The 10 Stocks to Watch in 2014
Twitter, Salesforce.com, Nike, and FedEx are among the names attracting our expert contributors' attention.
Microsoft: The Once (and Future?) King of Tech Is Getting a New CEO and a Fresh Start
By Michael Comeau
The challenges are obvious: Microsoft has to A) gain a bigger foothold within the mobile computing industry, B) keep the legacy PC industry afloat as long as possible, and C) build a better brand name.
The latter objective may be the most important, and most challenging.
Too many consumers view Microsoft with disdain, or worse, apathy, because of past product quality issues and poor product planning. The Xbox brand has a large and loyal following, but gaming has never been a serious profit center for Microsoft.
With a fresh start under a new leader from the outside, will consumers view Microsoft any differently?
We're about to find out.
Michael Comeau edits Minyanville's Buzz & Banter and is also a regular columnist on Minyanville.com, focusing on technology and consumer stocks. Read more of his work for Minyanville, here.
Exelixis: An Admittedly Unconventional Biotechnology Pick
By David Miller
Exelixis (NASDAQ:EXEL) is an admittedly unconventional pick from the biotech space. It’s not one of the new IPO class of billion-dollar, barely Phase I companies. It’s not unknown and certainly not overloved, though I think it’s been overlooked.
The company’s only focus is advancing Cometriq (aka cabozantinib). Already on the market for the treatment of relatively uncommon medullary thyroid cancer, Exelixis is seeking broader approvals in the treatment last-stage prostate cancer, second-line kidney cancer, and second-line liver cancer. There are positive Phase II data on the drug in these indications, so the clinical trial risk isn’t as high as other companies. So why is the company overlooked?
The first trials in the prostate cancer space are a bit of a head-scratcher to some of us who fancy ourselves experts in such things. But most of all, there was nothing interesting going on in 2013 -- bad news for our, “what have you done for me lately” markets.
That changes dramatically in 2014. The so-called “COMET” trials in prostate cancer return data. If positive -- and that’s not a given -- they’ll open up the lucrative prostate cancer space.
Much less appreciated is melanoma data coming in the first half of 2014 from cobimetinib, a drug Roche Genentech (OTCMKTS:RHHBY) acquired from Exelixis. If positive -- and most people I know think the trial will be positive -- this unlocks a $400 million initial market in front-line melanoma. Exelixis gets 30-50% of the US profits from cobimetinib and a 10-15% royalty on ex-US revenues. Almost none of the buy-side analysts have cobimetinib revenues in their models, so positive data will almost certainly lead to hikes in price targets.
David Miller is the Portfolio Manager for hedge fund Alpine BioVentures. David is also the former CEO of the independent research firm Biotech Stock Research. In addition to co-founding BSR, Mr. Miller currently co-teaches an entrepreneur's workshop for the Center for Student Entrepreneurship at the University of Washington - Bothell. He is a regular contributor to Minyanville's Buzz and Banter. Read more of his work for Minyanville, here.
Disclosure: Miller has a position in EXEL.
Rockwell Medical: Disruption in Progress
By Jonathan Moreland
Safe, boring businesses can be vulnerable to disruptive technology. Rockwell Medical (NASDAQ:RMTI) is both safe and potentially disruptive, and looks like a good bet to alter the staid dialysis business from within.
Rockwell is one of only two major suppliers of dialysate (a chemical used in dialysis) in the US. Unfortunately, this stable business is not particularly profitable due to pricing pressure from much larger competitor, Fresenius (NYSE:FMS). Caps on reimbursement from Medicare and Medicaid for dialysate don’t help either.
Rockwell’s dialysate business has, however, opened a valuable channel for this trusted supplier to sell related, higher-margin products through to a very concentrated customer base. That’s what Rockwell has been focused on doing for years, and the risks of its past efforts are finally translating into rewards for shareholders via two new products: Triferic and Calcitriol.
Triferic is a potentially disruptive drug that replaces the need for iron to be intravenously delivered into dialysis patients. It has both clinical benefits for patients, and economic benefits to dialysis providers by reducing the need for costlier drugs now used in the process.
Both the efficacy and safety of Triferic were clearly shown by clinical trials that wrapped up last summer. Rockwell can now file a new drug application (NDA) for Triferic in early 2014, with expectations of getting the drug in place to attack a $600 million annual market opportunity by the end of 2014.
Rockwell also looks likely to get its new generic vitamin D product, Calcitriol, to market by the end of 2013. All that‘s left in the process is to receive FDA manufacturing approval. Calcitriol is also used in dialysis, and it’s the lowest cost option around, targeting a larger market estimated at $350 million per year.
I bought into Rockwell in early August 2013 for its sum-of-the-business value, after a troika of insiders with excellent track records generated a clearly bullish InsiderInsights Company Rating for RMTI. While the stock is up by nearly 200% since then, the risk in the Rockwell investment thesis is also much lower now that Triferic’s clinical risk has passed. Also to the dismay of persistent short sellers, the company’s liquidity risk is now negligible after it successfully raised cash earlier in 2013.
