Last week I looked at four companies and compared each to the catalysts that have led Sprint (S) to its 120% increase in value during the last three months, with the goal being to determine whether or not there is another stock presenting similar upside. In last week's article I determined that Level 3 (LVLT) was the most similar of the group, although not an exact match. In this article I am looking at four additional stocks, and the companies I'll be discussing are arguably even more controversial then the ones I looked at in Part One, and are sure to bring out the best in people, who have very strong opinions surrounding the companies that are about to be discussed.
In order for a stock to follow the same path as S it must be controversial. It must have a development or a catalyst that is obvious, but is being hidden from investors due to the performance of its stock. It must be a better company today than it was last year, but also trading with a considerable loss. In other words, it must replicate Sprint, a company that had just begun to sell the iPhone, was posting net subscriber gains, and was attracting customers to its service with unlimited data and making vast improvements to its overall business model, meanwhile trading with considerable 12-month loss at a price under $2.50. With that being said, let's look at four companies, and determine if there may be a second chance to capitalize on Sprint's early gains, with another company that's in a similar situation, or if the market lacks another Sprint at this time.
Research in Motion (RIMM)
Last week I started with Nokia (NOK), a company that I identified as having little chance in making a comeback. In this edition I'll start with Research in Motion, a company that has no chance of making a comeback, or at least in the near future. The stock has lost 72% of its value as it continues to lose market share from Apple (AAPL) and the Android operating system. Therefore, to determine whether it is presenting upside similar to Sprint, is to determine whether or not the company has a clear plan to regain market share, if it has a recent development that will allow it to recapture market share, and if it's making all the right moves in order to achieve this task.
The simple answer is "absolutely not!" RIMM has no plan, it doesn't have a competitive edge, and with every day its operating system becomes even more historic compared to its competitors. Unfortunately, there is no kind way to say it, no one is buying Blackberrys, the devices are technically extinct, and are more likely to appear at the Smithsonian than to become the first choice of consumers. Sure, it has good emailing features, and some business people appreciate its ease of sending messages. However, all Android based smart phones and iPhones have messaging and efficient emailing, along with another 100 features that are not found on any Blackberry.
During the company's most recent quarter it lost more than 40% of its revenue year-over-year, which is the opposite of a company such as Sprint that is increasing its market share. Therefore, with all things considered, I think it could be a long road for RIMM investors, because with $16 billion in sales during the last 12 months, there is still a significant amount of market share that the company could lose, and with new Android based phones and an iPhone 5 launch it could get much uglier before getting better. As a result, the company's best idea may be to lock the doors, shut the windows, and brainstorm in an attempt to find the creative genius that led to the development of the Blackberry and its buzz back before the flame lost its flare.
First Solar (FSLR)
Believe it or not, there is a stock that has lost more in terms of valuation than RIMM, and believe it or not this stock has increased in value by nearly 50% during the last month. The lucky winner is First Solar, and FSLR has lost nearly 80% of its valuation during the last 12 months, and is by far the biggest loser of the market. A couple years ago First Solar was one of the most popular investment choices in the market, a true momentum play for investors to capitalize on the growth of solar, however as solar has failed to exceed expectations, FSLR has fallen off a cliff despite posting significant gains in revenue and showing recent signs of a turnaround.
Earlier this month I wrote an article praising FSLR's most recent quarter, and then because of its progress decided myself to purchase 520 shares at $17.10. First Solar is a company that I feel has bottomed and is now showing progress and could trade significantly higher due to it being undervalued, however it is in no way, shape or form the next Sprint, but rather a speculative play that could present large upside if management makes all the right moves and plays all of its cards the right way. Also, a little help from Europe and maybe a little growth in the industry wouldn't hurt either.
At this point, First Solar could become the next Sprint, but today it still has way too many questions. During its most recent quarter, which led to its monthly gains, the company increased both revenue and income by 80% year-over-year and increased its guidance. The primary reason for its gains was due to increased revenue from selling power plants, therefore its shift to projects could become the first step to a company changing development such as Sprint receiving the iPhone. However, like I said, it's still too early and there are too many questions. Because if a company were truly in a transitional period then it wouldn't have laid off 2,000 employees, had subsidies suspended, or closed its plant in Germany. And with high costs, changes in demand, and high exposure to Europe I still think it is too early to make such a bold call. With that being said, I do own the stock, because its developments in the last quarter were worth noting and if the company can turn its operations around then it could present substantial upside.
Almost immediately following Part 1 of this series there were several comments and I received countless emails asking "why not CLWR?" The truth is that it's a company which I have often tried to avoid due to my belief that if you don't have something nice to say then you shouldn't say anything at all. However, it has more than doubled since July 25 and there is a large group that believes that it has the catalysts and the investor interest to become the next Sprint.
