Some Stocks Are Best Kept at Arm’s Length
BY John Dorfman
Like a politician’s promise, some stocks have an alluring story but little to back it up.
You are definitely walking into danger if you buy a stock that sells for 100 times revenue or more. These are concept stocks, the shares of companies that have done little or nothing yet but are expected to come up with a driverless car, a cure for a major disease, a blockbuster gold mine or some other fantastic breakthrough.
Most often, investors’ hopes are dashed.
Over the years (2000-2006 and 2012 to the present), I have compiled 11 lists of stocks selling for 100 times revenue or more. The one you’re about to read is the 12th.
On average, the stocks from warning lists have lost 32.6 percent in the 12 months after publication. By contrast, the Standard & Poor’s 500 Index has gained an average of 7 percent.
The warning list has shown losses, as I expect it should, in nine years out of 11. Twice (2003 and 2004), it showed a gain, but only once (2004) has it beaten the S&P 500.
All four stocks on last year’s list fell. In the biotech arena, Acadia Pharmaceuticals Inc. (ACAD) fell 48 percent, and Neuralstem Inc. (CUR) dropped 80 percent. Also in the medical sector, Accelerate Diagnostics Inc. (AXDX) lost 50 percent. The other stock on the list, Armour Residential REIT Inc. (ARR) declined 13 percent. Collectively, the four stocks on last year’s warning list were down 47.9 percent from Feb. 17, 2015, through Feb 12.
Bear in mind that results for my column picks are theoretical and don’t reflect actual trades, trading costs or taxes. The record of my column selections shouldn’t be confused with the performance I achieve for clients. And past performance doesn’t guarantee future results.
What’s expensive
The average U.S. stock sells for 1.77 times revenue. I consider any stock that sells for five times revenue expensive. A stock that sells for 100 times revenue is ridiculously expensive in my judgment — a valuation so extravagant as to make gains unlikely.
Of course, it’s possible that investors’ sky-high hopes will be rewarded. Of the 58 stocks I’ve warned against because they sold for 100 times revenue or more, 44 declined in the next 12 months.
Here are three that I recommend investors stay away from. If you’re a short seller who bets on selected stocks to decline, you might want to look at these as potential shorts.
Acadia Pharmaceuticals
Even after its 48 percent decline in the past year, Acadia Pharmaceuticals is the most expensive stock on my overpriced list, selling for 22,078 times revenue. This San Diego biotech company has drugs in Phase II or Phase III clinical trials for the treatment of Parkinson’s disease, Alzheimer’s disease and schizophrenia. The company had revenue last year of $120,000 and has a market value of a little over $2 billion.
For Acadia’s drugs, the “addressable market” is huge, but even if its drugs can prove safety and efficacy, many questions remain unanswered regarding marketing arrangements, royalties and future competition. Several directors have sold shares in recent months at high prices than today’s $18 or so. And the company issued new shares in January, diluting existing shareholders.
Many traders are looking for a big drug approval here as soon as May. That may happen, but there’s still a long road ahead.
Like a politician’s promise, some stocks have an alluring story but little to back it up.
You are definitely walking into danger if you buy a stock that sells for 100 times revenue or more. These are concept stocks, the shares of companies that have done little or nothing yet but are expected to come up with a driverless car, a cure for a major disease, a blockbuster gold mine or some other fantastic breakthrough.
Most often, investors’ hopes are dashed.
Over the years (2000-2006 and 2012 to the present), I have compiled 11 lists of stocks selling for 100 times revenue or more. The one you’re about to read is the 12th.
On average, the stocks from warning lists have lost 32.6 percent in the 12 months after publication. By contrast, the Standard & Poor’s 500 Index has gained an average of 7 percent.
The warning list has shown losses, as I expect it should, in nine years out of 11. Twice (2003 and 2004), it showed a gain, but only once (2004) has it beaten the S&P 500.
All four stocks on last year’s list fell. In the biotech arena, Acadia Pharmaceuticals Inc. (ACAD) fell 48 percent, and Neuralstem Inc. (CUR) dropped 80 percent. Also in the medical sector, Accelerate Diagnostics Inc. (AXDX) lost 50 percent. The other stock on the list, Armour Residential REIT Inc. (ARR) declined 13 percent. Collectively, the four stocks on last year’s warning list were down 47.9 percent from Feb. 17, 2015, through Feb 12.
