Editor's Note: Today, we debut Small-Cap Spotlight, a new weekly feature on TheStreet.com, aimed at providing readers with straightforward opinions on the most interesting stocks in the small-cap universe.
Frank Curzio and Larsen Kusick closely follow many of the small names that offer significant potential for aggressive investors looking for unique investing situations. Each week they'll highlight two plays and tell readers whether readers should consider investing in some of the most exciting small-cap opportunities. Click here to send them ideas of stocks you'd like them to cover in the future.
The Danger in Dendreon
Kusick: A Bad Bet
Our first stock this week is a name that's had quite a ride since March:
, the biotech company that has seen Provenge, a vaccine for prostate cancer that is its most developed drug candidate, spur intense debate among health-care professionals and investors alike.
The rollercoaster ride began on March 29, when an FDA panel voted 13-4 in favor of the efficacy of Provenge and 17-0 in support of its safety, triggering a short squeeze that sent
Following the vote, bears cried foul, noting that the FDA effectively changed its efficacy question after an initial negative response from the panel, which voted no when asked if the data "establish the efficacy" of the treatment (the key word being "establish"). But the panel changed its tune when asked if the data were "substantial but not conclusive." Nevertheless, the bulls won the round and shares pushed well over $20.
Early this month, however, shares fell back to the $6 area when Dendreon received an approvable letter from the FDA that requested
additional data on Provenge, momentarily extinguishing the bulls' hopes that a product could go to market anytime soon.
And just when it seemed the news flow had stopped, Dendreon announced on Thursday morning that the FDA would accept either a positive interim or final analysis of survival from the company's ongoing IMPACT study (already in progress) as sufficient for its request for additional data.
The announcement gave clarity to the timing behind a potential approval of Provenge, as Dendreon has said that it expects to complete enrollment in the IMPACT study by year's end, with interim survival results expected in 2008. In addition, the FDA's acceptance of data from an already in-progress study means that Dendreon won't have to pony up more cash to start a whole new trial. Shares rallied back above $10 on the news, fueled in part by massive short-covering.
With all this news causing shares to trade up and down and up again, should investors be putting their money into this stock? I'm going to say no, but the reasoning takes a bit of explanation. Most important, readers should understand all of the factors that have made Dendreon one of the most volatile stocks in the market over the past two months.
What struck me when I first stumbled on Dendreon well before the March FDA vote was how negative much of the analyst community was toward the company. Based on what analysts were saying, you'd think Dendreon shouldn't have been in business. In particular, the bears were confident that the upcoming Provenge phase 3 trial would fail to meet its primary endpoints.
As it turned out, the conviction of the short-sellers and the confidence of the negative analysts set up the perfect situation for a short squeeze, despite the fact that the results left a lot of room for interpretation.
The primary driver behind the big moves in Dendreon has been sentiment: the shorts and analysts being wrong about the March 29 vote, and the big decline from levels near $20 back down to single digits happening when the outlook turned out to be dimmer than the bulls were expecting. Thursday's big move once again illustrates how the massive short position can generate extreme swings in the share price.
I believe that Provenge has potential, and it may end up being a winner sooner or later. But there have been enough doubters about the effectiveness of the treatment -- including professionals in the oncology field -- to make me think that the road ahead will be long and difficult. If I'm putting my money to work and buying shares in a small-cap company, I want growth and a solid plan for the future, not just speculation about a drug the entire market already is focusing on..
In the case of a biotech that's unprofitable, I want a solid research platform, intellectual property and/or numerous early-stage treatments that aren't yet priced into shares. To me, going long Dendreon is nothing more than making a bet on Provenge, and that seems more like gambling than investing. I simply can't give my blessing to any investor looking to get into this stock at the recent price of $6.70 -- or at any price, for that matter.
As a closing note, let's not forget the
stock sale by Dendreon's CEO Mitchell Gold immediately after shares popped in early April. The company did its best to explain that there was only a short window during which the executive could make a sale, but frankly I don't care. It looks terrible, smells fishy and makes me all the more happy to say "pass."
Curzio: Speculative Buy-and-Hold
I also remember reading research reports for Dendreon back in January when shares were trading at $4. One report had a sell rating with a target price of $1.50 (which was recently reduced to $1.00), and another had a buy rating with a target price of $12. If you thought it was confusing then, it's a lot worse now. But unlike Larsen, I do see potential and think the drug is worth making a bet on, eventually.
After today's announcement, management anticipates that it will have interim survival results for its Provenge study in 2008. While shares are up about 40% on this news, it does not mean the study will yield positive results -- so the stock may be a little ahead of itself. Also, Dendreon will probably need to raise additional capital sometime this year. This is when I would be a buyer.
