The S&P 500 ($SPX) dropped 2.6% and the broader Russell 3000 ($RUA) dropped 2.7% on Tuesday, August 2nd, 2011. Of the 4,600 stocks that were tracked, the top 25 losers that closed above $1 at market-close on July 28th were analyzed to determine if they would continue going down, or if they would reverse their moves going forward. The following are the best buy and sell ideas based on that analysis:
Buy Ariad Pharmaceuticals Inc. (ARIA): ARIA is engaged in the development of drugs that treat aggressive and advanced-stage cancer by regulating cell signaling with small molecules, and it is also developing small-molecule drugs that block signal transduction pathways in cells responsible for osteoporosis, and immune and inflammatory diseases. Its shares fell 10.1% on Tuesday, and they are up 113% YTD.
ARIA has three drugs in various stages of development, Ponatinib in phase two development for chronic myeloid leukemia and phase one for advanced acute myeloid leukemia; Ridaforolimus or Rida in phase three development for soft tissue or bone sarcomas and in phase one and phase two trials against various other cancers; and AP26113 in preclinical stage for lung cancer, lymphoma and neuroblastoma. The stock appears fairly expensive on the surface, given that it is in the development stage with no meaningful revenues and losses running at the rate of more than $100 million on an annual basis. However, a closer examination of the stories behind each of these drugs currently under development gives an insight into the promise that each holds.
Rida is partnered with Merck (MRK), who just last week submitted a marketing authorization application for ridaforolimus with the European Medicines Agency, and marks the start of a round of global submissions that also includes regulatory agencies in the U.S., Canada, and Asia-Pacific among others. If approved, Rida has the potential to generate strong cash flow to finance the other two products currently under development as it would be the first molecularly targeted drug for the treatment of patients with metastatic sarcomas and the first sarcoma drug to be approved for use in the maintenance setting. Furthermore, Ponatinib is also well ahead in its development, has blockbuster potential, and could very well be approved by the end of 2012. Lastly, but not in the least, their AP26113 candidate, although in the earliest stage of all three products in their pipeline, may have the largest potential. It is similar to Pfizer’s (PFE) ALK inhibitor crizotinib that generated a lot of excitement before it was discovered that ALK mutations made the cancer more resistant to the drug. However, ARIA’s AP26113 candidate inhibits the ALK mutations and thereby overcomes the limitation of crizotinib, and may indeed have huge blockbuster potential as it moves ahead in the development pipeline.
We are not favorites in playing the "roulette wheel" of early stage biotech companies in advance of FDA decisions, but within that context, we believe that the ARIA story with two promising late-stage candidates and one promising early-stage candidate is promising. The stock has pulled back recently in what appears to be more of a technical and consolidation pull-back after it hit its 2004 highs in the $13-$14, and may offer an attractive buy opportunity in the $8-$10 range for those comfortable with the risk of investing in early stage biotech companies. The mean analyst target is $14, with a high of $16; and of the eight analysts that cover ARIA, seven rate it at buy/strong buy and one rates it at hold.
Sell Miller Energy Resource (MILL): MILL is engaged in exploration, production and drilling of oil and natural gas in the U.S. It primarily holds interests in approximately 600,000 lease acres located in the Cook Inlet area of Alaska; and 54,500 acres of lease holdings located in the Appalachian Basin, Tennessee. Its shares fell another 14.7% yesterday, in addition to the steep 56% plunge since the negative Street Sweeper article last Thursday that accused the company, among other things, of over-inflating the value of its assets and also cast negative doubts on the ethics of senior management at the company. We issued a sell on MILL in our daily coverage of last Thursday’s biggest losers; the stock has fallen another 62%, since we issued that sell, and we continue to stand behind that sell rating.
Sell Agfeed Industries Inc. (OTC:FEED): FEED is engaged in the animal nutrition and commercial hog production business primarily in China. The stock plunged 32.7% on Tuesday, and it is down 54.4% YTD, after the company announced disappointing preliminary results for the June quarter. Specifically, the company guided revenue down to $84 million from previous estimates of $92 million, and it projected a net loss of $17 million or 26c per share loss versus analyst estimates of a loss of 1c. The loss includes an expense of $9.2 million related to the collection of outstanding accounts receivable in the company’s Chinese animal nutrition business and an additional $5 million of bad debt allowance to increase its bad debt provision. Furthermore, the company also withdrew its Form F-1 registration relating to spinning-off its animal nutrition business due to market conditions.
With the 32.7% plunge yesterday and the stock trading in the $1.30s, it may be a bit late to sell on the negative news, but we would be sellers into any reversal rallies approaching $2 based on the company’s deteriorating fundamentals on many levels, including a shortfall of revenues and higher losses. Furthermore, with the bad debt charges in the June quarter, there is some doubt now on the ability of the company to translate its sales growth into cash flow.
