Stay Away from “Lottery Ticket” Stocks

5G, Biotech, Growth Stocks

Congratulations to Immunomedics (IMMU)!

Who are they?

Immunomedics is a New Jersey-based biotech company. So why am I congratulating them? Well, the company has been publicly traded for 35 years, and they’re about to do something for the very first time.

Immunomedics is close to having its very first product! This is a company that’s been publicly traded since the “A-Team” was on the air, and they’re finally going to have an actual, real-life, honest to God, no foolin’ product.

You know, something people can actually buy! This is so exciting!

Right now, the FDA is reviewing Immunomedics’ application to market an antibody treatment for breast cancer. All kidding aside, I hope this is a breakthrough product and not just for IMMU.

But this is raising some disturbing questions. How can a stock go for long on the public markets without ever having a product? I’ll be honest: It’s not the company’s fault. Instead, I blame investors. As long as investors are willing to throw money at companies like this, they’ll keep the show running.

I put Immunomedics in the category of “lottery ticket” stocks. These are stocks that trade on the market, but in reality, they’re more like lottery tickets.

You usually find lottery ticker stocks like Immunomedics in the biotech space. If their research pays off, then you can expect the stock to soar. If not, then it will just languish along zombie-like year after year.

There’s really no middle ground. You either have a very small chance of making a ton of money or a high probability of making nothing.

The stock price history of IMMU shows just that.

Most of the time, shares of IMMU have traded at a few dollars per share. However, every few years, the shares dramatically spike on encouraging news. Some of those spikes are more than ten-fold. After a while, the excitement goes down, and IMMU drifts back to its normal home of a few dollars per share.

This cycle repeats itself every few years. All the while, the stock really hasn’t moved much.

I encourage investors to steer clear of lottery ticket stocks. Unless it’s in a field in which you have particular expertise; instead, stick with the workhorse stocks. These are the companies that deliver steady profits year after year. When in doubt, a steady workhorse will beat a lottery ticket stock. In fact, one of the worst things to experience is early success with a lottery ticket stock.

Taiwan Semiconductor: The iPhone Workhorse

One of the best workhorse stocks I like right now is Taiwan Semiconductor (TSM). There’s a lot to like about TSM. For one, the company controls half the worldwide foundry business.

TSM has dominated Apple’s chip production ever since Apple became Taiwan Semi’s biggest client in 2015. Since the launch of the iPhone 7 in 2016, TSM has been the sole supplier of central processing units for Apple’s smartphones. The company was the first to offer seven-nanometer chip production at a significant volume.

I also like that Taiwan Semiconductor is investing in the latest chip technologies, and it’s wisely diversifying away from the slowing smartphone market (60% of revenues) and Apple.

Business is going very well for Taiwan Semi. Since mid-June, the stock has rallied 61% for us. In October, TSM reported Q3 earnings of 62 cents per share, which was two cents more than analyst consensus. Taiwan Semi generated $9.4 billion in sales for the quarter, which also topped consensus.

Taiwan Semi’s CFO said, “Our third-quarter business benefited from new product launches both in premium smartphones and high-performance computing applications using TSMC’s industry-leading 7-nanometer technology.” This is very encouraging. The CFO added, “We expect the strength of demand for our 7-nanometer technology will continue, driven by high-end smartphones, initial 5G deployment, and HPC-related applications.”

The company is due to report fiscal Q4 earnings on January 16th. For Q4, TSM sees sales ranging between $10.2 billion and $10.3 billion. I was impressed to see TSM significantly raise its capex spending plans for 2019 to a range of $14 billion and $15 billion.

For Q4, Wall Street expects earnings of 70 cents per share. That’s up from 63 cents per share one year ago. I think TSM can easily beat those expectations.

We added Taiwan Semi at a time when their business was somewhat weak, but our thesis was that demand would soon return. That’s happening now. TSM is no lottery ticket.

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