Five very cheap stocks

Investment Analysis Clubs Saul’s Investing Discussions
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We have recently had discussions of five stocks which have become very cheap for “good reasons” which may, or may not be actual good reasons. I’m not saying these are good stocks to buy, or bad stocks to buy. I don’t know! I’m putting them forward for discussion, not so much of the individual stocks, but of the category: Companies with a good story but with a major problem which may or may not be of their own making, and which may or may not be temporary. I could see someone saying a small position in each of this kind of stock is warranted as a speculation, but I could also see someone saying there are surer places for his or her money, even if the PE is higher. What do you think?

Here are the five sample stocks:

ANET - Because of CSCO lawsuit and possible competition

UBNT - because of flatlining for five or six quarters with a fall off of their main business coupled with a growth of their enterprise business.

GILD - I don’t follow this company but I think it’s because of thoughts that insurance will refuse to pay the ridiculous prices they charge for their hepatitis drug, the number of cases is very finite, and competition in their HIV market.

PFIE - Collapse of the oil market, etc

SZYM - Total change in the thesis, or at least a several years postponement of the original thesis.

Saul

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Re: GILD, and Hep C, there are 130-150 million patients worldwide. I have seen articles saying the count has leveled off in the USA (due to greatly decreased IV drug use), but not sure about worldwide.

Also the American insurance companies are paying for it. They are negotiating reduced rates, which are not disclosed publicly. I think the main concern about GILD is competition in the Hep C arena driving down prices. Which it has started to do due to Abbvie’s fairly effective yet inferior competitor, with more likely to come, esp. from Merck.

The other thing is, Hep C is only about half of GILD’s business. I saw an article where if you valued the company only on the non-Hep C half, which is more diversified (I think the largest family of drugs is HIV related) and growing that it’s a buy just based on that, with Hep C treatment revenue as frosting.

I’m not a doctor or a health expert; I just read a bunch on this. I hold a 2.3% position with an average entry price of $102. Cheers.

From the World Health Organization:

Hepatitis C
Fact sheet N°164
Updated April 2014
Key facts

Hepatitis C is a liver disease caused by the hepatitis C virus: the virus can cause both acute and chronic hepatitis infection, ranging in severity from a mild illness lasting a few weeks to a serious, lifelong illness.
The hepatitis C virus is a bloodborne virus and the most common modes of infection are through unsafe injection practices; inadequate sterilization of medical equipment in some health-care settings; and unscreened blood and blood products.
130–150 million people globally have chronic hepatitis C infection.
A significant number of those who are chronically infected will develop liver cirrhosis or liver cancer.
350 000 to 500 000 people die each year from hepatitis C-related liver diseases.
Antiviral medicines can cure hepatitis C infection, but access to diagnosis and treatment is low.
Antiviral treatment is successful in 50–90% of persons treated, depending on the treatment used, and has also been shown to reduce the development of liver cancer and cirrhosis.
There is currently no vaccine for hepatitis C, however research in this area is ongoing.

http://www.who.int/mediacentre/factsheets/fs164/en/

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We have recently had discussions of five stocks which have become very cheap for “good reasons” which may, or may not be actual good reasons. I’m not saying these are good stocks to buy, or bad stocks to buy. I don’t know! I’m putting them forward for discussion, not so much of the individual stocks, but of the category: Companies with a good story but with a major problem which may or may not be of their own making, and which may or may not be temporary. I could see someone saying a small position in each of this kind of stock is warranted as a speculation, but I could also see someone saying there are surer places for his or her money, even if the PE is higher. What do you think?

I guess the question with these stocks is: Do you buy them now and wait for the turnaround, which might never come, or might come and be very profitable… or do you wait for some sign that things are going better and buy them on the way up. Any thoughts?

Saul

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OK - I’ll be the first to take a stab at this question.

First thing I’ll respond to is:

I’m putting them forward for discussion, not so much of the individual stocks, but of the category: Companies with a good story but with a major problem which may or may not be of their own making, and which may or may not be temporary.