Management believes its cash balance is sufficient to cover continuing operating losses until Triferic is launched in late 2014. Rockwell’s income statement should improve before then, however, from Calcitriol’s revenue contribution and sharply lower R&D expenses. When they hit the market, both Calcitriol and Triferic should also prove to be an easy, cost-saving sell to Rockwell’s established customer base, which includes close partner (and potential acquirer?) DaVita HealthCare (NYSE:DVA).
While experience shows that the FDA can find unexpected ways to disappoint those awaiting its decisions, the odds of FDA events being favorable to Rockwell appear very good. Yet with risk now much reduced, Rockwell’s upside potential appears far from fully priced in. Even a risk-averse investor like me thinks this is one special situation worth “buying high” with the reasonable expectation of “selling higher.”
Jonathan Moreland is the Founder and Director of Research at InsiderInsights.com, which offers users a weekly newsletter, real-time insider trading data, and analytics. Every day, Minyanville publishes a story featuring InsiderInsight's top insider trades filed with the SEC. Those stories can be viewed, here.
Salesforce.com: A Grand Metaphor for the Great Rally
By André Mouton
There’s a special place in my heart for metaphors, and I’ll be watching Salesforce.com (NYSE:CRM) because, in some ways, the enterprise solutions company has become a grand metaphor for the Great Rally. The stock shows us so many of the trends we’ve come to expect in the last few years: rising market cap, falling volume, persistent short interest. There are plenty of bears, but instead of restraining the market, they’ve only fed it. The second half of 2013 has been absolutely brutal to the shorts, and capitulation may be in the air -- but I wouldn’t bet on it. It’s one thing to catch a falling knife, and another to stare down a freight train.
In terms of its business strategy, Salesforce.com is truly a creature of the present. The focus on top-line growth, the long chain of acquisitions to achieve that growth, the use of stock options to fund the business, and the preference for non-GAAP earnings that hide the scope of those stock options-- I could be describing any number of popular tech companies. If the world were always sunny, we wouldn’t need roofs; and so long as markets are being generous, these companies can nurse their perennial losses without getting investors wet.
With the rally entering its sixth year, it might be wise to keep an eye on the weather forecasts. This means watching companies that, like Salesforce.com, have captured the market’s hopes (and its wallets), and which have the most to lose should that enthusiasm give way to fear.
André Mouton is an independent investor who cut his teeth in the dot-com crash and chewed his lip in the financial crisis. He is a former writer for Offbeat Magazine in New Orleans and a touring (but not itinerant) musician, who now lives in New York. Read more of his work for Minyanville, here.
The 2014 Debt Collector
By Duncan Parker
Virginia Beach, VA-based Portfolio Recovery Associates (NASDAQ:PRAA) has experienced an incredible run of growth that doesn’t look to be ending anytime soon. The 2014 US economy will likely best be described as “concerning." As such, companies with slow-paying debtors will hire companies like Portfolio Recovery Associates to collect on their behalf while keeping their own balance sheet looking solid. From a fundamental standpoint, Portfolio Recovery’s balance sheet deserves an A+. Its opportunity to charge off around $100 million in goodwill (deferred taxes) in the future highlights savvy management at the helm. Its small market cap (around $3 billion) means exponential growth is very possible.
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From a technical lens, a pullback seems possible near-term. Why? My guess is its affiliation with numerous indices could cause this baby to be thrown out with the bath water if we experience a pullback from another debt ceiling debacle. Therefore, Portfolio Recovery Associates is likely more of a second-quarter 2014 buy. Keep this one on the radar!
Duncan Parker left his position as a Financial Advisor at Merrill Lynch in 2012 to focus his time on a handful of high-net-worth clientele and further develop systematic trading algorithms. He is now a Managing Member of Queen Anne’s Revenge, LLC/LP, an RIA and hedge fund employing quantitative strategies through data mining seasonality trends with technical analysis in equities, options, futures, and foreign exchange markets. He is a regular contributor to Minyanville's Buzz and Banter. Read more of his writing for Minyanville, here.
Flotek Industries: A Long-Term Fracking Play for 2014
By Brandon Perry
As America continues on the path of energy independence, I have been looking for some good long-term fracking plays. My favorite in the space is Flotek Industries (NYSE:FTK).
This company is on the Chemicals side rather than on the Exploration & Production side of things. From a fundamental perspective it has just about everything you want: P/E around 20 with a growth rate of close to 40, giving it a low PEG of around 0.5. Plus a return on equity of 29! Net margins are around 15 where 10 is more typical, so management is running an efficient company. It has multiple product streams for further penetration with existing customers. Product lines include drilling products as well as all the various chemicals required for the fracking process. I see the fracking chemicals becoming a lead -n type of product to get its foot in the door and allow for additional product sales once it has established a relationship with the customer.
The balance sheet has high liquidity, with a current ratio around 1.5. Balance sheet management has been top-notch, in my opinion.
The cash-flow statement is a little concerning on the free-cash-flow side at first, but it is distorted by the recent acquisition, as well as by refinancing measures to reduce interest rates on long-term debts. These adjustments have hit cash flows near-term but build sustainability in the long run.
