Today I'm going to look at two companies I believe could do some serious damage to your stock portfolio over the next year.
Billion dollar potential?
Small-cap pharmaceutical firm ImmuPharma (LSE: IMM) hopes to develop a new treatment for lupus. The company's Lupuzor product is currently in a phase III trial, with results expected early in 2018.
ImmuPharma believes that Lupuzor could have an addressable market "with the potential for multi-billion dollar sales", based on the demand for, and pricing of, existing treatments.
If the Phase III trial is successful, ImmuPharma will hope to find a larger partner to fund the commercial development of Lupuzor. If this happens, shareholders could enjoy a big payday.
However, the reality is that many of these experimental medicines don't work. Although ImmuPharma has backing from fund managers at both Legal & General and Aviva, these managers' shareholdings are likely to account for perhaps 1% of their portfolios. If things go badly, the resulting loss will be small relative to the value of the portfolio.
The firm has no revenue and had net cash of just £1.5m at the end of 2016. Its market cap of £72m is mostly based on the hoped-for success of the Lupuzor trial. If the trial isn't successful, I'd expect the share price to collapse.
In my opinion, ImmuPharma is a binary bet at this point. If things go well, the shares could rise. But if the trial isn't a success, then the stock could easily lose 50% of its value. If you hold the shares, I believe you need to ask yourself whether you'd be comfortable with a loss of this size.
If not, then it's worth remembering that ImmuPharma has risen by 50% over the last six months. Now might be a good time to take some money off the table.
A good company at the wrong price?
Choosing good companies to invest in isn't always enough to guarantee a profit. It's important also to make sure that the price you pay for the stock is low enough to make further gains likely.
In the case of bookmaker Paddy Power Betfair (LSE: PPB), I'm not sure that's true. This does appear to be a good company. The combined group's revenue rose by 18% to £1,551m last year, while its underlying operating profit was 44% higher, at £330m.
Underlying earnings per share are expected to rise by 20% to 402p this year and by a further 12% to 450p in 2018. The problem is that most of this good news already appears to be reflected in Paddy Power Betfair's share price.
The stock trades on a trailing P/E of 24, with a 2017 forecast P/E of 20. The prospective dividend yield of just 2.5% is below average for this sector. Although dividend growth has averaged 13% since 2011, if earnings growth slows as expected, then I'd expect dividend growth to slow too.
Paddy Power Betfair's share price has fallen by 10% over the last year. Given the outlook for slowing earnings growth, I think the shares could fall further before bottoming out. I'd steer clear for now.
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Roland Head owns shares of Aviva. The Motley Fool UK has recommended Paddy Power Betfair. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.