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.
Honda Motor (NYSE:HMC)
For obvious reasons, domestic automakers get a lot of attention in the U.S., but foreign competitor Honda may now be the most attractive value of them all.
Without question it's been a rough start to the new year for Honda in the U.S. Total unit sales are down 3.6% so far in 2014, as its best-selling Accord has seen year-to-date sales decline by 13.6%. Some of this decline could be linked to the exceptionally cold weather that marked the first two months of the year, but it also could signify that one of Honda's biggest comparative advantages, fuel efficiency, has narrowed due to hybrid technology innovations and more fuel-efficient engines from a number of its peers.
Despite these concerns, and its weaker market share in the U.S., Honda's no-nonsense line of cars should continue to sell well with cost-conscious consumers in the U.S. and China. The potential for rising lending rates in the U.S. could push consumers toward less expensive, fuel-efficient cars, a market in which few automakers can rival Honda. Similarly, growth in China's middle class should provide an opportunity for all automakers.
Honda's valuation makes a lot of sense at just eight times forward earnings, considering the strength of its third-quarter report issued at the end of January. Honda reported a more-than-doubling in net income after its alternate businesses performed extremely well. Motorcycle revenue was up 30%, power product revenue jumped 9%, and its financial-services segment added 29%. With the company driving steadily toward long-term profits, auto-savvy investors searching for a turnaround candidate should give Honda a look.
Agios Pharmaceuticals (NASDAQ:AGIO)
When it comes to Agios Pharmaceuticals, I know I've been violating every rule of common sense regarding biotech stocks over the past couple of days. However, I believe Agios' early-stage results for AG-221 are simply too impressive to ignore.
Agios is a clinical-stage biopharmaceutical company focused on select inhibitors and enzymes, which it believes will help it develop effective cancer therapies. On Monday, the company reported initial data from its phase 1 study for AG-221, an oral inhibitor of IDH2 mutations that the company anticipates will help fight blood cancers.
AG-221's initial results showed that the experimental therapy was both safe and tolerable, which is the common goal of initial clinical studies. However, clinical activity from its study also showed that six of seven evaluable patients experienced an objective response to the therapy. Three patients in the initial cohort had a complete clinical remission. Let me remind investors that a complete clinical remission in any type of blood cancer is pretty rare, so the fact that this occurred in three of seven evaluable patients, including those at the lowest dose, is incredibly encouraging. Furthermore, Agios hasn't even reached the maximum tolerated dose yet, so the drug's effectiveness could actually improve.
Of course, these results should be put into perspective: Early-stage results contain a small patient pool, and a larger cohort can lead to far different results. Agios is also burning through cash, even with a partnership that includes collaboration on AG-221. Although it has enough cash to last at least three, maybe four years, I estimate that Agios will burn through approximately $40 million in cash annually. In short, Agios is losing money; investors should keep that in the back of their minds.
Still, I consider AG-221 to be a potentially exciting blood-cancer therapy and believe that alone should give you reason to closely monitor Agios.
As per the norm, I have a company that short-sellers may want to get on their own watchlists. This week that company is weight control center operator and franchisee Medifast.
Shares of Medifast have soared over the past two years as consumers embraced healthier eating habits and flocked to its weight loss centers. Medifast has done its best to reduce its cost structure and position itself for long-term success. In 2013, for example, Medifast increased its net income by $8.1 million to $24 million despite flat revenue.
However, there are a number of concerns that I believe investors have ignored that could make Medifast the perfect short-sale opportunity.
To start, Medifast's business is naturally cyclical, and customer loyalty is practically nonexistent. In other words, whenever economic growth slows down, weight control centers and healthy-eating subscription food plans are often among the first things to get tossed out of consumers' budgets. The end result is that Medifast and its peers have very little pricing power and are instead forced to discount their services and products in order to draw in consumers. That's a formula for stagnant long-term margins, as there's only so much a company can do on the cost-cutting front.
Second, where's the top-line growth? Medifast delivered only a $180,000 increase in revenue for 2013, due in part to a disconcerting 6% decrease in average revenue per health coach in the fourth quarter. This service-style revenue provides Medifast some of its beefiest margins, so its decline bodes poorly for the company's immediate future.
With Medifast's revenue is again expected to be flat in 2014, and there's little benefit left to be realized from cost-cutting, it could be time to part ways with this highly cyclical company.
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.
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