The stock market seems to be touching new all-time highs on a consistent basis -- and it may not be all fluff. Many companies and industries have reported impressive full-year 2016 earnings, and the economy as a whole appears to be continuing its expansion. Investors are optimistic that the good times will last for at least a little while longer.
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A rising tide may lift all ships, but there's no doubting that some stocks are hotter than others. Investors in Northern Dynasty Minerals (NYSEMKT: NAK), Resolute Energy (NYSE: REN), and Editas Medicine (NASDAQ: EDIT) have enjoyed quite a run recently. But while the three stocks have had success recently, I have absolutely no interest in adding them to my portfolio. Here's why you may want to consider keeping your distance, too.
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World's largest headache?
Northern Dynasty Minerals may have given up a good chunk of its eye-popping gains in the last month, but the stock is still up nearly 320% in the last year. Investors thought that a Trump presidency would result in deregulation, specifically for strict environmental laws, which would grease the wheels for getting the company's Pebble Project -- one of the largest undeveloped reserves of gold and copper in the world -- off the ground. Management wasted little time reassuring the market that its prospects were trending in the right direction.
In late January the company issued a press release stating that it had the backing of the new administration and told investors to expect a solution to the previously derailed permitting process with the U.S. Environmental Protection Agency within 100 days. A new partner would be found to help develop Pebble by the end of the year, too.
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But the details haven't quite supported the initial euphoria.
For instance, even if the EPA agrees to traverse the permitting process with Northern Dynasty Minerals, it could take up to four years and $150 million to complete -- and that's if everything goes smoothly. Then, the company has to spend, presumably, hundreds of millions to billions of dollars to develop the Pebble Project before the first ore can be extracted and sold. One big problem: The concentration of gold in ore found during the company's own exploratory drilling is at least half of that found in other American gold mines, which are also among the world's most expensive.
In other words, everything has to go perfectly (and then some) for Northern Dynasty Minerals to make investors money on a consistent basis. I'm not risking it.
A premium valuation could squeeze investors
Resolute Energy stock was trading at $32 per share when I first told investors that they should consider locking in gains. It has gained another 46% since then thanks to a continued stream of favorable developments. The company exited 2016 producing over 20,000 barrels of oil equivalent per day (BOE/D), mostly from its high-growth assets in the Permian Basin, and expects its full-year 2017 average production to be up to 40% higher. It also agreed to a new $150 million credit facility and reported an 82% increase in proved reserves, which now stand at 60.3 million BOE.
Operations are certainly improving and the balance sheet is becoming healthier, but I still won't be going near the stock. Why not? Resolute Energy owns a market cap near its all-time high set in 2011, but it's still far from achieving the same financial performance. Consider that full-year 2016 revenue will easily be less than half of the all-time high watermark of $350 million set in 2013. And although EPS is improving each quarter, the company is still far from profitability. Even without accounting for transition-related expenses, its gross profit in the third quarter of 2016 was half of the quarterly average from 2013.
Put another way, while investors are rewarding Resolute Energy stock for rapidly improving operations, there's a long way for the company to go before it really earns its current valuation. That hints that the stock may struggle to find sustainable gains in the future, or may even give up some of its recent gains.
Undisputed winner of gene editing legal spat
Editas Medicine stock is down roughly 19% in the past year, but it has been on fire since last November. The biggest catalyst, of course, was the recent U.S. Patent and Trademark Office decision that allowed the company's licensed intellectual property to stand. It swiped away the legal uncertainty hanging over the stock regarding the genome editing tool known as CRISPR, which is the centerpiece of the company's gene editing technology platform. The details of the decision also meant the company wouldn't have to go through the potentially messy process of licensing additional patents, which could have come at a substantial cost both upfront and in future milestone and royalty payments.
The decision means investors can now focus on more familiar biopharma risks, such as the uncertainty of clinical trials. However, investors are only at the beginning of a long R&D process. In fact, Editas Medicine won't begin its first clinical trial until later this year at the earliest.
It's not all bad news. The company ended September with $200 million in cash on hand. That can go quickly, especially for a company without revenue, but Editas Medicine has only partnered one of its seven therapeutic programs. Its two peers, Intellia Therapeutics and CRISPR Therapeutics, have partnered three and five programs, respectively. It seems that management -- or potential partners -- waited for the patent issue to be cleared before engaging in collaborative talks. With the worst now over, and the company's intellectual property position stronger than ever, management should be able to cash in on its gamble and pad its cash position even further with new partnerships and upfront payments.
Therefore, my decision to stay away from Editas Medicine isn't based on my concerns with the company's operations, but rather due to the simple fact that the company is still in the earliest stages of development with a technology that has yet to be proven in humans. Until the range of possible outcomes is narrowed and more certainty emerges for the pipeline, I won't be touching the stock.
What does it mean for investors?
A rising stock market can mask the potential red flags of a stock. Despite recent gains by Northern Dynasty Minerals, Resolute Energy, and Editas Medicine, investors that dig deeper into the details will discover solid reasons to think twice before starting a new position. I'll be looking elsewhere for stocks to add to my portfolio.
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