Bear in mind that results for my column picks are theoretical and don’t reflect actual trades, trading costs or taxes. The record of my column selections shouldn’t be confused with the performance I achieve for clients. And past performance doesn’t guarantee future results.
What’s expensive
The average U.S. stock sells for 1.77 times revenue. I consider any stock that sells for five times revenue expensive. A stock that sells for 100 times revenue is ridiculously expensive in my judgment — a valuation so extravagant as to make gains unlikely.
Of course, it’s possible that investors’ sky-high hopes will be rewarded. Of the 58 stocks I’ve warned against because they sold for 100 times revenue or more, 44 declined in the next 12 months.
Here are three that I recommend investors stay away from. If you’re a short seller who bets on selected stocks to decline, you might want to look at these as potential shorts.
Acadia Pharmaceuticals
Even after its 48 percent decline in the past year, Acadia Pharmaceuticals is the most expensive stock on my overpriced list, selling for 22,078 times revenue. This San Diego biotech company has drugs in Phase II or Phase III clinical trials for the treatment of Parkinson’s disease, Alzheimer’s disease and schizophrenia. The company had revenue last year of $120,000 and has a market value of a little over $2 billion.
For Acadia’s drugs, the “addressable market” is huge, but even if its drugs can prove safety and efficacy, many questions remain unanswered regarding marketing arrangements, royalties and future competition. Several directors have sold shares in recent months at high prices than today’s $18 or so. And the company issued new shares in January, diluting existing shareholders.
Many traders are looking for a big drug approval here as soon as May. That may happen, but there’s still a long road ahead.
AR Capital
AR Capital Acquisition Corp.(AUMA) is a blank-check company (no substantive operations yet) controlled by real-estate and brokerage titan Nicholas Schorsch. Mr. Schorsch is currently defending a lawsuit brought by teachers’ unions among others, accusing him of accounting irregularities and unfair self-enrichment at American Realty Capital Properties, another company he has controlled.
AR Capital shares go for about 39,000 times revenue. Of course, the company, formed to make one or more acquisitions, hasn’t made any yet.
Pdv Wireless
Based in Woodland Park, N.J., pdv Wireless Inc. (PDWV) makes wireless communications systems that help companies with mobile workforces stay in touch. The initials pdv come from the company’s former name, Pacific DataVision. It has been public for only a year and so far has posted losses. The stock is followed by only two analysts from smallish brokerage firms, both of whom recommend it strongly.
Pdv shares fetch 105 times revenue. By contrast, AT&T trades at 1.5 times revenue and Verizon at 1.6. Let’s not forget what a harshly competitive field telecom is.
Disclosure: I hold a short position in Armour Residential REIT for one client. I have no positions in the other stocks discussed in today’s column, personally or for clients.
AR Capital Acquisition Corp.(AUMA) is a blank-check company (no substantive operations yet) controlled by real-estate and brokerage titan Nicholas Schorsch. Mr. Schorsch is currently defending a lawsuit brought by teachers’ unions among others, accusing him of accounting irregularities and unfair self-enrichment at American Realty Capital Properties, another company he has controlled.
AR Capital shares go for about 39,000 times revenue. Of course, the company, formed to make one or more acquisitions, hasn’t made any yet.
Pdv Wireless
Based in Woodland Park, N.J., pdv Wireless Inc. (PDWV) makes wireless communications systems that help companies with mobile workforces stay in touch. The initials pdv come from the company’s former name, Pacific DataVision. It has been public for only a year and so far has posted losses. The stock is followed by only two analysts from smallish brokerage firms, both of whom recommend it strongly.
Pdv shares fetch 105 times revenue. By contrast, AT&T trades at 1.5 times revenue and Verizon at 1.6. Let’s not forget what a harshly competitive field telecom is.
Disclosure: I hold a short position in Armour Residential REIT for one client. I have no positions in the other stocks discussed in today’s column, personally or for clients.
