As investors we seek answers for everything affecting the price action of the stocks we own. When a stock trends higher on little news we search for technical indicators that could've explained its rally. When a stock falls we do the same, or when it does something really off-the-wall we go into deep head-scratching mode in an attempt to find answers. But sometimes, there are trends that can't be explained, and as a fundamental investor, you have to rely on the theories that have been successful in the past. You must remember that despite short interest, selling pressure, illogical trends, etc. that if a company does well, its stock will usually follow. Furthermore, these illogical trends are almost always moments of opportunity, but can no doubt be frustrating. With that being said, I am looking at three stocks with unusual trends, that appear undervalued, and with significant company progress that should appreciate with gains in time.
In regards to Questcor Pharmaceuticals (QCOR), we all know why it lost 50% of its value back in September: It was under a short-attack, lost coverage from Aetna, and a government investigation ensued into the company all of which were announced in a short time span. It was a rough month for the biotechnology company, a company with operations that are reliant upon the success of just one product, Acthar Gel.
As a result of Questcor's 50% loss in the last two months, the company is now trading with a forward P/E ratio of just 6.20. The company sports very attractive margins, no debt, a strong cash position of more than $100 million, and an investor-friendly executive staff. Recently, following the allegations against the company, Questcor announced a quarterly cash dividend (currently a 3.20% annual yield) and a near 4 million increase to its original 3.2 million share buyback program. To most this would be a major sign of confidence or reassurance, but the stock is yet to appreciate and exceed its current resistance above $27.00.
At $26.39 a share, Questcor remains an undervalued company based on its current growth. The company has reported sales of $424.30 million in the last twelve months, and during its last quarter grew sales by 134.60%. Therefore, the company is showing no signs of slowed growth despite approaching the half-billion dollar mark with just one product. The truth is that no one really knows the true potential of Acthar Gel. We only know that it's growing fast and that all indicators suggest that the company has significant growth ahead.
According to Questcor, the loss of coverage from Aetna only affects 5% of its total sales, but the real question is what will happen with the investigation? Is the company inappropriately or simply very aggressively marketing its only product? This is a company that is buying back shares aggressively, trading illogically, and has been investor-friendly throughout this entire process. Based on current fundamentals alone, this is a cheap stock, one that should present great upside potential over the next twelve months, pending any further findings from the investigation.
Over the last two years, I have covered Spectrum Pharmaceuticals (NASDAQ:SPPI) more so than any other company, and there has never been a stock more frustrating for me to own. The reason it is so frustrating to own is because there are no logical reasons for its constant inability to appreciate with gains that reflect fundamental performance. The company says all the right things, posts incredible growth, continues to prove its doubters wrong, but remains one of the most shorted stocks in the industry.
In my opinion, Spectrum has lost 23% of its value in 2012 because of executive insider actions. Ealier this month I wrote about the insider selling, including 14 total sells in the last three months totaling 384,400 shares. We don't know why the company's CEO has been selling shares, some say its because of his age (near 70 years old) and some say it was a pre-set plan to sell his shares. Either way it has created doubt, and left some wondering if it's a sign of things to come due to his profit taking at such depressed prices.
The company continues to tell a good story, but a fragile stock does not respond well to strong insider selling, regardless of the reasons. Spectrum is now trading with a one-year loss for the first time in two years, of 7%, yet remains one of the more consistent fundamental performers. However, the stock has recently found some stability thanks to a rarely seen insider buy from its CFO, of 10,000 shares.
Since I have been following the stock, there have been bears that doubt the company, and have said that generic pressure would crush its top line, yet the company continues to prove them wrong. The doubters have often added that Spectrum's strategy of acquiring products cheap and developing successful products will not work; yet Spectrum has three approved products. Those same doubters are now saying that sales will be flat in 2012, but judging by recent history, they'll probably be proved wrong.
The company's trailing P/E ratio of 7.36 is considerably cheap for a company growing its top line by 35.3%, and has a large pipeline of late-stage products. Spectrum operates with the concept of synergy. It develops products that can be marketed by the same sales team and then strategically attacks the market. The company's lead product, Fusilev, may be approaching a top-line limit, but the company is working to eliminate regulatory hurdles for Zevalin, and should be able to double the sales from its acquisition of Allos. Overall this is a great company, trading very cheap, that operates efficiently, but trades illogically most likely thanks to insider selling. Unlike Questcor, there aren't any major looming questions surrounding its future, and the company is diversified enough to provide security for investors at its current price. Personally, I have given up hope of trying to call the stock's short-term direction, but it is showing stability at its current price. Hopefully, there might just be brighter days ahead for frustrated Spectrum longs such as myself, if the company's CEO will establish some support for his stock by holding his shares.
When you think of Deloitte's list for fastest growing technology companies, you most likely would not think of NeoStem (NBS), much less put the company in the top ten. But in reality, it is ranked number seven nationally. This is a company that has returned a gain of just 12% over the last twelve months, 82% in the last six months, but is growing rapidly with an even brighter future ahead.
The $100 million company has had a very busy three months, and has traded flat, which is why it made this list. During the last three months, the company has sold its large Chinese generic pharmacy, announced promising data for two clinical candidates, received a new grant to move forward with its VSEL Technology product, and has redeemed its Series E Preferred stock which ultimately creates support for investors. Surprisingly, the stock has remained flat. However, based on the rules of biotechnology (and what drives a stock in the clinical phase), it should be trading over $1.00-and regardless of short-term direction, it will eventually find its way.
An investment in cell therapy may be scary to some, especially seeing as how there are no approved cell therapy products in the U.S. However, NeoStem is developing its products with morality in mind, by not using human embryos. The company announced data in regard to its lead product, AMR-001, in which it noted that no patient who received more than ten million cells had a deterioration of heart muscle function. Meanwhile at least 30% of patients who received less than ten million cells saw deterioration. The company also announced that its VSEL Technology created bone from cells in mice, and will now be progressing into human trials. Some have labeled the company's VSEL Technology to be a true medical breakthrough in medicine if proven effective, and this piece of data was an early indication of success. Thanks to the sale of the company's generic pharmacy, it can now properly focus on and develop this technology and move forward with other ventures. The company had nearly $8 million on its balance sheet at quarter end, but earned an additional $12.3 million with the sale of its generic pharmacy, including the elimination of more than $30 million in debt. As a result, the company has the cash and strength on its balance sheet available to make big moves in the development of its products.
The diversified company is a play in cell therapy as it has a presence in several industries as a contract manufacturing organization (CMO), and is a clinical-stage biotech company. It's no doubt a confusing company. However, despite being a clinical-phase company, NeoStem saw sales growth of 104% with revenue of $4.4 million during its most recent quarter. This is a result of its 65,000 square foot manufacturing business, which has numerous clients, including three late-stage clients that could see approvals in the near future. In a recent interview with the company's CEO, Dr. Robin Smith used 10% as a figure for potential revenue from this segment, or $5 billion. Then, you add the sales potential of AMR-001, or $1 billion, and its VSEL Technology, and you have a company that is trading at a deep discount at an illogical market capitalization.
Disclosure: I am long NBS, QCOR, SPPI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The opinions expressed in this article are that of the author, are intended for informational purposes only, and should not be used in making any investment decisions.