Cabot Small-Cap’s “Next Medifast”

by Travis Johnson, Stock Gumshoe | May 31, 2012 5:25 pm

Sleuthing out the next 16,000% gainer (they think) teased by Cabot Small-Cap Confidential

We are apparently in a rut with health and medical teasers this week, and I haven’t the strength to jolt us out of it just yet … plus, I haven’t covered a teaser from the Cabot[1] folks in a while, so let’s have a look at this latest one.

The newsletter being promoted is Cabot Small-Cap Confidential[2], which is one of the limited-audience small-stock newsletters that keeps its pricing pretty high (current $1,200 a year) and offers, in exchange for that cost, the promise that their readership will be small enough to give you a decent chance of buying the small capitalization stocks that editor Thomas Garrity[3] covers — they say the subscription list is limited to 500 people, which is indeed a nice, small number compared to a lot of the lower-priced newsletters, many of which claim hundreds of thousands of readers (though even that small number means $600,000 in revenue per year — so you needn’t cry for them).

And as is the custom at Cabot, they make their case by taking credit for past victorious stock picks and “guaranteeing” massive returns (or your money back!). Those guarantees, of course (just like the guarantees at all other publishers) only pertain to the money you spent to subscribe to the letter, of course, not to any cash you might lose by following their recommendations. Here’s how they tease us in the intro letter from Timothy Lutts[4] (he runs Cabot, Garrity’s publisher):

“16,023% Profits Ahead For My Next Medifast

“Just like Medifast’s breakthrough diet[5] products revolutionized the weight loss[6] industry, this new small-cap health food juggernaut is doing the same thing in the beverage industry–all thanks to the backlash against high-fructose corn syrup and excessive sugars that has led to a boom in demand for naturally sweetened iced teas, juices, lemonades and energy and sports drinks.

“This is why the natural food and beverage market grew an incredible 44% between 2006 and 2011 as Coke and Pepsi’s market share has shrunk–health conscious consumers no longer want to “buy the world a Coke”…or Pepsi, for that matter.

“This is also why this company’s revenue has soared 4,900% to date and is clearly on track to match Medifast’s incredible 16,023% profits….

“The natural-beverage industry is expected to grow 11% per year through 2013, with sales approaching $23.5 billion …

“And this small-cap juggernaut already has a contract with a major natural-food supermarket.”

But then when we click through to Garrity’s sales letter, we get more promises … but about a different company. Lutts was pitching a natural beverage company, and Garrity highlights a medical company:

“Why My Newest Recommendation Looks a Lot Like Medifast in the Early Days

“Just like Medifast’s breakthrough diet products revolutionized the weight loss industry, this small-cap medical juggernaut is doing the same thing for the surgical treatment of vascular diseases that are a leading cause of age-related death in the United States.”

Huh.

Well, We don’t get any additional clues about that natural soda company, but that one real clue in there — 4,900% revenue growth — means there aren’t many possible candidates. And, frankly, there aren’t any candidates I’m aware of that have grown their revenue by that percentage and are still small cap companies. Jones Soda (JSDA)[7], for example, has been pitched as a hot potential grower in this space several times over the years, and introduced a new “au natural” line this year, but revenue has collapsed (along with the stock) and is now right about where it was ten years ago … Jamba Juice (JMBA) has tried on occasion to get some branded packaged drinks (as opposed to their fresh smoothies) out into the supermarkets, but is also in a several-year revenue decline (though I suppose it has grown revenue since they started reporting in 2005 and 2006, it’s just that they peaked in 2008) … and, well, there ain’t many candidates.

So this, an educated guess will tell us, is most likely a decidedly non-small company that several of the Cabot folks have liked in the past, Monster Beverage (MNST)[8] … which used to be called Hansen Natural (HANS) and has indeed grown revenue by at least 4,900% (if you go back to when they went public 20 years ago, it’s more like 8,000%, though I suppose you could go back further to when they were a little juice company in Southern California in the 1930s to get whatever number you want). This is not a small cap company by any measure, they now carry a market cap of $12 billion — still roughly a tenth the size of megacorps Coke (KO) or Pepsi (PEP), but not a small stock. So that’s a wild guess that they’re still carrying a torch for Monster/Hansen. There are probably some under-the-radar natural beverage companies I’ve never heard of, so give a holler if you think there’s a better match for those paltry clues.

Personally, If I were looking to tout a small cap natural soda company I might instead look at a really teensy one, a company I’ve had half an eye on because I like the drinks (not because I necessarily think they’re a great buy right now) is Reed’s (REED) — they make Reed’s Ginger sodas, which are natural, including some nutraceutical ginger drinks for nausea control and the like, and also own the still teensy but perhaps up-and-coming Virgil’s brand of natural root beer (and otheer sodas) and China[9] Cola. A ridiculously small company (though bigger than Jones Soda now) with a market cap of about $30 million and another $6 million or so in debt, so for God’s sake don’t just rush out and buy it because I mentioned them, but they seem to have good distribution and appear to be on the verge of profitability if they can get enough of a “buzz” going to boost sales just a little bit (they came close to break-even last year). They have not grown revenues by anywhere near 4,900% over the past years according to data I’ve seen, but they started very small in the early 1990s so I suppose it’s a distant possibility that this is the stock Garrity is picking.

