If you're thinking of investing in stocks under $5, even in mid- and large-cap companies, make sure you're getting a deal instead of low-value paper. As you might expect, a lot of cheap shares are cheap for a reason.
In this clip of Industry Focus: Healthcare, Motley Fool healthcare analyst Kristine Harjes and contributor Todd Campbell dish on a pair of inexpensive healthcare stocks that aren't looking so hot for 2016 and why investors should stay away from them.
A full transcript follows the video.
This podcast was recorded on Dec. 21, 2015. MannKind and Sanofi have since terminated their collaboration agreement.
Kristine Harjes: So, in light of the holiday season and also just because here at The Motley Fool we love a good pun, today's theme, if you picked up on it, is STOCKing stuffers. So, stocking stuffers are generally more inexpensive little gifts that you put in the stockings. They're supposed to be pretty cheap.
So, Todd and I decided on this theme, and we were like, "OK, what sort of companies should we consider here?" I did a pull on Capital IQ, trying to find companies with a share price of less than $5. And I came up with this list, I refined it a little bit because I didn't want any of these tiny little market cap stocks. So, I did $250,000 or above in market cap. And we're looking at this list, and we're like, "This is kind of all coal." Did anything stand out to you, Todd, in that list of the worst of the worst, in that list of priced-under-$5 stocks?
Todd Campbell: Yeah, you and I were both looking at it thinking, "Yeah, I think I would rather get coal than any of these in my stocking."
Harjes: At least coal's not going to go down in value. Hopefully.
Campbell: Right, I can always burn it if I need to.
Harjes: And put some light back in your life after all the losses on the rest of these stocks.
Campbell: Right. I think this is something that's really important to hammer home. We've talked about it before in the show. Usually, stocks get down, in a price basis, to these "cheap" levels, and people think they're cheap. They're really not. Oftentimes, stocks have low stock prices for a reason. Without a doubt, when we were looking through this list, we'd see names like MannKind (MNKD 2.08%). These are troubled companies that I don't think I'd recommend anyone wrapping and sticking under the tree or in the stocking this year.
Harjes: Yeah, MannKind is trading at about $1.50 a share right now. This is a company that we've covered before. They only continue to have more and more problems. The backstory on them is that they developed an inhalable insulin called Afrezza, which sounded really promising and ended up not being too promising due to a number of different problems, and the story only gets worse from there.
Campbell: Yeah. The drug had a circuitous path toward the FDA. Finally received approval last year, went on the market in February, there's a licensing deal with Sanofi, and Sanofi is the one who's out there repping it. A lot of people had high hopes for that deal, because Sanofi also markets the top-selling diabetes drug Lantus. So far, though, it just hasn't happened. $5.5 million in sales through 2.5 quarters.
Harjes: And this is a drug that was supposed to be a blockbuster, meaning a billion dollars.
Campbell: Yeah. The concept was pretty darn good -- allow people to no longer have to rely on injecting themselves, which is something that obviously makes some people wince, and instead deliver the insulin via an inhaler that works a lot like an asthma inhaler.
There were some advantages that Afrezza has, including a fast onset of action. But, when push came to shove, doctors so far, have found it too onerous to try and convince insurers to pay for it and be able to adhere to some of the things on the label, such as the regular lung function tasks. It's a sad situation, because it's one of those things where the drug looked really good, but it shows you that you can have a really interesting drug, but it doesn't necessarily mean that there's a market for it.
I think, in this case, they spent tons of money in bringing this to the market, and now trying to get it in front of people, and that cash is starting to run out. And you just have to wonder how long this company's going to remain around in its current form.
Harjes: Yeah, the CEO recently departed, Sanofi has the option of back out, and they very well might do that pretty soon.
Campbell: MannKind owes Sanofi a lot of money. MannKind is supposed to be eating up some portion of the losses, and MannKind doesn't have the money to pay Sanofi for those losses, so they've basically just been banking them, and it's basically like a loan that they're supposed to be paying interest on.
At some point, the company may look at it and say, "Either we're going to collect, and MannKind goes solvent, and we're going to take all their assets that they pledged as collateral. Or we're just going to wash our hands of the whole thing and walk away." So, yeah, that's a coal stock for 2016, not one that I would want to get underneath the tree.
Harjes: I agree. Another one that I think we'd both consider coal would be PDL BioPharma (PDLI), which right now is trading for $3.83 a share. So, again, you say, "Oh my gosh, that looks cheap." What stands out about them is that they pay a 16.5% dividend yield, which is the highest in healthcare, and really just an insane number. So, at first glance, you might see that and say, "Wow, this is a hidden gem right here."
Campbell: Back in the late '90s and early '00s, when I was really involved in the sell side and doing some other things, I remember PDL was the thing, because they had this fantastic technology, monoclonal antibody patents that were going to revolutionize how we treat various conditions. That indeed has happened. The problem is, patents only last a certain amount of time.
And PDL, basically, what they did is the licensed these patents out to people like Roche. Roche made billions off of this, paid a royalty back to PDLI. However, now those patents have expired, and they're just rolling through whatever is left in inventory. That means the revenue that has been coming in from these royalty streams is going to start drying up. I think investors have to recognize that when you see a stock trading at $3 or $4 that has a high dividend yield, there's probably a good likelihood that that dividend yield is not sustainable.
Harjes: So, what looks like it might be cheap clearly is not actually a good deal. And that's really the heart of it -- when you're looking for a bargain stock, you don't want to just look at just share price. It's, like, if you're looking to stuff your kids' stockings and you go to the dollar store and buy a bunch of stuff for $1, that's really worth well under that.
The flip side of that... an actual good bargain, like Black Friday sales or something where you pay $500 for a TV that's $2000. That's not going to fit in a stocking but still. Two very different types of cheap that we're talking about here.