Here you go Doc:
Stock Trends
Volatility-resistant
stocks
By R.S. Salomon Jr.
THE NEW YORK STOCK
EXCHANGE has instituted a change in
the pricing of listed securities, allowing
transactions to take place in sixteenths
instead of the prior minimum threshold
of eighths. Eventually it is expected that fractions will
disappear altogether and trades will be in dollars and cents.
This is supposed to narrow spreads and save investors money.
Maybe, but a side effect is likely to be increased volatility.
Here's why: Differences of a penny or two can tip the scales
between doing an arbitrage trade or not doing it. Changing
spreads between derivatives and actuals can trigger sizable
flows of program or basket trades. You can expect, therefore,
that the narrower spreads will lead to more in-and-out trading
divorced from underlying fundamentals
Index fund managers, too, benefit from the smallest possible
spreads. They receive new money and must put it to work.
They buy all the stocks in the relevant index and have no
particular insight about individual companies. If money is taken
out of the index fund, the selling would be equally
informationless. An index fund's chances of matching the
index are affected by tiny differences in spreads.
But what's good for traders and index fund managers isn't
necessarily good for other investors. When you narrow
spreads, you decrease the profitability of marketmaking.
Marketmakers will be less willing to commit capital if their
returns are narrowed, and as a result market liquidity will
suffer.
Each of these stocks has blockbuster
drugs and patented technologies.
So you face the twin possibilities of increased trading that is
unrelated to fundamentals and fewer marketmakers willing to
risk capital to make orderly markets. The resulting volatility
won't serve the interests of long-term investors and can
frighten away small investors.
Whether I like it or not, tighter spreads are here. So I have
gathered a basket of smaller companies whose performance is
unlikely to be harmed by increased volatility but rather depend
on company-specific developments. Each of these stocks has
blockbuster drugs and patented technologies in the fight against
cancers, rheumatoid arthritis, heart disease and less-invasive
surgical techniques. The stocks have been weak recently and it
looks like a good buying opportunity to me.
Centocor (42, CNTO) is a biotech firm developing many
products in the fight against cancer and infectious diseases.
Two main products that will be the key drivers for rapid
earnings growth are ReoPro and cA2. ReoPro is an antiplatelet
drug used to prevent blood clots in coronary angioplasty
procedures; cA2 is waiting for FDA approval for its fight
against Crohn's disease. My price target is 70 sometime in the
next year.
Impath (30, IMPH) is a leading source of cancer information,
providing physicians with patient-specific diagnostic and
treatment data for breast cancer tissue samples and other
difficult-to-analyze tumors. Earnings are growing very rapidly
and should be up 50% or more in 1998, to $1 per share. I have
a price objective of 45 over the next 12 months.
Immunex (55, IMNX) is a leading biopharmaceutical firm that
develops immune system science for cancer, inflammatory and
infectious diseases. The company has an exciting new drug in
the latter stages of clinical testing for the treatment of
rheumatoid arthritis. I think the stock can easily reach 100 over
the next year.
Theragenics (35, THRX) is a leader in the exciting new field
of implantable radiation devices designed primarily for prostate
cancer and, recently, for various liver cancers. The company is
in a rapid growth phase with sales up more than 100%, and
earnings are being propelled even more dramatically. My
one-year price target is 65.
Last, Boston Scientific (45, BSX) has been slaughtered from
its recent high of 78 because of some short-term problems in
Europe that will likely be resolved over the next few months.
BSX develops, manufactures and markets medical devices
used in a wide range of minimally invasive surgical
procedures. The company has had an excellent track record of
rapid growth and high profitability. With projected earnings of
$2.25 for 1998, I think the stock can again reach the 70s in the
next 12 months
SK |