But anyway, we’re going to move on — what’s the medical stock that Garrity is pitching?

Here are his clues:

“… unlike the diet industry, where YOU must pay to lose weight, the bulk of our company’s surgical procedures will be paid for by the government AND the shareholders will reap massive profits along the way.

“You need only look at the two factors below to understand why:

“A huge percentage of the 77 million Americans who turn 65 over the next 19 years will ultimately require these kinds of heart-saving treatments, as heart disease is one of the leading age-related illnesses in America, and the fact that Medicare insurance will shell out billions to pay for them.

“Those are just two factors that made this one pop on our radar screen. A quick look at these confirming dynamics and you’ll see why this could be my next Medifast.

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“This small-cap company’s surgical technology solution offers less discomfort and quicker recovery than traditional methods.

“18 already-FDA[10]-approved patents will keep competitors out of this sector for decades.

“Again, demand for this company’s surgical products will only grow larger every day as 77 million baby boomers turn 65 over the next 19 years.

“The company is clearly the leading provider in its sector over both the short and long terms, with analysts projecting 155% growth next year vs. 22% for the sector. The projections for the next five years look even better—118% vs. 12%.

“Shareholder-friendly and expert management combined with 175 years of medical device experience has already handed investors nearly 300% gains over the past two years and looks to repeat this performance every two years for the next decade or so.

“PLUS it may also be the perfect takeover candidate, thanks to its $82 million in revenue, 27% revenue growth and monopoly-like position in this growing field.”

This one doesn’t come in with quite a perfect match for the Thinkolator, but after sleuthificating on those clues a bit I’m pretty sure he’s teasing Endologix (ELGX)[11].

Endologix is a decent-sized company, market cap around $800 million, and they have indeed had 12 month periods recently when they generated roughly $82 million in revenue and 27% revenue growth (for the most recent quarter it was a trailing 12 month revenue number of $89 million and growth of 32% year-on-year). They just did a small equity offering and reported earnings (well, not earnings — losses) that were slightly worse than analysts expected, but they’ve failed to meet analyst expectations in each of the past four quarters and the stock has still moved up pretty consistently over the last two years.

They sell a device and stent for abdominal aortic aneurysm repair (that condition is dreaded enough that it gets its own acronym, AAA), it’s called the AFX Endovascular AAA System, and the new device was implanted for the first time less than a year ago (it received FDA approval last Summer), so it’s early days yet. They also do claim 18 patents, as teased, and they do say that this device enables a minimally invasive procedure that leads to better results and quicker recoveries.

There are other vascular device/robot companies out there, and I don’t know how the market shakes up or how the products compete — for a while Hansen Medical (HNSN — no relation to the drink company) was the darling of the vascular surgical “robot” business, with their connection to everybody’s favorite robot stock Intuitive Surgical (ISRG)[12], and there’s also Volcano (VOLC), which has been teased before — they’re more of a vascular diagnostic company, they do intravascular ultrasounds to diagnose the kinds of problems that Hansen or Endologix might help a surgeon to repair.

Certainly an interesting company, and it seems to be the strongest match — I can’t verify that they have 80% market share, but that would all depend on what you consider the “market” anyway (80% of the robotically assisted endoscopic aneurysm repair business? I haven’t seen such numbers in my brief foray, but they may well be there). They seem to have a good base of business and a growing revenue stream that’s actually surprisingly (to me) steady, and there are certainly plenty of customers out there with vascular problems and, as we age, I assume we’ll continue to see more and more AAA problems that require fixing. The company is projecting revenue this year of well over $100 million, so everything seems to be on track.

Wise minds than I will have to take a look at the science, but the financial setup appears pretty decent for an emerging growth stock if analysts are right about their growth potential — and once surgeons fall in love with a device and get good results, it can be hard to unseat a product that’s entrenched, so that would be a nice potential future to look forward to if their vascular thingamajig catches on.

Though it’s also worth noting that Hansen Medical, in a very similar business, was at $40 in 2008 and is at $2 now — I gather that there were a lot of company-specific reasons for that, but don’t assume that growth is assured just because they have a cool device.

Sound like the kind of stock you want to own? Too scary? Let us know with a comment below.

And if you’ve ever been one of the “exclusive” 500 who subscribed to Cabot Small-Cap Confidential, please click here to let us know what you thought by sharing a brief review[13]. Thanks!

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