Hyperdynamics Corp. (HDY): HDY is a development stage oil and gas exploration and production company. It is the operator and holds 77% of one of the largest exploration and production licenses in West Africa in the Republic of Guinea covering approximately 25,000 sq. km. The stock was up 12.0% on Tuesday, and it is down 7.3% YTD, on no recent new news. With no revenues in the short-term, when you buy HDY, you are essentially speculating on the outcome of the drilling of test wells in West Africa. Only two Wall Street analysts currently cover the company rating it at buy/strong buy and with a price target of $8, well above the current price in the $4.60s.
Sell Hansen Medical Inc. (HNSN): HNSN is a developer of medical robotics for accurate positioning, manipulating and control of catheter and catheter-based technologies. It focuses on electrophysiology procedures for the diagnosis and treatment of patients, who suffer from abnormal heart rhythms, or arrhythmias, such as atrial fibrillation. The Sensei system is compatible with fluoroscopy, ultrasound, 3D surface map & patient electrocardiogram data & was cleared by the U.S. Food & Drug Administration in May 2007 for manipulation & control of certain mapping catheters in Electrophysiology procedures. The stock was down 11.6% on Tuesday on no recent news.
HNSN is still in the development stage, generating $5.3 million in revenue in the latest available March 2011 quarter while incurring losses of 21c per share or $11.4 million. Its shares have run up four-fold since their lows in the $1.20s in December 2010. We believe that there is not much of a fundamental basis for the run-up, and that the stock is ripe for a pull-back. The company is projected to continue incurring heavy losses in the foreseeable future, its available cash-on-hand of $45 million will only last six quarters at current burn rates in the $6-$8 million after which it will have to dilute existing shareholders by selling stock.
Sell Ctrip.com International ADR (CTRP): CTRP is a China-based consolidator of hotel accommodations, airline tickets and packaged tours targeting individual business and leisure travelers in China. CTRP aggregates information on hotels and flights and enables customers to make informed and cost-effective hotel and flight bookings. The stock was down 10.9% on Tuesday after reporting its June quarter on Monday after the market-close, and it is down 1% YTD.
The company reported $129 million in revenue and 27c in earnings for the June quarter versus consensus estimates of $131 million and 27c, and it guided down for the September quarter saying that it expects to continue the net revenue growth year-on-year at a rate of 15%-20%, which calculates to $140-$146 million, well short of the consensus analyst estimate of $153 million. Furthermore, margins dropped in the June quarter as expenses for product development, sales and marketing, and general and administrative all grew faster than the growth in revenues. CTRP currently trades at forward 27 P/E, in the top one-third of its historic P/E range. We believe that the fundamental deterioration in the company’s revenue growth and margin erosion do not warrant such a high valuation, and with the stock trading near its highs after a 500% increase in the last two-and-a-half years we would be looking for a pullback to more reasonable levels say in the $25-$30 range.
Buy MetroPCS Communications Inc. (PCS): PCS is a wireless telecommunications carrier, offering wireless broadband mobile services in the United States. The company’s services comprise voice services, data services, mobile Internet browsing, mobile instant messaging, location based services, social networking services, and push e-mail; and custom calling features consisting of caller ID, call waiting, three-way calling, and voic ema il. It also sells mobile handsets. A key distinguishing feature of the company versus other providers of cell phone services is that they do not require an annual contract, unlike similar service from AT&T (T), Sprint Nextel Corp. (S), and Verizon Communications (VZ). The company’s shares were down 34.9% on Tuesday after the company reported that in the June quarter, revenue came in at $1.2 billion and earnings came in at 24c, well short of the consensus analyst estimate of $1.23 billion and 28c. Furthermore, PCS indicated that economic headwinds were offsetting the secular growth trends of smart phone upgrades, and that this dynamic would continue into the September quarter.
We believe that the stocks 34.9% plunge yesterday was an over-reaction to the miss, and that shares are likely to consolidate here and mount at least a reaction rally to the plunge soon. The stock trades at a forward 7-8 P/E, at the bottom of its historic P/E range, while earnings are expected to grow strongly even with the downward correction issued in the current quarter report. We would be buyers here in the $9-$10 as the stock retreats to support in the $9 range.
Credit: Historical fundamentals including operating metrics and stock ownership information were derived using SEC filings data, I-Metrix® by Edgar Online®, Zacks Investment Research, Thomson Reuters and Briefing.com. The information and data is believed to be accurate, but no guarantees or representations are made.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Disclaimer: Material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. Further, these are our ‘opinions’ and we may be wrong. We may have positions in securities mentioned in this article. You should take this into consideration before acting on any advice given in this article. If this makes you uncomfortable, then do not listen to our thoughts and opinions. The contents of this article do not take into consideration your individual investment objectives so consult with your own financial adviser before making an investment decision. Investing includes certain risks including loss of principal.