Lynch considers this situation often provides a lot of opportunity. So, I guess it’s worth at least paying attention and maybe use it as a filter for stock to review.

But, for me, when it comes to investing, I never invest in generalities (I don’t hold any ETFs, Index Funds or mutual funds - I held mutual funds for a while, but that’s a way separate discussion). So, I won’t give you a categorical answer. I make my investment decisions on a case by case basis.

Of the five companies listed, I know something about a couple, UBNT (long, but recently trimmed) and PFIE (wouldn’t touch it).

I love the way UBNT conducts business. The primary product has some advantages over the competition based on technology, but technical advantages often have a way of evaporating pretty quickly. I think the biggest thing these guys got going for them is competitive pricing coupled with market pulse responsiveness. That’s a hard combination to beat despite any current problems.

As for PFIE, maybe I just don’t understand what they do well enough to think it’s special, but I don’t think it’s special. That along with the conditions in the oil patch mean not much new business for who knows how long. Of course oil will not stay this cheap forever, and even if it does, drilling will pick up again eventually, but I would rather find better investments now.

From the little I know about Arista, I’m skeptical. Arista says the Cisco suit is without merit. What else are they going to say? I don’t know about that. Cisco does not have a history of litigation. And the fact that the Arista leadership came from Cisco might well indicate that the suit, in fact, carries considerable merit. I’m not buying.

Gilead and Solazyme - I don’t know enough about either of them to have an opinion.

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Utah Chris,

You paint a rosy picture for GILD. But there must be some reason for them having such a low price relative to current earnings. I mean, a PE of 13!? With rapid growth of revenue and earnings! What’s going on? The market must expect earnings to fall. Or something? What’s the bear argument? To discount the bear argument we have to at least know what it is!

Saul

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I personally own ANET at a loss and GILD at breakeven. For ANET, I’m waiting to see the impact of the lawsuit. No idea how long it could take and the potential fallout if any. I think they could be a great company but it’s just too uncertain to add here. For GILD, I’m more certain due to their lineup of future drugs and the large amount of cash flow they produce. Low P/E and just started a dividend. I would add or start a position here.

Chad

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Chad, please see post #5856.
Saul

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I guess the question with these stocks is: Do you buy them now and wait for the turnaround, which might never come, or might come and be very profitable… or do you wait for some sign that things are going better and buy them on the way up. Any thoughts?

I own PFIE and am waiting to see how they did in the December quarter. Did oil price decline affect their sales? If not in the Dec quarter, what about the March quarter?

I own UBNT at 9% which is too high of an allocation for me given the uncertainty about airFiber X. I think downside is limited and I will keep selling covered calls (rather than selling shares outright) until my position is about 4-5%. I am trying to learn more about the Service Provider business as its recovery for UBNT would mean a big recovery for UBNT and the stock price.

I owned GILD for part of last year and rode the stock from the mid-$60s to the low-$80s if I recall correctly. I sold because their HIV was hardly growing. I did not do the work to analyze their pipeline and, since I have a 9% allocation in CELG with a strong conviction in CELG’s long term future, I sold my GILD shares (CELG and GILD are both big biotechs so I felt I don’t need to own both of them).

Chris

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I’ll chime in because I own ANET (a 1.5% stake). I bought in November after the share price declined due to lockup expiration concerns. I considered ANET’s prospects to be quite good, given the explosive need for bigger, better, faster cloud networking capabilities. My enthusiasm faded once CSCO announced its lawsuit, but I was willing to wait and see how ANET performed during what will likely be a long, drawn-out litigation circus (such matters typically take years to resolve). I was underwater but not yet willing to pull the plug. Then came a Taiwan trade journal report that Facebook was considering a shift to “white-box” networking gear. I don’t know enough about cloud networking hardware to judge the potential impact adequately. As I understand it, the largest cloud providers (e.g. Microsoft, Amazon and now Facebook) are looking to optimize their networks with low cost “white-boxes” which is hardware minus the software programming that comes with the boxes offered by CSCO and ANET. If the cloud providers switch to much lower cost alternatives, then the profit projections for ANET will neccesarily be reconsidered. It certainly hurt that CITI, one of the lead underwriters for ANET’s IPO immediately downgraded the stock to “hold”.

