Barron's, the widely read and longtime industry standard, had several interesting long and short ideas in this week's magazine. As stories in this weekly can often move the shares of the companies covered in the coming trading week; it is worthwhile to peruse the issue for ideas of what to buy and what to avoid. Here is a synopsis of this week's Barron's Picks and Pans with commentary added:
Let's start with possible long ideas. Small biotech (Less than $1B market capitalization) Exact Biosciences (NASDAQ:EXAS) gets a nod this weekend. The FDA just approved its test for colon cancer. This cancer is the number #2 killer among various forms of cancer and is eminently treatable if caught soon enough.
Exact's new test does a much better job detecting this form of cancer than existing tests and the company should be able to charge ~$300 a test. There are ten million of these tests currently done in the United States on an annual basis. This should increase in the coming years due to demographics and possibly due to the Affordable Care Act, if it turns out to cover a substantial amount of currently uninsured individuals.
Barron's calls out that 30% of the shares are currently short which could enable a short squeeze. The Barron's piece reckons Exact Sciences could snare a 30% market share of existing tests which should equate to $3 a share in earnings by 2020. This does not include any overseas sales. Given recent approval and small market capitalization, company could be a solid acquisition for a bigger player. The shares go for just over $13 a share. This could make an interesting position for speculative investors.
The magazine also calls out a real estate investment trust (REIT) I own in my income portfolio, slating it for a 25% total return including dividends. The REIT is DDR Corp. (NYSE:DDR), an owner and operator of various shopping malls in the United States and Puerto Rico. The company had a near death experience during the financial crisis but has rebounded sharply since then.
The Barron's piece is positive on the company recently selling off its Brazilian properties given the challenges in that emerging market. The shares have been held down by its Puerto Rico operations (13% of operating income) but should be bolstered by that island's ability to recently float a large bond offering.
DDR is selling at more than 10% discount to its net asset value and at a discount to other shopping mall REITs. This discount should narrow as FFO (Funds from Operations) starts to grow again. An income investor gets paid a 3.8% dividend yield while awaiting for this to occur.
Facebook (NASDAQ:FB) heads the "Pan" list in this week's magazine. Barron's takes the social media giant to the woodshed twice in this week's edition (I, II). First, it states investors are too rosy in respect to how much of global online ad spending Facebook can capture. The article speculates that Facebook would have to capture almost a third of online spending to justify its current valuation. The company has just over 10% of this spending currently.
Another article takes Facebook to task for paying $19B for Whatsapp and over $2B for Oculus recently, neither of which has revenues let alone profits. This also compares to what looks like the bargain price of $1B the company paid for Instagram which was easily integrated into the company's business model.
Like most momentum stocks, Facebook has had a substantial pullback over the past few weeks. The shares are down more than 15% from recent highs. However, the shares have still tripled over the post IPO lows over the past year and a half. The stock still goes for 36x projected FY2015's EPS. I would avoid the shares at these levels. The shares might get interesting if the stock pulls back to the $50 a share level.
The magazine continues its negative outlook on highflying Tesla Motors (NASDAQ:TSLA). They might have the timing right this time as the shares have fallen some 20% from its recent highs. This week's article postulates that in order to justify Tesla's current market valuation, the company must (a) Find a partner to build a $5B lithium battery "gigafactory", (b) Take 30% off the cost of current battery costs and (c) sell 500,000 vehicles annually five years hence.
It is that last goal that I think is the most challenging. The company should face increasing competition from major automakers in the electric vehicle space in coming years. In addition, electric vehicle tax credits should diminish or disappear as other carmakers see their electric vehicles sales grow. This is important as this is a core part of Tesla's current margins and profits.
Even after the stock's recent pullback, the shares go for over 55x FY2015's consensus EPS. Investors are also valuing the company by over $1mm per vehicle Tesla delivered in 2013. Extremely optimistic in my opinion and I would continue to avoid the shares even after their sharp pullback.
Disclosure: I am long DDR. 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.