Looking at the financials, (something usually not associated with the biotech sector), Dendreon has $77 million in cash as of last quarter. Management anticipates that its capital expenditures for 2007 will be approximately $95 million and only $55 million in 2008 -- due to costs already incurred to prepare for the commercialization of Provenge.
With only $77 million in cash, and roughly 18 to 24 months (by my estimate) before the interim data is presented to the FDA, the company will likely need to raise capital -- which should not be a problem based on the potential for Provenge. Recent data supplied by numerous sources, including a 4.5 month survival difference in patients taking the drug, has me convinced that Provenge will eventually be approved by the FDA.
But based on today's recent move, I would wait until after Dendreon announces that it will raise capital. Shares are likely to sell off, as was the case back in November when the company said it would sell 9.9 million shares to institutional investors; then I would buy and hold. This is a speculative call, but given the enormous potential of Provenge, it could prove to be rewarding when the time comes.
Curzio: Chew on Crocs
, the maker of the comfortable yet aesthetically challenged clogs, has been on a tear since January, climbing 80% to a recent $80, in the face of heavy shorting. Below, Frank and Larsen debate if this shoemaker deserves a spot in your portfolio.
The company has defied most critics who claim that its valuation is too rich and its shoes are a fad, and I believe the stock is a buy in the short-term.
At its current price, Crocs' market cap is twice that of competitors
. From a valuation perspective, shares are trading 20 times next year's estimates of $3.80 -- just slightly ahead of the industry average of 18 times. But Crocs is expected to grow earnings in excess of 25% over the next three to five years, according to Capital IQ -- a much higher rate than its competitors. This growth trend is an indication that Crocs is not as expensive as some analysts suggest.
Crocs' shoes are flying off the shelves, domestically and internationally. Its products are now sold in 37 countries through more than 8,000 international retail-store locations. In 2005, international sales accounted for 7% of total revenue, and in 2006, this number swelled to 32%. It would not be surprising to see international sales grow to 50% by next year as new products hit the market.
These numbers are not associated with a fad. Based on the growth potential heading into the summer, it's likely that Crocs will beat estimates for at least the next two quarters, which will likely result in a higher stock price. The short-term outlook remains favorable, and I'd be a buyer here.
Kusick: This Stock Wears Well
Crocs happens to be a stock that I've
written favorably about since last fall. After the stock's strong run in 2007, some investors might be wondering if it's time to sell and move on, while others might think they missed out by not buying earlier. I believe that the recent strength is a result of investors beginning to realize that Crocs are not a fad, and that the company is only beginning to capitalize on the popularity of its brand.
The biggest knock on the stock is valuation, as shares are trading around 38 times trailing 12 month earnings. However, as Frank already mentioned, shares are trading around 20 times 2008 earnings estimates, which is much more reasonable. And besides, the high valuation on shares of Crocs is nothing new, and anyone who passed on the stock a year ago missed out on big profits.
We're not talking about a value play here. This is growth, growth, growth. Crocs is one of the fastest-growing companies in the footwear-and-apparel sector, and the company boasts an extremely loyal existing customer base and a reputation for comfort that should drive continuing growth in market share as the company introduces models with a style that's more mainstream than its traditional brightly colored clogs. As long as the company keeps growing, the P/E ratio will always look bloated compared to its peers.
Crocs is exactly the kind of company I want to own, based on a differentiated product, big international potential and what I believe is a reasonable valuation relative to earnings growth. I like the stock here, but investors who are afraid they might be chasing it at this price can employ a "buy half now and the other half 5 points lower" strategy.
This means that if you want to invest $10,000 in the stock, put $5000 to work today, and wait to see if the volatility in this name gives you an opportunity to fill your position lower. Of course, you run the risk that the stock never comes in to the lower price point, but that's why you put on the half position to start -- so you don't miss the entire opportunity.
A big driver for shares over the past year has been the large short position, which stood at about 28% of the float as of May 15 (most recent data). The shorts have been dead wrong with their skepticism about Crocs' valuation and the belief that the shoes are destined for "fad" status. Indeed, when looking at the stock, the large short position is icing on the cake.
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In keeping with TSC's editorial policy, Frank Curzio doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Frank X. Curzio is a research associate at TheStreet.com, where he works closely with Jim Cramer and and writes
. Previously, he was the editor of The FXC Newsletter and senior research analyst for Greentree Financial, and passed his Series 7, 63 and 65. He appreciates your feedback;
to send him an email.
In keeping with TSC's editorial policy, Larsen Kusick doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Kusick is a research associate at TheStreet.com, where he works closely with Jim Cramer and works on TheStreet.com Stocks Under $10. Prior to joining TheStreet.com, he worked in options trading and management consulting. He appreciates your feedback;
to send him an email.
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