My problem with CLWR has always been that it has burned cash every year since going public, and it always seems to be two steps from bankruptcy. However, back before Sprint began selling the iPhone it was in the same situation, and was probably an even closer one step from bankruptcy. In fact, before Sprint announced that it would be carrying the iPhone I was very bearish, as its loss of subscribers, inability to return a profit, and the manipulation of its balance sheet were all signs to avoid the stock. However, combined with the iPhone and unlimited data, the company is staging its comeback, which shows that one major key development can change a company.
In regards to CLWR it has one of the fastest 4G networks ever built, and during its most recent quarter it did announce good guidance. Therefore, perhaps it is staging a comeback, but in my opinion, it is still too early to tell. In order for it to be the next Sprint, it would also have to be significantly undervalued, and it's more than doubled during the last five weeks. And as an investor, I am not certain that I appreciate its rally, which was fueled by speculation of a "strategic transaction" combined with rumors that Dish Networks (DISH) was the lucky buyer. I am not going to speculate as to whether or not DISH invested $400 million into CLWR, but I will say that rallies led by speculation are often dangerous and end badly. Therefore, CLWR needs some facts to validate the rumors, and if not, then its stock will fall. As a result, because of its performance, its lack of facts, and its overwhelming presence of speculation I don't believe it falls under the category of being the next Sprint, not yet, but perhaps in the future.
I have stated on several occasions that biotechnology is an investment to itself, that doesn't play by the same rules as other industries. Speculation is what you try to avoid in other industries, but in biotechnology it is the primary driver of performance. And DNDN is one of the most speculative, controversial, and underperforming stocks in the history of biotechnology. But for the first time, it may now be appropriately valued, and making the decisions to grow with the sales of Provenge rather than hoping that sales can match its spending.
Over the last few years perhaps the most significant problem of Sprint has been its spending and its struggle to compete with AT&T (T) and Verizon (VZ). The company would try to match its competitors with office locations and increase its presence yet didn't have the customers or growth, leaving most locations unprofitable. However, now in the iPhone era, this weakness has become one of its greatest strengths, as Sprint is competitive with both T and VZ in terms of locations and makes it convenient for potential subscribers to switch to Sprint, and take advantage of its unlimited data plan. And when you really think about it, this change would not have been possible if not for management's decision to approach Apple and pay a lot of money to sell the device that consumers wanted.
Here's the thing: DNDN already has its iPhone. It has Provenge, which as of now is one of the most innovating vaccines in the treatment of cancer. Now, the goal becomes to efficiently market and manage Provenge to become the next Sprint, which is what Sprint has done with the iPhone.
Like Sprint, Dendreon's costs were too high for its demand, which are in part due to Provenge being so expensive to manufacture (like the iPhone being expensive to sell), and its three state-of-the-art facilities that are large enough to manufacture for Pfizer (PFE), and way too large to manufacture Provenge (similar to Sprint's presence being too large before having the iPhone). During its last quarter the company announced it was closing the Morris Plains New Jersey facility, therefore cutting 40% of its workforce which would drastically cut its COGS. And I believe that this move is the first step in DNDN shutting down the majority of its manufacturing process and switching back to Neostem (NBS), a company that manufactured all of Provenge when it was in clinical trials.
In my opinion, Dendreon using a third-party manufacturer would be similar to Sprint offering unlimited data; it would be a company changing advantage. Dendreon is for the first time appropriately valued, and Neostem conveniently has locations in both New Jersey and in California. Not to mention, Neostem manufactures for many companies as a leader in the space, therefore it would drastically cut the costs of DNDN with Neostem's experienced staff and ability to integrate Provenge in with its large manufacturing capabilities. Of course this is speculative, but closing the facilities in NJ was necessary but leaves a large hole, a hole that must be filled, and I believe that if it makes this change that DNDN could achieve profitability and regain investor confidence. But with DNDN lowering its COGS, increasing revenue, and adding 115 new accounts it is obvious that it is seeing improvements, and much like Sprint is priced at a huge discount despite these improvements.
After looking at eight different highly controversial companies I am not certain that any are the next Sprint. All are still highly speculative and must still cross certain barriers before creating this level of upside. However, there are companies with similarities: Alcatel-Lucent (ALU) has the key developments and the value, Clearwire is the obvious choice because of its connection to Sprint but still lacks the catalysts and is being driven mostly by speculation, DNDN's decision to build beyond its demand is similar to that of Sprint and now with sales rising and an easy way to cut costs, it could easily present the same upside we've seen in shares of Sprint, and finally Level 3 was my choice as the most similar following its successful acquisition of Global Crossing and its lack of investor support. But none is presenting the same clear-cut upside as Sprint at $2.50, all are wait-and-see stocks. Therefore, as we wait and see, valuations will be very important to watch, and if encouraging key developments are announced then be prepared, because you might just have the opportunity to capitalize on the next Sprint before it trades higher.