Seeking Alpha
Value, registered investment advisor, growth at reasonable price, long only
Profile| Send Message|
( followers)  

Can This Stock Double Again?

I stumbled upon a stock back at the beginning of the year by the name of Santarus Inc. (NASDAQ:SNTS). The company develops immediate release proton pump inhibitor prescription products to treat gastrointestinal conditions. Maybe the symbol should be BURP. The company currently has five promising drugs in its pipeline.

I did not come upon the stock by accident. At the time, the stock possessed all of the criteria that I require before I consider or buy shares in the portfolios that I manage. To begin with, the stock was a domestic small-cap stock. This has been and continues to be the sweetest spot in the investing world.

As investors, we have various asset classes like equities, bonds, commodities, etc. all vying for our attention. In my book, it is absolutely vital to be invested in the right asset classes at any given point in time. Being in the right asset classes can really make or break our overall performance numbers. I am not a believer in Asset Allocation or so-called "buckets of money." This method of investing calls for keeping a fairly wide exposure to many asset classes and adjusting them according to one's age and risk tolerance, not asset class performance.

To me it was absolutely obvious that the bond market was standing on the railroad tracks just waiting for the fed freight train to come along and annihilate interest rates. I prefer to get off of the railroad tracks before the train comes, not after. By then it is too late, and the damage has been done. The time to get out of the way in the bond market was BEFORE the inevitable taper talk, not after.

I sent out dire warnings in my weekly newsletter months before the bond market got hit.

(click to enlarge)

(click to enlarge)

Treasuries are now down 11.1% year-to-date, while the S & P 500 (equities) is up 17.8%. This is a very large differential in asset class performance. Emerging markets have also been a terrible place to be invested in 2013. China (NYSEARCA:FXI) is in a bear market (-17.9% ytd) while our market is roaring to new highs.

Precious metals have also been a terrible asset class for more than one year. From $1800 per ounce down to $1200 per ounce is quite a dramatic drop. To not manage your asset class exposure along the way makes little sense to me. Sometimes I wonder if asset allocators are just plain lazy?

So this is now July of 2013, what are the best asset classes now? I track 45 of them on a daily basis and the same trends have pretty much been in place for about one year now. Here are my current top eight ranked asset classes:

Data from Best Stocks Now App

You will notice that the top eight all have something in common. They are domestic and they are equity related. There are not any bonds, commodities, or foreign stocks at the top. They have not been there for a long time. You have to examine your own portfolio and see how your assets are allocated right now. I DO NOT have any exposure to the bottom ranked asset classes:

Data from Best Stocks Now App

As you can see, being short the market or sitting in a lot of cash or short-term bonds has also been a very bad place to be. Markets are cyclical however, at some point in the future, these will be leading asset classes once again, but not now.

Santarus is obviously a domestic small-cap stock. In fact, I found out that it is right here in my backyard of San Diego, California. Not only was the stock in the right asset class, but it was also in the right sector of the market. I also rank the all of the sectors that are available to us on a daily basis. Here is how they currently stack up:

Data from Best Stocks Now App

Medical related sectors have led the market for well over one year now. Not only have I been heavily weighted in small-cap stocks, but I have also maintained out-sized exposure to the medical sector, especially drug and biotech stocks. This has helped carry the aggressive growth portfolio that I publish in my newsletter every week to a year-to-date gain of over 25%.

The best expression that I can use for the biotech sector over the last 18 months is: red-hot. Here is a chart of IBB, an exchange traded fund which tracks the sector:

(click to enlarge)

That chart is sure a lot better looking than treasuries and gold! Still a believer in asset allocation?

Santarus is a small-cap, domestic biotech stock. When I bought my shares in the stock back in January, the chart of the stock looked great. It still looks great. A healthy stock-chart is also a requirement that I have before I consider or purchase a stock. I would much rather buy into strength as opposed to weakness.

For this reason, I do not buy downtrends--sorry, gold. I also do not like sideways trends like Apple (NASDAQ:AAPL) is currently in. I avoid like the plague topping out trends that are beginning to roll over. For that reason, I sold my Apple back at $637 per share and have not been in it since. I am also hesitant to buy extended uptrends. It could be argued that Santarus is currently in an extended uptrend.

(click to enlarge)

That is where valuation comes into play. Can the earnings growth support higher prices?

(click to enlarge)

Data from Best Stocks Now App

In my eyes, this is still a fairly inexpensive stock. The shares are trading at a nice discount to its growth rate. The PEG ratio is currently 0.73. Furthermore, when I take next year's EPS estimate of $1.30 and extrapolate it out over the next five years, I come up with a target price of $43.50, which still represents some significant upside potential.

Santarus passed my valuation test back in January and it still passes it today. Just one more criteria that the stock has yet to meet, the performance test. I like stocks that are superior relative performers from a short, intermediate, and long-term basis:

(click to enlarge)

Data from Best Stocks Now App

As you can see from the above screenshot, the stock still passes the performance test with flying colors. It is one of the strongest stocks in the market today. It currently earns a momentum grade of "A+".

Even though this stock has more than doubled since my initial purchase, it still meets all of the criteria that I require in a stock. In fact the stock still has an overall rank of 44 out of the 3,394 stocks that rank on a daily basis. My rank is based on performance, valuation, safety, and the chart of the stock. I think that the shares have the potential to double again over time.

Clients of Gunderson Capital Mgt. Inc. remain long the stock.

(click to enlarge)

Source: Can This Stock Double Again?