Looking for Laggards After the Latest Market Rally

With the S&P 500 SPDR (SPY) trading to the upside by more than 10% in the last five days on the prospects for a short-term

$15B rescue package

for U.S. auto makers to prevent rising unemployment rates from skyrocketing into double digits, Caraco Pharma (CPD) and Altria Group (MO) represent two laggards from defensive industry groups.

The accompanying one-month chart (click to enlarge) illustrates a highly correlated sell-off in Caraco and another small generic drug company, Hi-Tech Pharmacal (HITK), with HITK recently rallying to cut its one-month loss to 20% from a 45% decline at the low. However, the market value of Caraco has been cut in half over the past month and shares have failed to rally by any significant amount despite the overall market rally in the past five days.

Along with the

deep value parameters

for Caraco, and the potential to resolve a FDA warning letter, the bounce in HITK from its lows would translate into a share price in the mid-$5 range for Caraco in the near-term if they continue to follow each other's trading patterns.

Altria Group (MO) has lost one-sixth of its market value in the past month, resulting in a dividend yield of 8.5% as investors flock to more high-octane trades such as companies in the ETF Innovators (ETFI)

Global Maritime Transport Index

of 61 companies – with DryShips (DRYS) soaring by over 50% yesterday, but still losing about 90% of its market value in the past year on the back of declining commodity prices and the global economic slowdown.

For other potential opportunities in the

ETFI Emerging Biotech and Pharma Index

, below is a list of companies currently trading with a negative enterprise value, less than $10M in debt, less than 50M shares outstanding, and enough cash to fund operations for at least one year – providing a starting point for more research to determine if there is a reason to buy or if the market has it right by assigning no value to the following four companies:

1.) Achillion Pharma (ACHN):

Article on its HCV Pipeline

2.) Icagen (ICGN)

3.) Adolor (ADLR)

4.) Acadia Pharma (ACAD)

Comments

[Dan Jacome:]

HITK isnt just crushing sell side estimates, its rumored to be a takeout name, has been for a while, actually

2008 Dec 09 05:51 PM

[Mike Havrilla:]

Here is the rest of the article from my blog with a valuation comparison of HITK vs. CPD:

With shares of HITK trading up today by about 25% on record quarterly revenue of $25.1M and diluted net income of $1.1M or 9 cents per share, Caraco appears extremely undervalued at current levels of $3.50 per share. Caraco trades at the lowest price to sales ratio [PSR] in the generic drug industry at just 0.24X with a trailing price to earnings ratio [PE] of less than 4X, zero debt, $33.6M cash, and a market cap of $123M. As a comparison HITK trades at a PSR of 0.84X with an estimated forward PE of 16X, negligible debt, $16.1M cash, and a market cap of $71M.

2008 Dec 09 06:11 PM

[Austinh:]

Most people shouldn't be investing AT ALL, or if they it should be in the most solid companies possible like Wal-Mart. People need to invest as if they own the business and the whole business at that. If you don't understand how to read cash flow statement, balance sheets, income statements, and you don't understand how much cash the company has and where they are investing it and how well they are investing it with ratios like return on equity, return on invested capital, debt to equity ratio, quick ratio etc. etc. then you should NOT BE INVESTING VERY MUCH IT IS FOOLISH. IF you can't read a cash flow statement then please do not invest until you study.
Peace and good luck investing in the stock market
www.uinvest2.com

2008 Dec 14 12:53 AM