Technically, the company's stock price is in a strong uptrend, which is exactly what you look for in a small growth company. I could easily see this thing doubling in a year, and doubling again in five years. It is pretty much a "catch it on the 50-day dip" type of stock.
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Brandon Perry is the president of Perry Investment Management, LLC. In addition to managing money, Brandon teaches Financial Planning at his Alma Mater, UT Austin, writes the financial columns for Influential Magazine, contributes to Minyanville's Buzz and Banter, and is very active in helping people with their finances in his church. Read more of his writing for Minyanville, here.
Disclosure: Perry has a position in FTK.
FedEx: A Reliable Economic Indicator With a Strong Balance Sheet
By Oliver Pursche
How will the economy fare, and will the Fed begin to taper its asset purchases in 2014? These are the principle questions on investors’ minds. The transportation sector has long been viewed as a leading indicator of economic activity, and by many as a forecasting tool for the stock market’s direction (i.e. Dow Theory). This is why I think FedEx (NYSE:FDX) is one of the stocks to watch now and in 2014. I prefer FedEx over UPS (NYSE:UPS) and other transportation and delivery companies because it continues to gain market share from its competitors, particularly in the US, making it an even more reliable indicator. Moreover, much like the overall market, FedEx is displaying strong technical momentum at this time. Revenues for the company are expected to rise 4% in 2014 about in line with the median forecast for revenue growth of the S&P 500 constituents. Similarly, EPS for FedEx is expected to rise by just over 13% next year, also a near mirror image of the S&P 500 as a whole.
From an investment perspective, I like FedEx because of its strong balance sheet and easy-to-understand business model. Revenues and earnings should grow nicely over the next few years and the company has a healthy, growing net cash flow from operations. Lastly, heading into 2014, I am favoring cyclical companies, in particular, those that should continue to benefit from falling commodity (e.g. gasoline and energy) prices.
Oliver Pursche is the President of boutique money management firm Gary Goldberg Financial Services, is in charge of all business operations, and serves on the firms' Investment Committee, Executive Committee, and Board of Directors. Pursche is also a Co-Portfolio Manager of the GMG Defensive Beta Fund (MUTF:MPDAX). Read more of his work for Minyanville, here.
Disclosure: FDX is a holding in MPDAX and some separate accounts at GGFS.
By Justin Sharon
Justin Sharon authors Minyanville's stock upgrades and downgrades articles every morning. He has extensive experience on Wall Street, most recently at the Private Client unit of Merrill Lynch. A 12-year spell in its research department encompassed the eras of Blodget, boom, bust, and Bank of America. Read more of his work for Minyanville, here.
National Fuel Gas: Mind Your Own Fracking Business
By Howard Simons
When we take a look at the energy industry through the lens of history, an interesting and somewhat unexpected trend emerges that can be summarized as heavier to lighter in the fuel source. Once we got beyond the basics of inefficient one-year captures of sunlight in the form of wood and figured out multiyear captures of sunlight in the form of fossil fuels, we went from coal to fuel oils to kerosene to gasoline and then eventually to natural gas.
Dreamers think we will shift one fine day from hydrocarbons to hydrogen, but I have been listening to that nonsense for more than 40 years now. As Germany is finding out the hard way, if you want an omelet you have to break some eggs, and that means fossil fuels or nuclear; if you want high-cost intermittent energy, have I got a deal for you with wind and solar. And, yes, the best substitute for imported petroleum is domestic petroleum; stick that in your distillation tower and crack it.
The world is chock-full of methane; the trick always was extracting and transporting it economically. Now that large-scale fracking has proven its value in the former, the value proposition will concentrate once again in the latter. This is why I find a firm such as National Fuel Gas (NYSE:NFG), an integrated natural gas company located in Williamsville, New York, intriguing.
Undiscovered? No; no issue with a 45.25% one-year total return falls into that category, and its forward P/E of 22.35 hardly makes it cheap. But it is in all segments of a growing industry and is well-situated geographically to take advantage of a regional market where supply is constrained politically by New York’s aversion to fracking. Should New York allow widespread fracking in the Marcellus Shale, National Fuel Gas is positioned to go along for the ride.
Howard Simons is the President of Rosewood Trading, Inc. (AKA Simons Research), and strategist to Bianco Research. He writes on macroeconomic and financial market topics including fixed-income, commodities, currencies, derivatives and equity markets, and is the author of The Dynamic Option Selection System: Analyzing Markets & Managing Risk. Read more of his work for Minyanville, here.
Following the Early Path of Google
By Sean Udall
Sean Udall is an investment strategist, portfolio manager, and proprietary trader with extensive experience across a wide variety of asset classes, including equities, fixed income, currencies, and derivatives. He’s a recognized trader, prolific writer, and the founder of the TechStrat Report, a technology-focused investment newsletter from Minyanville. Read more of Sean's commentary, here.
Disclosure: Udall has positions in Facebook and Twitter.
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Follow me on Twitter: @JoshWolonick and @Minyanville