Dec 13 2013, 07:30 | 70 comments | includes: FTEK, HYGS, IMUC, MNKD, TA, TNXP
Disclosure: I am long TNXP, HYGS, MNKD, IMUC. (More...)
(Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.)
Exactly one year ago today Seeking Alpha published our first of six "Pro" articles. It has been a very successful year for the six stocks we have written about.
Each Pro article we wrote is an in-depth analysis (about 30 pages) of a stock we bought and recommended buying, and on average these stocks have gained 174% from our first recommendation. So let's see what we can learn from the 2013 "Pro" year, and look ahead to 2014.
The Results
Here are the peak and current returns for each of the six stocks: Initial Price
It might be tempting to say that these stocks made gains based on initial excitement generated by the articles, but that's really not the case.
In fact, none of these stocks peaked in the 30 days that the articles were public (not including TNXP, but that article was published a week ago). And half of these stocks have made fresh highs in the last week.
Six times in a row we recommended a stock that went on to double on its own merit, within months. What did we see beforehand? Usually complexity, growth, and insider ownership.
Complexity
Understanding some stocks requires doing some self-education. Maybe complex stories are too difficult for some investors to understand, but more than that they seem so scary and time-consuming. In each of these six stocks complexity seemed to be a key to the stocks being undervalued when we found them.
Growth
In a real way, growth has never been an issue in the stock market - ever. The US economy has been fielding more and more workers for its entire history. As the baby boomers retire, that's all over, probably forever, and it is happening around the world.
For the first time ever, growth can no longer be assumed. It logically follows that growth will be valued at the highest premium ever assigned by the market, now and for the foreseeable future.
Each of these six stocks is a growth story. The market wants real growth, does not have enough of it, and will assign it a high value.
Insider Ownership
Given that we are looking at complex growth stocks, insider ownership is an excellent indicator of a good buy. The people running the business understand its complexities, and can have an excellent feel for its prospects. Insider ownership was noteworthy in these six stocks.
Fuel Tech
Fuel Tech was a prototype pick - a complex growth story with bankable insider ownership.
It took time to understand exactly what this energy/chemical technology company was selling. But with a little effort it was plain to see it had large addressable markets that could gobble up their products for years to come.
Fuel Tech's growth story seems to be playing out, it made a 52 week high in the last week, two-and-a-half times where we recommended it. Insiders were the tip-off, the CEO was a large owner, and then bought meaningfully more.
TravelCenters of America
A complex growth story. TA was complex in a different way than the other five stocks. TA was basically a lesson in reading the filings. This stock had a horrible reputation, something along the lines of the Portnoy family would never let it make money. But after looking into the complexities of the lawsuits and contracts, the story was much better than advertised. And the business was worth the wait, an aggressively expanding oligopoly with cash flows that should be secure as long as the American highway system is intact.
MannKind
Like Fuel Tech, MannKind was a complex growth story with enormous insider ownership. Understanding MannKind's technology and history was exhausting - very daunting.
That is probably why it soared to more than four times where we first recommended it.
(To be clear, we first wrote about MNKD earlier than that, but we said it could easily issue shares and per our disclosure we had not bought it. After it did indeed issue shares we bought - per our disclosure - and recommended buying it.)
MannKind was by far the largest of our six picks, exceeding $2 billion in market cap.
Hydrogenics
Complex - check. Growth - check. Insider ownership - check. Hydrogenics made a new 52 week high yesterday, about two-and-a-half times where we first recommended it.
ImmunoCellular Therapeutics
A complex growth story that moved significantly higher on its own merit. We first reccommended IMUC after it had been removed from the Russell 2000 for valuation reasons. From there at $2.15, it traded all the way to $4 in the last month.
This was for good reason. New information came out about their original ICT-107 trial. 8 of the 16 glioblastoma patients lived for a full five years, just plain miraculous.
It was very disappointing then, that the current trial reported results that were nowhere near as encouraging.
We have reviewed the released results and listened to the conference call, and along with our original research and the follow up data from the original trial, this is our summarized opinion:
This trial's data will continue to get better over time, like the original. Some patients will show a continued response, but this information will take years to play out, as with the original trial. I do not think that IMUC will have a product in the market for years, and I think that is a shame. I think that eventually IMUC will raise money and run a phase III trial in ICT-107.
