The Blitz: Are These Stocks Presenting Upside?

by: Brian Nichols

Last week's "Blitz" created great discussions and produced questions that have been tremendous. This week I am looking at several stock-specific questions, while in previous weeks I have looked at diversification related topics. I will continue to take questions through Seeking Alpha,, or through Twitter in the week prior to future postings. This week's questions cover broad topics. Therefore, I hope you enjoy, learn, and at the end, feel free to chime in.

Click here to see last weeks "Blitz".

DRhino asks, "Is Galena Biopharma's (NASDAQ:GALE) acquisition of Abstral, good news or bad news for investors?"

Yes, I think it is great news! When I woke Monday morning to learn that Galena had acquired the fentanyl sublingual tablet for the management of breakthrough cancer pain, Abstral, I was shocked to see that the stock did not double.

Some bears may say that the use of fentanyl will be small, and that this will not be a success. However, consider the fact that the market potential is $400 million, and that it returned sales of $54 million in Europe alone (in 2012)! Furthermore, it is growing rapidly in Europe, having reached 29% of its potential market, and reporting growth of 42% in Q4 2012 compared to the year prior!

With European growth of 40%, $54 million in its first full-year of launch, and great penetration into the European market, how big is this news? I think it's massive! Consider the fact that last year ACADIA Pharmaceuticals (NASDAQ:ACAD), which is a highly promising company that I deeply respect, met both primary and secondary endpoints for its drug, pimavanserin, in a Phase 2 study. Now, the company has seen its market cap increase from $120 million to $650 million based on the potential approval of one product that has peak sales potential of about $300 million. Therefore, now that Galena has an approved product that could reach similar peak sales, and has a market cap of $130 million, with its biggest product still in Phase 3, I say it's worth at minimum one times peak sales, which may still be too cheap. In my opinion, this makes sense; if ACADIA is trading at 2.5 times peak sales without ever selling a product then Galena has to be worth at least one times peak sales with a proven product that is growing by 42% year-over-year!

With all things considered, I can't see how the acquisition is not good. I think it will help build the company's network and that it will prevent further dilution, which is evident by the company's decision to enter into non-dilutive financing. On a side note, I think Grant Zeng wrote a phenomenal article explaining the acquisition, and I urge you to read it here. My bottom line is that I think Maxim Group's price target of $6 (announced on Tuesday) is much more appropriate than its current price at $2.00, and that the company just went from an undervalued clinical stock to a deeply undervalued growth stock by basically bypassing clinical trials on a product with a very large market; this was a company-changing home run!

Seeking Alpha user, stmf45, asks, "Would STX be just as attractive without its yield?"

When you decide on an investment you are doing so with the collected information. It's all pieces of the puzzle that come together to determine whether or not you buy. In regards to Seagate Technologies (NASDAQ:STX), this is a company that is paying a forward dividend yield of 4.40%, after increasing its yield a whopping 19% last November. It's also a company that returned 95% of its operating cash flow in the form of share redemptions and dividends in the first half of fiscal 2013, making it among the most shareholder friendly companies in the entire market. To better explain, take a look at the chart below so that you can see just how much cash this company has returned to shareholders over the last four quarters.

Quarter/Fiscal Year 2012-2013

Cash to Shareholders (millions)

Operating Cash-Flow (millions)
















*Also includes early retirement of debt

The question of, "Would Seagate still be good without the dividend?" is a good one because much of Seagate's investment upside lies in the company's willingness to return cash.

While dividend investors look at the facts found on the chart above, you must also look at its fundamentals, because there are many bears for STX. Those who are bearish on STX have a negative outlook on the hard disk drive (HDD) industry. These drives are mostly used in PCs and laptops, which have seen a decline since the emergence of smartphones and tablets. However, these bears forget to address the company's presence in game consoles, supercomputers, medical imaging devices, home entertainment systems, DVRs, and even in the Cloud. HDDs are required to handle the large amount of storage that is kept in the Cloud. Thus, Seagate benefits from this transition-and according to its recent quarter, the company is creating next-generation hardware and software solutions for solid-state storage markets. This type of storage is used in a lot of smartphones and tablets, from companies such as OCZ Technology (NASDAQ:OCZ) and Fusion-IO (NYSE:FIO). However, the margins are low in the solid-state storage space, and Seagate is a company with margins over 20%. Hence, "next generation" most likely alludes to the company's goal to develop and enter the market while maintaining high margins.

As you can see, despite a slow PC/laptop market, this is a company with a lot of upside. And when I look at the stocks P/E ratio of less than 4.50 and its price/sales of 0.78, I believe that without a shadow-of-a-doubt that STX is a "buy". However, if you remove the $1.1 billion last quarter given back to shareholders, and its massive yield, then you can see that it's an undervalued company in a struggling industry. So, because of its value, I still think the stock is attractive, but not nearly to the same degree as a Seagate that returns over 100% of its cash flow to investors. user, Keahi, asks, "Do you use downside stops? If so, do you use larger stops when investing in volatile stocks?

