How Investing is Like the Olympics
Best Disruptive Stocks
First, a quick quiz.
Raise your hand if you’ve heard of Mallinckrodt.
Now, raise your hand if you’ve heard of Cadence Pharmaceuticals.
Odds are you recognized the name Mallinckrodt (MNK). It’s a big drug company (nearly $4 billion market cap) that traces its roots to 1867, when the three Mallinckrodt brothers founded a chemical company in St. Louis, Missouri. The company employs more than 5,500 people in 47 locations around the world, selling a wide verity of branded and generic drugs, including acetaminophen, codeine and morphine.
But you probably didn’t recognize Cadence Pharmaceuticals (CADX). The company is only 10 years old, has been public for only eight years and employs only 211 people.
In other words, Mallinckrodt is very visible, while Cadence Pharmaceuticals is not.
But investment-wise, it’s the little-known company that has far greater potential for growth!
In fact, I recommended CADX to you just three weeks ago (January 27), as part of my Best Disruptive Stocks series.
I wrote, “Cadence has a drug called OFIRMEV that’s an intravenous form of acetaminophen. Acetaminophen, of course, is well proven as a pain reliever, and the advantage of this form is that it can be administered in controlled doses intravenously, by hospitals. Additionally, it can be combined with opioids to treat more severe pain, in the end reducing the usage of opioids.”
Reducing opioid use is a noble goal because opioid prescription, unfortunately, sometimes leads to opioid addiction and abuse. And that sometimes leads to heroin, and that seldom turns out well.
Well, since I wrote about Cadence, two things have happened.
Philip Seymour Hoffman died from a heroin overdose, reminding us that anyone can fall victim to this drug.
And Mallinckrodt agreed to acquire Cadence for $14 a share, 27% over its previous market value.
I hope you bought some.
And if you didn’t, I hope you understand the lesson this acquisition reinforces.
The best way to win in the market is to own the stocks of fast-growing young companies that are becoming increasingly well respected by investors. As more and more investors conclude that it’s smart to buy these stocks, they tend to go up.
And if a big competitor concludes the young company would fit nicely into its own structure, it can buy the whole thing, giving shareholders a quick payback, just as Mallinckrodt has done with Cadence.
It saddens me slightly to see Cadence Pharmaceuticals snapped up by Mallinckrodt, because what could have been a great long-term investment has suddenly disappeared. But I can’t really complain about a 27% return a couple of weeks.
It’s not the best return from discovering a fast-growing young company, but it’s a good one.
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So what does this have to do with the Olympics?
It’s the big names of the past that got all the attention before the event—Bode Miller, Julia Mancuso, Shaun White, Shani Davis.
They were proven winners and it was easy for the media to write about them, talk about them, show video of their past wins.
But those big names, once they’ve peaked—and many of them have peaked—are doomed to become less successful, as they are beaten by up-and-coming athletes who aren’t famous yet.
It certainly happened this year.
Bode Miller—America’s most famous downhill skier, was looking for a gold medal but got eighth. Bode is 36 years old, while the new champ, Matthias Mayer, is 23.
Shaun White, the most famous snowboarder in the world as well as the richest, was looking for a third gold in the halfpipe but got fourth. Shaun is 27, while the new champ, Iouri Podladtchikov is 25—and the silver medalist, Ayumu Hirano, is 15!
Shani Davis, looking for a third gold in the 1,000 meters speedskating, got eighth place. Shani is 31, while the new champ, Stefan Groothuis, is 22.
To me, those old familiar athletes are no different from the old familiar names you can invest in like Apple, Cisco, McDonald’s and Microsoft. They’re well known, they’re comfortable, and it takes no effort to understand their business; you already know it. But everybody else already knows it too, and as a result, there’s no great investment opportunity there.
People on the inside of the sporting world knew very well which new kids were capable of upsetting those old winners. But the media gave us the easy stories—the stories that made us comfortable.
And here at Cabot, we know very well which new companies are capable of upsetting those old familiar names. We work hard to uncover and understand them, and we work hard to present them to you. But in the end, the real understanding—and the ultimate decision to act on the advice—is up to you.
Which brings me to the seventh installment of “Best Disruptive Stocks."
Ideally, these are companies that address a mass market, and thus have the potential to impact our lives for the better.
Ideally, these are companies that are young and not yet well known or well respected. Thus they have the potential for increased perception by investors as time goes by.
Ideally, these stocks are young and not widely owned. Thus they have the potential to be bought by more investors—especially institutions—and thus see their stocks soar over time.
All the Cabot editors have made contributions to this list of 10, and the stocks are being presented in no particular order, though I am trying to feature them when they’re at good entry points. I hope you enjoy them.
Disruptive Stock Number Eight
Workday, Inc. (WDAY)
Workday, which has been publicly traded since October 2012, offers Cloud-based enterprise software solutions. It’s already a major thorn in the side of Oracle and SAP and it has the potential to be a major long-term winner. Here’s what Mike Cintolo wrote about the stock in Cabot Top Ten Trader back on January 6.
“Despite being started by the founder of PeopleSoft, Workday is not your traditional software developer. The company is one of the many potentially disruptive start-ups that offer Cloud-based enterprise software solutions. Workday is horning in on SAP’s and Oracle’s markets, focusing on applications for human capital management and financial functions, including payroll, time tracking, expense management, analytics and financial management. The company’s full suite of Cloud applications are extremely easy to use and are updated rapidly, on average, three times a year, providing great value to customers. In fact, Workday’s customer satisfaction rate is an impressive 97%. Many investors were initially concerned that Workday would be a one-trick pony in the human resources market, but the company laid those worries to rest during its third-quarter earnings report on Nov. 26. During the quarter, Workday added 10 financial customers, as well as 50 new enterprise software customers. What’s more, those buying financial services also signed on for the company’s core HR software offerings as well. The strong uptake resulted in a 76% jump in revenue for the quarter, and prompted Workday to boost its fourth-quarter guidance well above analyst expectations. With analysts projecting the total addressable market for Workday software (both financial and HR) in the billions, the company has compelling growth potential.”
When Mike wrote that, the stock was trading at 85, and it’s had a nice gain since then. The fourth-quarter earnings report is likely out next week, and while there’s no doubt that growth will be impressive, the question, as with any growth company, is whether it will be impressive enough. In any event, the stock is likely to move.
So, you could simply buy here and hope for the best—but what I really recommend is that you become regular reader of Mike’s advice, so you always know what he’s thinking.
Every week, Mike presents 10 stocks that have great profit potential, and every week, he gives you follow-ups on all stocks that are still being watched. For active growth investors, there’s no better resource.
Yours in pursuit of wisdom and wealth,
Chief Analyst, Cabot Stock of the Month and
Publisher, Cabot Wealth Advisory