4 Longs And 1 Short To Consider

by: Paulo Santos

In this article I will explain 4 long ideas and 1 short idea I am following myself as part of a broadly diversified portfolio. These are all rather speculative, aggressive, ideas. Each has its own associated thesis and I will indicate where further, more detailed, information can be gotten regarding them. So here we go.

Long NovaBay Pharmaceuticals (NYSEMKT:NBY)

NovaBay is a microcap with just $48 million in market capitalization.

Novabay is developing its NVC-422 compound for 3 different indications:

  • Impetigo and acne, phase IIB;
  • Viral conjunctivitis, in phase IIB;
  • Urinary catheter blockage and encrustation, in Phase II.

Novabay also already has NeutroPhase, a wound-clearing compound that's cleared for sale and whose commercialization is starting.

The main difficulty with a company like NBY, is to know whether it's a realistic company or simply one more microcap biotech fraud. That difficulty is cleared by the fact that NBY managed to get partnerships to develop its compounds, namely a partnership with Galderma for the development of NVC-422 in dermatology indications.

Given the credibility and very low market cap, NBY seems like a decent option on the success of one or several of the indications NBY is pursuing. A more thorough estimate of possible value can be read on Smith on Stocks's article on NBY: "NovaBay's Robust Clinical Pipeline Approaches Critical Clinical Trial Results in 2013".

Long Mannatech (NASDAQ:MTEX)

Mannatech is a controversial pick, if only for the checkered lawsuit-prone past it has. Mannatech sells nutraceuticals through a MLM scheme, so basically not much unlike Herbalife (NYSE:HLF). Nutraceuticals are always accompanied with dubious claims, if not from the companies, then from salesmen representing the companies. And MLM is always dubious by itself as well.

But the thing is, these companies sometimes make money. It wasn't the case with Mannatech until recently, because all of the past scandals had a large and still ongoing impact on its sales, but now things seem to be turning around. And since Mannatech trades for close to the cash it has on hand, any turnaround can mean a much higher stock price.

In short, the thesis on Mannatech rests in 3 legs: Mannatech is cheap, its earnings are turning around (showed profits in the last quarter) and finally, Mannatech launched a new product and selling preposition in this latest quarter which might stop the revenue bleeding. None of this seems to be in the share price yet so there might be a chance to profit in this very dubious company. A bit more detail can be had in my article "Mannatech: Interesting Micro Cap With Possible Catalysts".

Long Questcor Pharmaceuticals (QCOR)

Questcor is a biotech company whose main product, Acthar gel, is used in treatments of nephrotic syndrome, sclerosis relapses and infantile spasms. QCOR has been seeing strong growth and earnings, but back in September the news struck that Aetna was going to limit coverage of Acthar gel to only infantile spasms - which is the smallest market of those presently covered.

The market deeply punished QCOR on the assumption that other insurers might follow suit. Indeed, the main risk with QCOR right now is that such might happen, which intrinsically limits the long exposure one can have to the name. Other than that, QCOR got hit with a government probe regarding its marketing practices, which would constitute a minor risk.

What this has produced, is an equity that trades at 8.5 times 2012 estimated earnings while growing these earnings at more than 150% year-on-year and showing increased estimates over time. Basically, for QCOR to go up one just needs other insurers not to follow Aetna's lead.

For more detail, I'd recommend the following article: "Putting Questcor's Counter-Rally Into Perspective"

Long Finavera Wind Energy (FNVRF.PK)

Finavera Wind Energy is a Canadian microcap that's developing several wind energy parks.

The thesis here is simple. Finavera is in the middle of dealing to either sell its assets or the entire company. A conservative estimate puts Finavera's equity value significantly above where it trades at today, so this acquisition stands a good chance of realizing a higher value. An estimated valuation of Finavera's equity can be seen in this article: "Finavera Energy: The Prospects For A Takeout Are High".

Short Angie's List (NASDAQ:ANGI)

Angie's List runs a website which collects reviews on service providers, namely in the healthcare industry (dentists).

Angie's List is the only short in this list of equities. The thesis is simple: Angie's list is burning through the cash it has on hand, and there's no expectation that this situation is going to turn around before the cash is all gone, in spite of Angie's List still carrying a significant market capitalization ($640.6 million). Sooner or later we will either see equity dilution or liquidity fears, both of which would pound the equity lower. Angie's List is down to $65.5 million in cash and burning up to $20 million per quarter.

For a more detailed view, I would recommend the article "Angie's List Financials Show A Train Wreck In Progress".

Disclosure: I am long MTEX, QCOR, NBY. 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: I am also long Finavera in Canada (FVR.V) and short ANGI.