Here's a question that is in response to the strategic investing section of my book. It plays off the emotion of investors, and I believe that it is absolutely crucial that investors use stop-loss orders in their investment strategy. The reason is simple: It's because we as humans are naturally illogical, and when faced with money-gaining or losing situations we almost can't help but to overreact.

Allow me to share a perfect example of overreaction/panic, and why using stop-loss orders are imperative. Santarus (NASDAQ:SNTS) is a company with approved products, a large pipeline, and is a company growing rapidly. Last quarter it grew sales 65%, drastically improved margins, and gave great guidance for the upcoming year. As a result, the stock has been on the uptrend; but on Monday when premarket losses were greater than 1% (thanks to the debacle in Cyprus) the stock, along with many others, opened with massive losses as investors panicked. The stock then fell to $15.80, but then immediately rose back to over $16.50, and then popped over $17.00 the following day.

Needless to say, there were a lot of people in deep regret after panicking on Monday, but those regrets could have been avoided if people would use stop-loss and limit orders to limit their involvement with a stock. I have talked about this often; the key is to set a stop-loss based on your risk tolerance right after you purchase a stock. The reason you do it after purchasing is because, if you have performed proper research, then you should be thinking clearer at that point compared to a volatile trading day. As for the second part of the question, you definitely adjust your stop-loss according to investments. If you buy a large cap high-yield stock then your investment will most likely be large and your downside risk will be smaller. However, if you buy a speculative biotechnology stock then your investment will be smaller, but your risk will be much greater. Therefore, you have to assess your own risk based on the size of the investment and the type of investment. user, redralph, asks, "Have you changed your outlook for LinkedIn now that it has traded higher?"

There is one thing that cannot change my outlook on a company, and that is the performance of its stock. However, since the number one goal of investing is to return more money than your investment, those who bought LinkedIn (NYSE:LNKD) last year were right; I was wrong.

It's probably good to start by saying that I never said that LinkedIn wasn't an efficient business, but I do believe that it is way too expensive and I am not sure that it can stand the test of time. In my opinion, a lasting social media company must have interaction, and on LinkedIn there is very little interaction. Personally, I have 892 connections, and of those connections I don't believe that I have ever commented on any post and I believe I can count on two hands how many people have commented on my posts since I joined. With the exception of endorsed skills and receiving random spam emails, there is too little of interaction; and while I appreciate the career-based purpose of the company, I don't believe it is worth $19 billion!

LinkedIn is currently trading with a trailing P/E ratio of 900.00 and more importantly a price/sales ratio of 19.55. Therefore, with a price/sales of almost 20, how much do investors expect this company to grow? If LinkedIn is going to become a company that stands the test of time, then sooner or later the valuation has to correct to reflect fundamentals, and this price/sales will retreat to a level around 5.00 (much like Google), and that's if the company can continue to grow. Accordingly, LinkedIn would need two years of 100% growth and flat trading to reach this level. But already growth is slowing. Allow me to explain.

The natural cycle of a company is that growth will slow year-over-year as it becomes larger. Last year, LinkedIn grew 86% (between 2011 and 2012). In the year prior, between 2010 and 2011, the company's growth was 115% year-over-year. With 115% growth in 2011, 86% growth in 2012, and then 81% growth in its most recent quarter, it is obvious that the company is commanding a larger piece of its market and that growth is slowing. As a result, it might need four or five years of flat returns to trade at a level that is consistent with market leaders such as Google.

Instead of LinkedIn, I think Facebook (NASDAQ:FB) is actually more attractive. While I believe both are expensive, Facebook's price/sales of 12.40 is much more attractive and, believe it or not, Facebook, with a much larger market, may actually be increasing its growth. For example, last year it grew revenue by 37% over 2011. However, in its most recent quarter the company grew revenue by 40%, and just recently launched new services such as Graph Search Beta, Gifts, etc., which could all boost sales. Furthermore, using market caps compared to users, each user on Facebook is valued at $59.00 compared to LinkedIn's $93.00. I wonder how much larger a premium can the market place on LinkedIn, and how much more can it monetize its members? With Facebook, I see a company that is just now tapping into its potential growth, and although expensive, I would pay more for the upside potential, but not for LinkedIn.


If you have a question about any of the stocks I follow, a market-related question, or would like my opinion on a specific topic, please feel free to send me an email or provide feedback in the comments section below. The goal of this series is to provide analysis from the previous week, or to talk about market-related events that might change the direction of the market. I hope you enjoyed this, found it beneficial, and that you will keep the questions coming.

Disclosure: I am long GALE, STX. 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.