Gem Screener: Momenta Pharmaceuticals (MNTA)
Declan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In my first post I outlined an investing strategy that has proven successful for me, certainly better than my more active hands-on trading has returned! But this is only half the story, next are the stocks that go into making the strategy work.
While I consider myself a technical trader (i.e. a trader who considers price action more important than any other factor) I have always looked to fundamentals for screening potential stock candidates. The basic filter criteria I adopt is as follows:
- % Chg EPS; Q to last yr Q of 25 % or more
- % Chg EPS; YTD to last YTD of 25% or more
- % Chg Revenue; YTD to last YTD of 25% or more
- Return on Average Equity of 17% or more
- 5-Yr Revenue Growth Rate of 15% or more
- Market Cap of at least $50M
- Net Profit Margin of 18% or more
- Current Price above $12
- Average 10-day trading volume above 250,000 shares
When this scan is run, 35 stocks are returned. The top-dog on the list (as ranked by Market Cap) is Apple (NASDAQ: AAPL), but Apple is hardly a new stock for anyone! But looking further down the list, particularly at the smaller cap stocks, can uncover some potential gems.
One of the slow burners on the list is Momenta Pharmaceuticals Inc (NASDAQ: MNTA). The company went public in 2004 and soared from $9 to over $30 in the space of a year. It subsequently walked itself back to $5 during the depths of 2008 despair only for it to claw its way back to the high teens, where it's currently pushing against $20 resistance.
While qualifying for the scan on the merits of its fundamental growth, the fourth-quarter outlook for 2011 is well below the comparable 2010 fourth-quarter projection (data from Estimize)
However, commentary on the company has been mostly positive; Seth Jayson of the Motley Fool had this to say on Momenta Cash Flows:
With questionable cash flows amounting to only 5.9% of operating cash flow, Momenta Pharmaceuticals' cash flows look clean. Within the questionable cash flow figure plotted in the TTM period above, stock-based compensation and related tax benefits provided the biggest boost, at 5.1% of cash flow from operations. Overall, the biggest drag on FCF came from changes in accounts receivable, which represented 20.9% of cash from operations. Momenta Pharmaceuticals investors may also want to keep an eye on accounts receivable, because the TTM change is 3.0 times greater than the average swing over the past five fiscal years.
While UBS Investment Research suggests strong partnership opportunities with bigger pharmaceutical companies in the follow-on-biologics space, although a projected price by UBS for the stock by the end in 2012 is around its existing $19 mark. It has also experienced a net outflow of insititutional money in the current quarter, about 7% of its float according to Rebecca Lipman of the Motley Fool.
Which brings us round as to what to do?
As is typical for a Biotechnology Stock it's prone to big price swings. The sharp sell off in September 2011 was triggered by lowered Revenue guidance on approval of a generic version of Lovenox, a blood thinner drug. But this bad news proved to be good news for value players who stepped in to grab shares from scared longs.
Because biotechnology stocks are so volatile, adopting the dollar-cost-average approach when the S&P is 10% or more from its 200-day Moving Average may mean missing other buying opportunities. An alternative to try here is to start accumulating when Momenta gets to its 40-week Moving Average (or 200-day Moving Average). In the past, this has proven to be a good starting point in building a position in the stock.
But we also need to define the risk. At what point should one stop buying, or sell an existing position if things go pear shaped?
The $10 mark looks to be firm support; at least buyers were prepared to step in at close-to-$10 from early 2010 onwards. If MNTA was to drop below $10 on weekly volume of 15 million shares or more, might be reason enough to take to the exits too.
The beautiful unknown is the upside. While it trades below $20 it's 'capped' and likely off the radar of momentum buyers (the short term mover-and-shakers of a stock's price). If it gets above $20 it may quickly push to $26 before entering a secondary consolidation. This secondary consolidation generally forms the "handle" of a "cup-and-handle" pattern. This in itself is a buying opportunity, particularly on the move from the "handle" and past $26.
As for now, it may be worth a nibble and is certainly a good one for the watchlist.
UPDATE: On January 26th the stock was crushed on a stay on an injunction against Watson Pharmaceuticals marketing a generic formula of Lovenox. At current pricing the stock is trading 9% below its 40-week MA. At this point it's offering good value assuming it can stay above $10. With a dollar-cost-average approach one is not trying to pick a bottom, but to be building a position using small buy-ins when the stock is 'oversold'; now certainly appears to be one of those times. It's unlikely to be challenging $20 again until to the second half of the year (at the earliest) which offers a few earnings releases to assess the impact of today's news on the bottom line. The next quarter will be of particular interest because the company has already projected sharply lower revenues. The guidance they offer then will offer a more rational assessment of today's news.
Holders of Momenta stock before today may be crying now, but that doesn't mean the stock is not trading at value.
Motley Fool newsletter services recommend Apple and Momenta Pharmaceuticals. The Motley Fool owns shares of Apple and Momenta Pharmaceuticals. fallond has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.