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.
Durata Therapeutics (UNKNOWN:DRTX.DL)
Durata shareholders, your nail-biting campaign is officially over, and you can breathe a sigh of relief. As of late Friday afternoon, the Food and Drug Administration had approved Dalvance (previously known as dalbavancin) as a treatment for acute bacterial skin and skin structure infections, or ABSSSI.
Dalvance was shown In phase 3 clinical studies to be noninferior to vancomycin, with comparably fewer treatment-emergent adverse events compared to the vancomycin control group. What makes IV-injected Dalvance so unique is that it's just a two-dose regimen of 1000 milligrams over 30 minutes and then 500 mg for 30 minutes a week later. The current standard of treatment entails a twice-daily infusion. With regard to safety and convenience, Dalvance looks like a superior ABSSSI option.
Shares, however, moved lower on the news, likely because they had run up more than 100% over the past year following the drug's successful late-stage results. But is this a valid reason for the drop? Probably not, and biotech-savvy investors willing to add Durata to their watchlist and dig a bit deeper could find a lot of value here.
For example, annual peak sales estimates for Dalvance are expected to be north of $400 million. Generally speaking, biotech companies tend to trade at a premium to the peak sales of their lead drug, yet Durata is valued right around its peak sales estimate, leaving the company possibly undervalued.
Durata also could turn the corner to profitability as early as 2016, depending on how successfully it's able to launch Dalvance. Remember, just because a drug appears superior on paper doesn't mean a novice marketing staff will be successful in launching the product.
There's a lot for prospective investors to keep their eyes on here, but Durata could deliver solid returns for opportunistic but patient investors.
Bank of America (NYSE:BAC)
I generally prefer to buy well-liked companies, as this is the easiest way for a business to form an emotional bond with consumers and generate long-term customer loyalty. My ownership in Bank of America stock is perhaps my one exception to this rule.
Few banks are as universally despised as Bank of America, which has been implicated in a number of mortgage-related scandals since the housing bubble burst. I admit that as a shareholder in Bank of America for roughly two and a half years, I've literally lost track of how many settlements it has paid out.
The expectation would be that at some point Bank of America will near a turning point in which the number of settlements drops, allowing investors to instead focus on its deposit and loan growth. That idea was thwarted, though, by Bank of America's multibillion-dollar calculation flub that pulled its previously announced dividend increase and share buyback announcement off the table. I was certainly disappointed with the miscalculation, but I now believe the dip could represent an intriguing opportunity to reload.
For one, Bank of America is still trading well below its book value of $20.75. Consider this figure a bit fluid, because it's incredibly difficult to tell what's really on Bank of America's books from quarter to quarter. Its settlements and the ever-changing quality of its loan portfolio make valuing Bank of America somewhat challenging, but my general thesis is that Bank of America is still significantly undervalued.
Also, Bank of America's core banking business appears strong. Total period-end deposits hit a record $1.13 trillion in the first quarter and the company issued more than 1 million new credit cards in an effort to take advantage of the consumer credit boom amid historically low lending rates. Most important, the company's tier 1 ratio under Basel 3 remained at 9.3%, which would signify that it has more than enough capital to survive another major economic downturn. Even the bank's net interest margin improved six basis points to 2.36% from the year-ago quarter. This doesn't mean there isn't room for improvement (especially in the oversight department, ahem!), but the basic banking functions that will drive cash flow for Bank of America are still well intact.
With the bank possessing a single-digit forward P/E, investors with a long-term time horizon could stand to earn significant dividend income and share price appreciation by hanging on to Bank of America here.
Lastly, as I do every Watchlist Wednesday, we'll end with a potentially intriguing short-sale candidate for my fellow pessimists. This week I'll double back to the biotech sector and highlight clinical-stage fibrotic disease researcher InterMune.
Contrary to what you might expect from my perceived negativity on InterMune shares, the recent news surrounding its lead investigational drug, pirfenidone, which is being targeted at treating idiopathic pulmonary fibrosis, has been impressive. InterMune last week released additional late-stage data on pirfenidone (which is known as Esbriet in the EU where it's approved in a number of countries) that showed that 22.7% of pirfenidone-treated patients had no decline in forced vital capacity, or FVC, over 52 weeks compared to just 9.7% for the placebo group -- a 132.5% improvement. This follows the investigational drug meeting its primary endpoint in the study, with just 16.5% of pirfenidone-treated patients showing a meaningful decline in FVC compared to 31.8% for the placebo group by week 52.
This data would certainly suggest a better than 50-50 chance of pirfenidone being approved in the U.S. But just because pirfenidone has demonstrated success in trials doesn't mean the drug will be an instant success on pharmacy shelves.
With a current valuation of $4 billion, InterMune is being priced as if pirfenidone's launch in the U.S. will be flawless. However, InterMune's handling of Esbriet's launch in the EU has been anything but perfect. Only in recent months have Esbriet sales begun to take off. Further, it doesn't look as if InterMune will actually turn the corner to profitability until 2016 or beyond. Combine this with peak sales estimates that range between $600 million and $1 billion globally and you have a company likely trading at the very top of its would-be valuation range well before its lead drug is even approved.
Although the idea has been thrown around that InterMune could be a buyout candidate, I just don't see why any of its peers would consider paying a premium to an already rich valuation. If short-sellers are looking for an intriguing "buy the rumor, sell the news" stock, then InterMune might be the right 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 owns shares of Bank of America, but has no material interest in any other 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 Bank of America. 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.