Four Paired Stocks Worth Watching This Week - Case Study Example

Four Paired Stocks Worth Watching This Week Table of Contents I. Introduction 3 II. Stock Pairs 3 VVUS and ARNA 3 2. TRP and ENB 5 3. PGLC and CRGC 7 4. ZNGA and Facebook 8 III. Conclusion 9 Works Cited 10 I. Introduction This paper presents four stocks that are paired for the special kind of relationships that exist between the stock pairs. The nature of the relationship and its dynamic shall be explored and explained for each of the four stock pairs. These stock pairs are 1) VVUS and ARNA; 2) TRP and ENB; 3)PGLC and CRGC; and 4) ZNGA and Facebook. II. Stock Pairs 1. VVUS and ARNA On the surface, an FDA panel recommendation asking both Vivus (VVUS) and Arena (ARNA) to to either come up with new clinical trials to determine the impact of their respective anti-obesity drugs on heart attacks prior to drug approval, or else to look at existing data on human trials done prior to approval, seems negative as far as the companies prospects are concerned. However, at least three things mitigate this news. One is that the FDA is not compelled to heed the advice of its panels. Two is that pronouncements by spokespersons of the FDA point out that the recent panel recommendation summarized above is not likely to have an impact on existing applications for drug approval. This means that the applications for approval. Three, consensus wisdom from insiders is that at any rate, the two companies already have in their possession a wealth of existing, prior to approval clinical data on human trials involving measuring the impact of their respective medications on strokes and heart ailments, and can comply with the recommendations of the FDA panel if necessary, without resorting to new, pre-approval clinical trials. All these taken together means that while on the surface, the FDA panel recommendation seems to be somewhat of a drag on the approval train for Vivus and Arena, the reality, especially with the announcements of the FDA spokespersons hinting that the approval processes have a slim chance of being derailed, is that both companies are probably in for a rosy future as far as the approval process is concerned, at least at the moment. Indeed, in reaction to the news on the recommendation of the FDA panel, the stock prices of both Vivus and Arena rose (Edney and Larkin; The Fly on the Wall). This joint rise in the stock price underscores market perception and underlying market and research dynamics that couple the two stocks and make of the two a stock pair worth watching. Moreover, the two are locked in a tight race for billing and for first-mover, as well as for the corollary financial rewards, to get to market with their respective medications for obesity. It is interesting, looking at the stock price charts over the last six months, how in recent weeks the fate of the two stocks seem to have coupled even more tightly. Vivus shares spiked fifty percent in early February of 2012, and has plateaued at a level of around US 20 dollars a share. Following this trend, Arena shares spiked 50 percent in early March, plateauing so far at around US 3 dollars a share. It is interesting to see how further milestones and market development for the two firms will reflect on their respective share prices (Edney and Larkin; The Fly on the Wall; Google Finance (a); Google Finance (b)). The market is on a keen lookout for key approval milestones for the two competing medications from the two firms. The drug Qnexa by Vivus seems to be ahead of the pack, with positive news coming from an FDA panel on February 22 of this year which weighed risks against benefits and found that the drugs risks were dimmed by its benefits. The FDA may or may not heed that panel finding, and at any rate come up with a decision on Qnexa by April 17 of this year. Lorcaserin, which was developed by Arena, is set for an FDA panel scrutiny by May 10. The FDA will then, by the 27th of June of this year, make its decision on the latter drug. The consensus is that positive news for Qnexa/Vivus ought to translate to positive news for lorcaserin/Arena, because if Qnexa is approved that will pave the way for similar anti-obesity drugs likewise being approved, and lorcaserin is just on the heels of Qnexa as far as approval and time to market go (Edney and Larkin; The Fly on the Wall; Simpson; 24/7 Wall Street). 