I’m not sure how ANET will respond to all this. The company will report earnings February 19. I’ll pay close attention to the conference call. That’ll be a decision point for me. (And, by the way, ANET ain’t all that cheap with a TTM PE >50)

As for GILD, I don’t own it. I think it’s a fine company, but it’s a biotech and I think the entire sector is wildly overbought.

As for what’s keeping GILD’s share price down? It’s the drug pricing issue:

http://tinyurl.com/kgsch3m

At $84,000 Gilead Hepatitis C Drug Sets Off Payer Revolt

Payers face billions of dollars in new drug costs as pharmaceutical companies develop increasingly complex products in the years ahead. Express Scripts Holding Co., Catamaran Corp., Aetna Inc. and CVS Caremark Corp. among others are already pushing back against the high cost of Gilead’s drug. They’re discussing how to pit similar drugs against each other, refusing coverage for some, or subjecting treatments to more review by outside experts and refusing to pay a premium based on one drug being more convenient to take than another.

Gilead’s new drug, Sovaldi, costs $84,000 for a 12-week treatment. Such breakthrough treatments and their stratospheric price tags have “absolutely” caused insurers to reconsider covering high-priced hepatitis, diabetes and other treatments…

“There’s been a feeling among investors that biotech drugs are immune from price competition,” Funtleyder said in an interview. “We’re getting to where we may have may reached a pain point.”

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Thanks Putnid, Now we know part of the bear argument on GILD at least.

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Saul, you are right. I’ve wondered that myself. I can only assume it’s due to the effect of pricing or the lack of pricing power. I haven’t added to my position yet because I’d like to see how this impacts them this quarter and if there’s any change.

Chad

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Many of the bear arguments against GILD remind me of those against Apple that drove it down from 700,. In the caee of AAPL the bear arguments sounded good on the surface, the products are too expensive, customers won’t buy them, no innovation, etc. They ignored the advantages of a huge cash hoard, dividends and stock buy backs. In reality Apple was better than ever, and the stock price eventually recovered.
It turned out customers would pay for iStuff, because it was just better. And even if no huge breakthroughs were on the way there was plenty in the pipeline.

I think GILD is a good long term investment. Like AAPL was. It is a high class company with an excellent record of picking acquisitions, and the money to do so. I have no idea what the stock price will be in 6 months, but suspect it will be higher in a couple of years. Meanwhile there is little risk of anything catastrophic happening. It is just starting to get solidly into anti cancer drugs so something good might happen here .

For an insurance company to only approve a clearly inferior product to treat a disease , killing people, is a clear path to punitive legislation and litigation and really bad publicity. Imagine the “my daughter died because insurance plan X wouldn’t pay for her treatment” stories on TV.

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On the first three, ANET, UBNT, and GILD all I can say is that they are outside of my area of expertise, technology and biotech.

PFIE cratered not on news of its own but in sympathy with oil. No decision needs to be made until the earnings report next week.

SZYM I didn’t like when it IPOd and I still don’t like. The Brazil venture is a negative (I don’t like investing in LatAm) and they need to show sales before I would consider investing.

Denny Schlesinger

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GILD’s stock came under pressure when ESRX (largest PBM?)announced that they would exclusively use ABBV’s competing Hep C drug. Recently GILD has gotten exclusive or preferred status from Envision RX,UNH, Aetna,Prime Therapeutics,ANTM and CVS. This has come at a cost of about a 46% net adjustment in pricing according to their conference call.

Rob

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Here are the five sample stocks:

ANET - Because of CSCO lawsuit and possible competition

UBNT - because of flatlining for five or six quarters with a fall off of their main business coupled with a growth of their enterprise business.

