When looking at building a diversified portfolio, one may consider adding a small piece to it that is rather speculative. If all goes right, this stock could provide you with great rewards in a short time period. But if things go bad, you'll get wiped out. One must truly consider the risk versus reward of each one before entering. So here are seven names that fit this category going forward.
Interdigital (IDCC): Interdigital is a technology company that is currently up for sale. The company has a large amount of patents on its books, several of which are used in smart phones such as the iPhone and Blackberry. The company has approximately 9,000 patents already, with about twice that amount currently being applied for. I initially discussed this stock when it was in the mid $60s. It is now around $45. That currently implies a market cap of about $2.05 billion, and an enterprise value of $1.55 billion (taking out cash and debt).
Interdigital believes that its patent pool is better than that of Nortel's, which was acquired earlier this year for about $4.5 billion. Even if the company fetches $3.5 billion for its equity, you're still talking about a $77 takeover price. That's significantly higher than where we are now. Some believe that the company will be sold for $100 to $120. I was originally in that camp but not anymore. The stock took a beating after a rumor came out that first round bids in the auction were in the $1 to $2 billion range. Disappointing news, but still, that was only first round bids. I think that an $80 to $90 price would be fair for the company, but if they decide not to sell, the stock will get hit hard. Everyone is counting on the buyout, which often can be a fool's game. In another article I'm publishing this week, I'm proposing buying a March $55 call for about $5.00. This would allow you to reap the profits if a buyout does occur, but limit your downside if it doesn't happen.
Walter Energy (WLT): This is another one involved in takeover speculation. Twice in the past three months, Walter has had huge up days where rumors were prevalent. In both cases, those gains didn't last long. Walter currently trades around $75, the level it was at when the first rumor came out. Despite a jump to over $97, that rallied died quickly and within weeks the stock was down to $53 as markets went lower. The stock is currently 40% higher than its October 4th low.
Walter produces and exports metallurgical coal for the U.S. steel industry. Don't expect a takeover from a U.S. based firm, it would most likely be one of the large international ones trying to increase their U.S. presence. That could provide a nice reward. This stock was above $140 earlier this year and above $130 in late July. It has suffered as economic fears have questioned the short term future of the steel industry, of which Walter is extremely dependent on. Without a takeover, Walter is dependent on a U.S. and global recovery, so if you don't believe in one, you probably should stay away from this name.
Dendreon (DNDN): The maker of the prostate cancer treatment Provenge has not fared well as of late. The stock fell from $36 to $12 at the beginning of August after quarterly sales were well below estimates, and the company decided to lay off some employees. The stock fell again recently as a new competitor has emerged in Medivation (MDVN). Dendreon's shares are at a new 52-week low, under $6.50.
Dendreon has always been a high risk, high reward stock. When good news comes out, the stock has gone from $4 to $25 in days. But we've also seen the reverse happen multiple times. This past week was not good for the company. Provenge was supposed to send Dendreon to the moon, and it did for a while, with shares nearly reaching $44. Another jump to $25 would give you a 3:1 upside to downside ratio here, but this is one of the riskiest companies out there. It could easily be at $3 just as fast as it could get to $30.
Netflix (NFLX): Shares of Netflix have rebounded nicely since last month's post earnings flop. After such a terrible quarter, many believed that this was the perfect short opportunity. But it hasn't traded that way, and has rebounded from under $75 to almost $94 on Monday morning. The shorts could be loving this.
Netflix is the ultimate battleground stock for the next few months. If they can hold onto subscribers and not lose a ton of money while expanding into the U.K. and Ireland, the stock could easily get back to $200 by the end of 2012. But if the masses continue to leave, $50 is a definite possibility in early 2012. I'm not willing to take a complete side as of now, but I'd be leaning slightly towards the short.
Sodastream (SODA): Sodastream is in the same category as Netflix. A growth company that kept rising but a top was inevitable. Last quarter's bad report sent the stock down 50%. Earnings come out on Wednesday, so that will be a key to this name going forward. A good report could send shares back to $50 by the end of the week, a bad report will send U.S. to $20. Is this company a fad or for real? Only time will tell.
Green Mountain Coffee Roasters (GMCR): Green Mountain recently took a dive after a presentation given by Hedge Fund Manager David Einhorn. Einhorn, who is short the stock, brought up growth concerns and accounting issues. The stock lost 30% in just a few days, but has recovered about 30% of its losses.
A forward P/E of 26 for the stock is much better than the 35-45 it saw earlier in the year, but many say this is still too much. Green Mountain is expected to report 100% yearly revenue growth when it reports its fiscal fourth quarter on Wednesday, and is currently forecasted for 62% next year. If they can get the accounting issues behind them and protect some of their patents that are slated to expire in 2012, this stock will get back to the $115 levels it saw just a few months ago. But if new competitors are successful next year, or there really is fraud going on at this firm, watch out below.
Sprint (S): Sprint now has the iPhone, but it also just floated another $4 billion of debt. And it will need at least $3 billion more the company says. $7 billion of new debt to build out its network and infrastructure will push the company's debt levels to about $25 billion. Not good considering the market cap is only a third of that.
I've been a bear of Sprint for a while, and will continue to be until they truly start to turn things around. They are currently adding a lot of debt, and are forecasted to lose another $2.5 billion this year, and $3 billion plus next year. It will be several months before the iPhone benefits truly kick in. And in just 4 months, they have over $2 billion of debt coming due. They will probably restructure it, but the interest costs will jump. And don't forget about Clearwire (CLWR), they could still lose another $2 billion if that company goes bust. I could see the stock going to $5 or $10 in the next five years, but I also see it going to $1.50 or lower first. They need to improve their balance sheet, and I don't see it happening anytime soon.
All seven of these names have the potential for big gains or big losses. Thus, you should do your homework, and decide which side of the trade you want to be on. Remember, GMCR and SODA report earnings on Wednesday, so take that into consideration. If you are ready to add some risk to your portfolio, these names are perfect for you.