2. TRP and ENB A look at five-year share prices for TransCanada (TRP) and Enbridge (ENB) shows some coupling, but the degree of coupling as far as share prices go is weak at best. The growth in the share price of ENB is around 105 percent for the past five years leading to the present, with current share price hovering at US 38-39 dollars. The growth in the share price is also consistent and on an upward trajectory during the past five years for ENB, and the graph shows very little price volatility. Indeed, the stock beta is at 0.14, which reflects some solidity in terms of the share price not being very volatile. In comparison, the fate of the share price of TransCanada Corporation cannot be said to be as rosy. Beta, at 0.24, is somewhat higher, though still relatively reflects some stability in the share price. In fact, current prices are at levels that are comparable to share price levels five years ago. No wonder that five-year growth for the share price for TransCanada is just at a little less than 12 percent. That said, share prices for TRP has been on a relatively consistent upward trajectory from five year low levels achieved around 2009, when stock price levels were a quarter lower than current prices. Taking a step back, it is interesting to note that the two have about identical market capitalization figures, at about US 30 billion dollars, which makes of the two an interesting stock couple, having the same market capitalization valuations, and in a way being roughly equal in market power in this regard at least. (Google Finance (c); Google Finance (d)). The two stocks are coupled here because they are basically in the same business, which is building and operating oil pipelines for toll revenues, and in a way they are in the same boat, with a large part of their future tied to the fate of the Keystone Pipeline, most importantly the Keystone XL oil pipeline that would connect oil sand oil from Alberta in Canada to refineries in the United States. This XL project is an extension basically of the original Keystone Pipeline project that TransCanada commenced the previous decade. That XL project has met with stiff opposition from environment, political, regulatory and economic lobbies in the United States, resulting in the rejection of the Keystone XL proposal. The key importance of the XL project, according to proponents and industry experts, to the North American economy is said to be a key driver for the optimism for the eventual approval of the XL project, which is slated to happen as early as 2013. This means that for TransCanada and for Enbridge, long and short term prospects are tied to the viability of the XL project, and for the project being able to hurdle through a long obstacle course of objections and hindrances thrown at it every step along the pipeline itself, and every step through regulatory approval and eventual legal approval and the signing of the contract. Judging by the length of time that it took for the original Keystone pipeline to get to the operational stage from the initial stages of planning and the long regulatory and legal approval processes, this XL project will be gestating for a long time. At any rate the fates of ENB and TRP are intertwined, and one can say with some confidence that the XL project and its fate will impact their share prices in the same way, if not to the same magnitude or degree, given diverging financial fundamentals (Welsch; Ausick; Bruce; Seeking Alpha; TransCanada Pipelines Limted; Google Finance (c); Google Finance (d)). 3. PGLC and CRGC PGLC And CRGC are coupled, for the main reason that there has been a buyout of CRGC by Sagebrush (PGLC, formerly known as SAGE). This buyout is in the form of PGLC shares, where the conversion, as proposed, is that five CRGC shares will be bought by four SAGE shares. This corresponds to each CRGC share being valued at around 80 percent of the value of SAGE/PGLC (Cassel; Continental Resources Group, Inc.): On July 22, 2011, Continental Resources Group, Inc. (the “Company”) sold substantially all of its assets to Sagebrush Gold Ltd (“Sagebrush”) and Continental Resources Acquisition Sub, Inc., Sagebrush’s wholly owned subsidiary, pursuant to an Asset Purchase Agreement (the “Asset Purchase Agreement”)...The 76,095,214 shares issued to the Company accounted for approximately 67% of the total issued and outstanding stocks of Sagebrush as of July 22, 2011 and the Company became the parent company of Sagebrush. As of September 30, 2011, the Company holds 62.84% of interest in Sagebrush (Continental Resources Group, Inc.). As early as October 2011, there were blog and forum commentaries making note of arbitrage opportunities in the then noted disparities between what was supposed to be the price of CRGC based on the SAGE valuation, and what the price was of CRGC as it was being traded in the market. At that time, with SAGE/PGLC shares being valued at 55 cents, CRGC shares were being traded at 22 cents, where the value of the CRGC shares ought to be 41 cents, judging from the Sagebrush valuation of CRGC shares, or what Sagebrush was willing to pay for every CRGC share. This tight coupling was a trading opportunity, and a chance for many to capitalize on the difference to make money. Or, to put it another way, since SAGE/PGLC had signified its intention to buy CRGC at that price, the fate of CRGC shares became intimately tied to the fate of SAGE/PGLC shares. This was likewise noted in forums, that the arbitrage opportunity existed only as long as SAGE/PGLC shares remained at the levels they were in when the arbitrage opportunity existed. With the SAGE/PGLC shares correcting downward, and if that trend held sway, then the margins between the market price of CRGC and the valuation price pegged by SAGE for CRGC would shrink, reducing potential trading profits and reducing the upside from arbitrage opportunities involving the two stocks (Cassel; Stockhouse Publishing Limited; Continental Resources Group, Inc.). 