GILD - I don’t follow this company but I think it’s because of thoughts that insurance will refuse to pay the ridiculous prices they charge for their hepatitis drug, the number of cases is very finite, and competition in their HIV market.

PFIE - Collapse of the oil market, etc

SZYM - Total change in the thesis, or at least a several years postponement of the original thesis.

ANET .25% position: Under a very large and black cloud with non litigative company suing them, one of their own founders suing them and most of the top execs from the company suing them…incest all around. I own it and am under water but will wait it out since the original story sounded so exciting. I wait.

UBNT 3.9%: I’m a hold due to the disruptive nature of their business, their strong communal support and their founder/CEO. I have faith here that whatever twisting and turning is necessary, Pera will get the job done.

GILD 4.3%: I’m a believer here and this reminds me exactly like AAPL story which, during the dark days, I bought more just like I intend to buy more of GILD. Really, a tempest in a teapot since they have the BEST drug to eradicate a serious disease and all this talk of discounts is background noise. Plus they have a great pipeline of products and smart management that is paying a dividend and buying back stock and saving lives. What more would you want?

PFIE started out as 2.6% but now is a 1.9% position:
I think they just got caught in the oil mess and are being overlooked due to oil prices and their small size. I will wait for all this to clear up.

SZYM Started out as a 1.9% and now is a .6% position:
I recently sold 25 $1 puts and will earn about $1200 if the price stays above $1. Once they have an earnings season under their belt…or 2…I will probably sell out entirely of this position. I don’t mind starting over with them given the new thesis and starting over at $1 makes good sense to me, should it come to that. They have a loyal ownership base and to my knowledge, none of the big money guys have left yet so I don’t think there’s much more downside and if not, then it was a good buy at just over $2, for at least a profitable, short term trade.

Mykie

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Saul,
And I own all of them.
So the question for me is, do I stay in them or just cut my losses?
That is where I differ from you, you saw the changes and got out, well done.
As they say to traders" Don’t fall in love with your position", too often one does. You do not and that is why you are a much better investor for it.
Thank you for having started the board last year and thank you to all the great people who are willing to share their knowledge
Erik

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So the question for me is, do I stay in them or just cut my losses?
That is where I differ from you, you saw the changes and got out, well done.

But Erik, the question is what do you do NOW, when the prices are way down? Even if you understand the reasons they are down. While it’s against my general principles (which are to invest in companies without a lot of static), I wonder whether a position spread between these five might not do well over a couple of years. Two or three would probably go nowhere, or a little down, or a little up, but the other two or three might be back up a bunch in a couple of years. Trying to decide whether this would be a better bet, or whether it would be better to stick with the successful stocks I already have, which I believe will be higher in two years for sure. Not a clear decision at all.

Saul

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ANET: Waiting for things to clear. Things are too fluid right now.

PFIE: Decline is w.r.t to Oil becoming cheap. Will wait to see what happens once Oil starts climbing back.

UBNT: Holding as I think they have a technology that is needed now. For most of the underdeveloped countries in the world, putting optical fibers is not an option and sometimes dangerous (think Afghanistan).

GILD: Expand whenever you can. This company is in post HCV era now and has plenty in the pipeline to keep growing.

SLZM: Have a very small position (0.46%) and being an environmentalist, I would like them to eventually succeed. If I had bigger position I would have readjusted but will hold for now.

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Saul,
Two or three would probably go nowhere, or a little down, or a little up, but the other two or three might be back up a bunch in a couple of years. Trying to decide whether this would be a better bet, or whether it would be better to stick with the successful stocks I already have, which I believe will be higher in two years for sure. Not a clear decision at all.

The thing that’s not clear to me is what’s clouding your decision.

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The thing that’s not clear to me is what’s clouding your decision.

Hi Brittlerock. I guess it’s that some of these stocks are so far down (SZYM, PFIE, etc) that with a bit of good news they might double or triple, just going half way back to where they’ve been. This made me toy with taking the equivalent of one full position, and dividing it among the five. Haven’t done it though.

Saul