Finally, May is over. This month is known as one of the worst months of the year. It is quite hard to figure out the reason behind this market anomaly.
The efficient market-hypothesis states that an abnormally low return in May is just a coincidence. However, the recent experience shows that May is not a good time to invest in equities. Remember 2010? The stocks were performing nicely until Greek issues emerged. Interestingly, the eurozone problems emerged at the month of May. 2011 was an okay period. The stocks did not fall sharply in May of 2011, but they lost their momentum. In this year everything was fine until May. However, May was a disastrous month. The stocks lost an average of 6.5% in the last month. Basic material stocks were the biggest losers, followed by financial stocks, and technology companies.
During the month of May, I tend to stay away from speculative stocks. This strategy does not work always, but it offers me a relief. I can have a nice sleep, knowing that my portfolio is safe. Since May is over, I am thinking of opening new positions in some speculative picks. Here is a brief analysis of 3 picks for the speculative portion of my portfolio.
Arena Pharmaceuticals (ARNA)
I missed the big rally on Arena last month. The stock provided an eye-popping return of 166% in the last 30 days. The company's flagship drug proposal, Lorcaserin Hydrochloride, recently received a positive recommendation by the FDA. Instantly, the stock made a huge jump above $6.
While everyone was trying to figure out what will happen next, the company announced a secondary offering, soon after the FDA advisory committee recommendation. Everyone was quite surprised about that decision, but the secondary offering could not cool down the bullish investor sentiment. Recently, Arena announced that it completed a secondary offering of 12.65 million shares for a price of $5.5 per share. Those who participated in the offering already made a substantial return of 20%.
The company earned a positive recommendation from FDA Advisory Panel, but as I stated before, that is just the beginning. FDA will go for a final vote in June 27th. The Food & Drug Administration usually moves in line with the advisory panel. It might still take some time for the drug to hit the shelves.
Meanwhile, Arena's closest competitor, Vivus (VVUS) will be in fierce competition. Vivus' weight loss drug, Qnexa, was originally turned down by the FDA in 2010. However, the company performed several other trials, and re-applied after two years. Finally, Qnexa received a green light from the FDA Advisory committee at the beginning of this year. However, Qnexa also needs a final vote from FDA. The vote will be held in July 17th, 3 weeks after the PDUFA date of Lorcaserin. I think both companies are engaged in a race against time, and there is a very bullish investor sentiment behind both companies. Therefore, they are worth to watch for big moves in this month.
Sirius XM (SIRI)
May has traditionally been a bad month for stocks, but this May has been a particularly bad one for Sirius XM. Not only the stock lost its momentum, but it is down by 17%. At the current prices, Sirius XM is back to where it started the New Year.
Looking at the chart above, one can see that $1.8 is a strong support level. I highly doubt that Sirius XM can go any lower than this price. Surely, the balance sheet has several red flags: Too much debt; a very low current ratio; a valuation that is almost 8 times the book value. But looking at the stock from a broader perspective, one can see a huge turnaround story. Sirius XM, a penny stock which was trading for as low as 10 cents at the beginning of 2009, made it to $2 by 2012.
Liberty Media (LMCA) already holds about 46.2% of the Sirius XM's outstanding shares. It recently increased its shares by 60.35 million. On the other hand, CEO Mel Carmazin is selling his shares and exercising highly profitable options. Currently, Liberty holds 5 seats in Sirius XM's board. Executives at Liberty Media announced their interest in boosting the Liberty's stake above 49.9%, which implies a de facto control of the company. I do not think small shareholders will be happy about the de facto take over. The stock was trading for as high as $6 in in 2005. At that time, there was a fierce competition in the market. Now, Sirius XM holds the dominant position, and therefore its market value should be much higher. This is one stock I am seriously considering for the speculative portion of my portfolio.
Las Vegas Sands (LVS)
Las Vegas Sands is one heck of a roller-coaster stock. After making it to as high as $60 in April, the stock slipped down to as low as $47.8. Still the year-to-date return is 12%.
The stock has a pretty high Beta of 3.68, making it a perfect candidate to play a rebound in equity markets. The fundamentals also look strong. Sales increased at an annual rate of 33% in the last 5 years. Earnings were boosted by more than 100% in the last quarter. The company's U.S. operations are providing regular cash flows. And the Macau business is becoming highly lucrative. The demand for labor is so high in Macau, the tiny island has an unemployment rate of only 2%. As fellow SA Contributor, The Independent Investor suggests, Las Vegas Sands has the strongest position in the Macau area. While economic growth in China might slow down, the rise of the middle-class citizens will surely boost the number of visitors to Macau area. Therefore, I think Las Vegas can be a good pick for both speculation, as well as, investment purposes.