4. ZNGA and Facebook The pairing for ZNGA and Facebook exists because ZNGA derives about all of its revenues from from the latter, and because, as of some estimates, about twelve percent of all of Facebooks revenues are derived from its relationship with Zynga. This relationship means that one, where Zynga goes, Facebooks revenues goes to a certain extent, at least as the things are at present. On the other hand, Facebook revenues can also be construed as a marker or as a flag for how well Zynga may be doing, assuming that Zyngas share of total revenues for Facebook remains as it is today. Zyngas future is tied to Facebook, unless it is able to diversify and create new revenue streams that are meaningful, outside of Facebook. For Facebook likewise, especially when it was just starting, Zynga was an invaluable partner, whose fate was tied to its own ability to cash in on its social networking platform/site/technology. With revenue contributions by Zynga to Facebook being what it is at present, about 12 percent, and with revenues of Facebook expected to hit US three billion dollars for the whole of the past year, the coupling cannot be tighter, and more evident in terms of the underlying valuations of the two firms. Zyngas current market capitalization is about US 9.2 billion, close to a tenth of the market valuation of Facebook as of the latest estimate, at a little over US 100 billion dollars. These valuations seem to correspond very well with the revenue share contributions of Zynga to the overall revenues of Facebook. Likewise, looking at total valuation, there seems to be some parallel between the meteoric rise of Facebooks market valuation over the past year and the substantial spike in Zynga market valuation and share prices over the past six months (Google Finance (e);Lawler; Moore; DealBook). III. Conclusion The pairings are very interesting for their varying natures. In the case of Facebook and Zynga, for instance, the pairing is borne out of a codependence, the former for the Facebook platform, and the former for the way Zynga has contributed to overall revenues and to the overall likability of the site. For PGLC and CRGC meanwhile, the pairing is due to the stock swap transaction, which has brought about opportunities for trades and arbitrages based on the differences between the price valuation for the stock swap and market prices for SAGE/PGLC and CRGC. For the first two pairs, the pairings are borne out of being in the same industry, and being largely affected by specific developments in their industries, one with regard to the approval of a line of drugs, and another on the approval of a pipeline project for oil from Canada to the US (Google Finance; Ausick, Cassel; DealBook; Simpson; Lawler). Works Cited 24/7 Wall Street. “Arena Files for European Drug Review (ARNA, VVUS, OREX)”. 24/7 Wall Street. 26 March 2012. 31 March 2012. Ausick, Paul. “TransCanada to Build Keystone XL Leg (TRP, ENB)”. 24/7Wall Street. 8 February 2012. 31 March 2012. Bruce, Mary. “Obama Defends Oil Record, Fast-Tracks Portion of Keystone Pipeline”. ABC News Political Punch. 22 March 2012. 31 March 2012. Cassel, Ian. “Arbitrage Opportunity? Sagebrush Gold Buying Continental Resource Group”. MicroCapClub. 25 October 2011. 31 March 2012. Continental Resources Group, Inc. “Form 10-Q, Securities and Exchange Commission”. Edgar Online. 30 September 2011. 31 March 2012. DealBook. “Tracking Facebooks Valuation”. The New York Times. 1 February 2012. 31 March 2012. Edney, Anna and Catherine Larkin. “Vivus, Arena Unlikely to be Affected by FDA Obesity Panel”. Bloomberg. 31 March 2012. 31 March 2012. Google Finance (a). “Vivus Inc.”. Google. 31 March 2012. 31 March 2012. Google Finance (b). “Arena Pharmaceuticals”. Google. 31 March 2012. 31 March 2012. Google Finance (c). “TransCanada Corporation”. Google. 31 March 2012. 31 March 2012. Google Finance (c). “TransCanada Corporation”. Google. 31 March 2012. 31 March 2012. Google Finance (d). “Enbridge Inc.”. Google. 31 March 2012. 31 March 2012. Google Finance (e). “Zynga Inc.”. Google. 31 March 2012. 31 March 2012. Lawler, Ryan. “Zynga and the perils of becoming a platform”. GigaOm. 1 March 2012. 31 March 2012. Moore, Chris. “Zynga Takse a Half-Hearted Step Away from Facebook”. The Motley Fool. 2 March 2012. 31 March 2012. Seeking Alpha. “Enbridges Version of the Keystone Pipeline Should Bring Profits”. Seeking Alpha. 30 March 2012. 31 March 2012. Simpson, Stephen. “Vivus Tries a New Path”. Investopedia. 21 September 2011. 31 March 2012. Stockhouse Publishing Limited. “Buying CRG.OB is a no-brainer!”. Srockhouse. 17 November 2011. 31 March 2012). The Fly on the Wall. “Vivus, Arena climb following FDA panel recommendation for heart attack studies”. TheFlyontheWall.com. 30 March 2012. 31 March 2012. TransCanada Pipelines Limted. “TransCanada is committed to the Keystone Pipeline System”. TransCanada. 2012. 31 March 2012. Welsch, Edward. “Alberta Premiere Disappointed With US Decision on Keystone Pipeline”. ADFN/ Dow Jones Newswires. 201. 31 March 2012. Read More