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 that 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.
Jazz Pharmaceuticals (NASDAQ:JAZZ)
Recent talk that Pfizer may be considering a bountiful bid of $100 billion for AstraZeneca should be exciting to mid-cap biopharmaceutical investors, as it suggests big pharma is itching for growth. One company that may find itself on the buy radar is Jazz Pharmaceuticals.
Jazz has just about everything a big pharmaceutical company could want in a purchase, including growing cash flow, orphan drugs, and a headquarters based in tax-friendly Ireland.
The real allure, though, is a high-growth portfolio comprised of internally innovated and acquired therapies in the psychiatric and oncologic fields. For 2013, Jazz's revenue soared 49% to $872.4 million, while its adjusted net income climbed nearly 34% to $388.3 million. This growth came on the heels of a 50% increase in sales of narcolepsy drug Xyrem and a 32% rise in sales of orphan therapy Erwinaze/Erwinase. This year, revenue is projected to crest the $1 billion mark, with top-line growth over the coming five years expected to remain in the double digits.
The advantage of Jazz's pipeline is that its orphan therapies such as Xyrem have incredible pricing power. Given the company's scarce competition, Jazz's cash flow is nearly guaranteed to grow for years to come. A potential suitor might find that to be very attractive, and would likely pay a hefty premium for such cash flow stability.
At roughly 14 times forward earnings, and with a hefty growth rate (PEG ratio currently below one), Jazz appears to be among the most perfectly suited buyout candidates. That, of course, doesn't mean anything will necessarily happen, but it's a stock I'd certainly suggest keeping your eyes on.
General Electric (NYSE:GE)
I know this is the "Thanks, Captain Obvious" pick of the week, but if you haven't been watching General Electric lately, you may be doing yourself a disservice.
You probably recall just how much GE struggled during the recession -- not because of a severe slowdown in operational segment orders, but because its financial arm was full of toxic loans. More than five years removed from the market bottom, General Electric has completely revamped its financial arm, and investors are once again able to focus on the core segments that matter, including energy, medical, and aerospace.
One of GE's biggest advantages is its diversity. A number of its products are situated right in the midst of a spending boom, including medical equipment for an aging baby boomer population and wind turbines for companies seeking innovative ways to produce energy with minimal greenhouse gas emissions. Similar to Jazz Pharmaceuticals, GE has a fairly predictable cash flow and the opportunity to grow globally whether the U.S. economy booms or stalls.
General Electric's first-quarter report last week offered evidence of that global growth, with adjusted earnings per share up 9% from the previous year. What's more, the company's order backlog stood at $245 billion and was up in each and every operational segment. While quarterly revenue growth was down 2% year over year, its industrial segment delivered 8% organic growth and growth markets (the equivalent of emerging markets) saw revenue to rise by 7%.
Long story short, GE's diversity both geographically and segment-wise allows investors to hedge their bets on a global recovery without fearing that one bad quarter would wipe out their investment. In case that's not enough, GE shareholders will collect a 3.3% annual yield in the process. With the housing bubble in the rearview mirror, I believe it's time to proclaim this conglomerate among the safest of blue-chip investments, and I would strongly suggest that income investors dig a bit deeper into the new GE.
Sears Holdings (NASDAQOTH:SHLDQ)
Shares of Sears Holdings have been on fire over the past couple sessions following word that board member Thomas Tisch had purchased 475,000 shares of stock, as well as a Forbes columnist's recommendation that Amazon.com (NASDAQ:AMZN) purchase the brick-and-mortar retailer. I believe both news-driven events could offer an opportunity for short-sellers to nab a bargain.
To address the first point (the insider purchase), directors have a keen understanding of a company's underlying business. When they purchase shares, it's a quiet way of informing investors that board members expect brighter skies ahead for the company.
However, consider for a moment that Sears has been unable to abate its downward revenue spiral for years. Comparable-store sales during the Christmas quarter fell by 7.8% at Sears' domestic locations and a miserable 5.1% at its Kmart locations. Its quarterly loss narrowed, but it still delivered a full-year loss of $1.4 billion. Sales have dipped every year since 2007, and the company has burned through cash in four straight years. That's hardly a reason for a director, or any shareholder for that matter, to buy into Sears.
The Forbes article, on the other and, notes that Amazon could use Sears and Kmart stores as distribution hubs and physical presences to widen its exposure, improve revenue, and reduce costs through synergies.
While the idea makes a little bit of sense from the physical-distribution standpoint, I can't see Sears selling itself without a hefty premium -- or Amazon wanting to dangle any substantial offer price in front of the retailer. Sears is a mess, and Amazon knows it. In what I consider the extremely unlikely event that Amazon would make a play for Sears, the e-commerce giant would have to understand that it could cost more to revamp Sears to its liking than the company is actually worth.
All told, Sears continues to look like a sinking ship, and short-sellers would be wise to keep this company high on their watchlist.
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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