We did not sell the IMUC shares we had before the news, and we have no plans to. But we think it will take a long time before IMUC recovers.
What to do? Plainly, I think that Tonix Pharmaceuticals will make up for IMUC's recent drop a number of times over.
Tonix Pharmaceuticals
We think TNXP will be the best performing stock of all.
Please read our Pro article on Tonix before it is too late! It is the only one of these six articles that is still free to read, and it goes private for non-Pro subscribers on January 1st.
Tonix is a complex growth story, and has perhaps the best insider ownership profile of any of these stocks. Tonix has more than doubled since we first recommended it, but has fallen off of its recent highs, and we think this is an entry point that everyone should take advantage of.
I won't rehash the article here (please read it now!), but in the week since the article was published there have been some bullish developments, so here are eight updates on TNXP:
1) In the Pro article we refer to TNXP as having 10 million shares. This is because we think TNXP is likely to trade much higher, and if that is the case there are a number of warrants that would be exercised. This would bring a lot of cash into the company and also bring the total share count to 10 million, up from the current count of 5 million (a meaningless number for a bull).
Part of the reason that we think TNXP traded down from about $10.50 to $8.00 is that there were almost half a million $8 warrants expiring on December 21st of this year. Up until last week it must have looked to those warrant holders that they would not get a chance to exercise them, and these warrants were almost definitely exercised in the last week. This would explain the quick dip, does not impact the share count (they were issued a year ago and already counted in the 10 million), and..
2) Tonix does not need money. They said as much twice in the most recent 10-Q, just raised what they needed in August, and if there was any question these warrants probably put about $3 million more cash in the coffers. Tonix has very significant inside ownership, and they don't want to be diluted any more than any other shareholder.
3) There are no more warrants likely to be exercised for years. There are no other warrants that expire for another four years (except for a small lot of 15,000 at $20 exercise) and it would not make sense to exercise them any time soon at any price.
4) The result of that batch of warrants is an excellent entry point for a stock that is going much higher in our opinion.
5) CEO Seth Lederman said he thinks this is a good entry point (at just under $9) several days ago, and he emphasized something we did not note in our article: Tonix went through its formative years not listed on a major exchange, and literally never had an IPO. That may sound shocking given that the former CEO of Glaxo, Alza, and JAZZ, (the list goes on) are on the board of directors, but Tonix came public through a reverse merger.
That has a lot to do with the fact that relatively no one has heard of Tonix, and why TNXP sits at a small fraction of where the market may come to value it.
6) Some patients are already done BESTFIT. Tonix has said it is aiming to release results of the 2b BESTFIT trial in October. We think this is when they will partner and realize a billion dollar market cap and $100 share price.
Things seem to be going according to plan - Tonix announced that some patients have already completed the Phase IIb BESTFIT trial.
7) We think Tonix will get a fair partner deal. In the Pro article we discuss the "Celgene contingency," and we do think that management will hold out for a fair deal. But we do not think it will be hard for management to get a fair deal. The major pharmaceutical companies are going through a patent cliff, Cymbalta and Lyrica in particular are coming off patent, and companies need to replace revenues. Tonix' management could not be better suited to making a deal, they have done exactly these kinds of deals in the past, and with the biggest players. It is management's stated preference to partner, and it would make no sense for Tonix to try to take the drug to market by itself. TNX-102 SL will be prescribed by primary care physicians, and this requires a vast sales force like Lilly or Pfizer has. Partnering makes perfect sense for everyone involved.
8) One last point that Dr. Lederman has made in the past week is that one way to compare the effect of different treatments is by using the "Cohen effect."
We have noted that in the IIa study oral cyclobenzaprine improved symptoms across the board vs. placebo. As it turns out using the Cohen scale shows the three approved drugs with a score of about 2 out of 10 (10 being the best). In Tonix' 2a trial cyclobenzaprine scored a very high 7 on the Cohen scale.
Conclusion
In our first year of Seeking Alpha "Pro" articles we have uncovered six doubles in a row. Keys have been:
Complexity keeping the story a secret Growth being the most valuable asset, and Insiders pointing the way
We think that Tonix Pharmaceuticals will go on to be the best performer of all, and if it is like the others it will continue to run for months. It is our top pick for 2014, and we encourage everyone to please read our TNXP Pro article while it is public!
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