 2010, met its primary endpoint in both of its phase 3 trials. As part of the deal when it was signed, Opko is eligible to receive up to $121 million in milestone payments as well as share in profits from commercialization in Japan. In addition, Opko has the option to market rolapitant in Latin America. Opko is also in the process of conducting a phase 3 trial of lead drug rayaldy for patients with stage 3 or 4 chronic kidney disease, secondary hyperparathyroidism, and vitamin D insufficiency, which has blockbuster potential.
So while there are good things happening with aspects of Opko's development process, the underlying fundamentals right now are downright ugly. Despite its revenue doubling in 2013 to $96.5 million, the company's current valuation of $3.9 billion implies a price-to-sales of about 40! Meanwhile, Opko burned through $58.2 million in cash as its loss more than tripled to $114.8 million for the full year from $31.3 million in the previous year.
Fundamentals aside, the real concern I have is that investors have already factored in stellar results from its late-stage rayaldy trial. I'm not implying that rayaldy hasn't been demonstrated as safe or effective, because its phase 2 trial did meet its primary endpoint. However, until we know just how effective rayaldy is based on its top-line phase 3 results -- due next quarter -- it's probably not wise to push Opko's valuation near $4 billion. Call me a stickler, but I'd prefer to count my chickens after they've hatched.
Long story short, we have a company with a few high profile potential blockbusters, but a valuation that would imply success is a near given. That looks like a formula which implies more downside than upside potential, making it a good watchlist add for risk-taking short-sellers.
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:
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, and recommends Coca-Cola, PepsiCo, and SodaStream. It also recommends Cisco Systems and Keurig Green Mountain, and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. 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.