Three Stocks For The Long Haul

Declan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I have reviewed over 80 stocks as investment opportunities. Some were more successful than others; for example, Tesoro Corporation (best performer) gained 99% within a sector that has underperformed the broader market, but Penn Virginia Corp (worst performer) dropped 33% and is unlikely to recover from the share dilution that cut the price. Collectively, 65% of the stocks I have featured have gained, with an average return of 6.6% for all featured stocks (compared to a 6.7% gain for the S&P over the same period).  In my review last month, I featured two stocks down double digits on their feature price, but which I own and will be looking to add to in the near future.  In this article, I will take a look at featured stocks I don't currently own, but will certainly consider for my portfolio in the future.

Tenet Healthcare Corp (NYSE: THC), featured last November at $25.18 a share, was a recommended covered call candidate in my review last month. While the stock is up over 50% on my feature price, it remains down over 80% from its 2002 high! It will take a long time to recover lost ground from many years of extended selling, but is at least on the right track, with the wind at its back.

Recent earnings point to a solid recovery supported by investor buying. Quarterly revenue grew by 7% and reversed an EPS loss in the prior year, but at $2.3 billion was below analyst estimates of $2.5 billion.  For the full year, the company earned $1.30 per share on $9.9 billion in revenue.  Admissions were up, and out-patient surgeries increased 13%. Expanded Medicaid is currently en route for Florida and New Jersey, and CEO Trevor Fetter expects all states will have to do likewise.  Twenty per cent of Tenet Healthcare Corp's beds are located in Texas, where 25% of the state's population is uninsured.  The company provided $450 million in unpaid care each year, but this could be reduced if more states adopted the health-care law.

The impacts of the health-care reform bill will continue to drive new earnings growth over the next few years, providing the basis for the long term recovery in the stock's price.  Next year is seen as more important for the company. The outlook is more negative for the next quarter, but this shouldn't matter in the long term.

NetEase.com (NASDAQ: NTES) was featured in April of last year.  The stock took a major hit in November, dropping from $56 down to $37 in the space of a few weeks.  The stock has worked its way back, driven by strong Q4 earnings that attracted two days of buying which was four times typical average trading volume.

NetEase.com has continues to struggle with Activision Blizzard (NASDAQ: ATVI) licensed operations.  Activision Blizzard saw a quarterly drop in subscriptions to its World of Warcraft franchise, and attributed the loss to its Chinese operations (which NetEase operates). However, NetEase.com did not express such disappointment in their earnings call. Activision Blizzard's next foray into the Chinese market is with a new Call of Duty, which it is developing with Tencent.  The company hasn't announced a launch date, but this is expected sometime in 2013.  If successful, it could lead to a separation in the NetEase.com - Activision Blizzard relationship, and perhaps thwart any Diablo III partnership. A break in the partnership would also remove marketing costs incurred by NetEase.com for promotion of said games, which are perhaps significant (given their mention), but don't come with individual specifics.

However, the Activision Blizzard story may just be a smoke screen for NetEase.com success, namely of its in-house gaming products.  The Chinese gaming market is well on its way to rivaling the U.S. market in revenue, with $10 billion generated in 2012.  NetEase.com reported $1.2 billion in revenues for last year, which was a 12% gain on the previous year.  Quarter-over-quarter earnings gained 14%, with new two in-house games: Kung Fu Master and Heroes of Tang Dynasty II, coming on stream in the latter part of the year.  NetEase.com doesn't quote specific figures for individual games, but were "particularly" satisfied with games like Kung Fu Master, and would look to invest more resources to develop it through game expansions.

Finally, ISIS Pharmaceuticals (NASDAQ: ISIS) was featured in September last year. The stock suffered heavy selling prior to its FDA pre-approval announcement for KYNAMRO. The stock ultimately went on to lose 40% as clinical trials pointed to a number of side effects with the drug, which threatened final approval for the drug.  However, investors took this opportunity to buy into what ultimately proved to be a successful FDA drug approval at the end of January.

What's interesting about the KYNAMRO approval process was that the worst of the selling, and the best of the buying, happened before the FDA announced.  The official FDA announcement boosted the stock, but the bulk of the gains were already banked at that point.  Ultimately, the stock is down just 2% from when I covered it in September, but it's had quite the ride between then and now! Despite this, the company will have to manage revenue expectations for a drug with significant side effects.  Approval is good news, but investors may want to be conservative in their expectations for the first revenue year.  This conservative outlook may lead to a 'negative' reaction in price, but it could also be an opportune time for building a position in the stock.

ISIS Pharmaceuticals competes in the RNA space with Alnylam Pharmaceuticals (NASDAQ: ALNY).  While market evaluations of the two companies are about equal at $1.5 billion, ISIS Pharmaceuticals has a significantly higher number of Phase II and Phase III products in the pipeline.  ISIS Pharmaceuticals also enjoys a higher revenue stream than Alnylam Pharmaceuticals, and this will improve with KYNAMRO.  The chief concern for Alnylam Pharmaceuticals is the insider selling, particularly an offload by Alnylam Pharmaceuticals' largest shareholder, Novartis. ISIS Pharmaceuticals could benefit from rotation out of Alynylam Pharmaceuticals should sellers turn up the heat in the latter stock.


fallond has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard and NetEase.com. The Motley Fool owns shares of Activision Blizzard. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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