Cabot’s “$15 Health Care Stock to Hit $45”

Sniffing out a tease from Cabot's Small Cap Confidential -- one reader says, "I've never seen these guys so confident on a recommendation"

By Travis Johnson, Stock Gumshoe, December 13, 2012

The folks at Cabot are no stranger to promises of doubles and triples — and they especially like to trot out specific pitches like this one, that a health care stock is going from $15 to $45 … and that, of course, makes us quite curious about just what stock they’re talking about.

You too? Great, well then let’s figure out who this is.

The tease is in service of Cabot’s Small Cap Confidential newsletter, which is one of those limited-circulation, high price letters that focuses on less liquid stocks. It’s admirable to keep circulation low when you’re touting small stocks, since that way you have less impact on the shares when your subscribers buy and sell … but that doesn’t mean we’re giddy about ponying up $1,200 for a “test drive.” So let’s see how they spin it and find out if we can ID this health care pick for you:

“We’re recommending a breakthrough $15 health care stock that our research shows could hit $45 in the next 12 months–with 20% to 30%
gains coming in the 90 days.

“We’re not just guessing here, either.

“The stock’s share price is up 383% and looks to be rising faster than the 974% we made in Monster Beverage a few years back….

“Just like Monster’s breakthrough natural drink products revolutionized the beverage 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.

“With 10,000 Americans turning 65 every day for the next 19 years, this is one medical stock on a growth trajectory that could easily surpass the big profits we made in Monster Beverage.”

So in case you haven’t guessed, they made a lot of money on Monster Beverage. All letters like to take credit for their past wins in their ads, but the Cabot copywriters push this more than most (almost every stock teaser pick of theirs is the “Next Medifast” or the next Monster, First Solar, etc.)

The Cabot system is heavily reliant on technical indicators, momentum, and growth, though Thomas Garrity, who runs Small Cap Confidential, is a bit more into the fundamentals than some of the Cabot editors — here’s how he says he does it:

“… our proprietary stock selection system has been designed not only to identify breakout sales, earnings, and profit margin expansion factors…

“… but also to identify the specific disruptive, game-changing technologies that most analysts miss and that will ensure a company’s market share and technical superiority for years to come.”

So that’s the strategy. Most of the picks he takes credit for are truly small or obscure, unlike Monster Beverage … or at least, obscure enough that I’ve never heard of them before. So how about some more clues about the specific stock he’s pitching now?

  • “This small-cap company’s surgical technology solution offers less discomfort and quicker recovery than traditional methods.
  • 18 already-FDA-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 104% growth next year vs. 13% for the sector. Shareholder-friendly and expert management combined with 175 years of medical device experience has already handed investors nearly 250% gains over the past two and one-half 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.

That actually sounds a little bit familiar, so I went back into the Gumshoe Vault and found that they used almost exactly this same language to tease a stock back in the Spring of this year … did the Thinkolator give us a good answer that time? (It almost always does, you know, but we claim only to get 99% of the picks right in a given year … which means we’re allowed to be wrong once or twice).

And yes, the Thinkolator is on track again — this is once again Endologix (ELGX)

Endologix does indeed have 18 patents, 104% growth for next year projected by analysts, and, actually, more than $82 million in revenue now (trailing annual revenue just hit $100 million) … so it looks like ELGX is still our “almost certain” bet to be this pick, but they didn’t update all the clues with the latest numbers.

And no, they’re not profitable just yet … they have been growing revenue nicely as their products get into the marketplace, they have a pipeline of additional products in the approval process now around the world, and they expect 20%+ compound annual sales growth, which should enable them to become very profitable if it happens, given their very good gross profit margins … but so far, they’re still sending money out the door just a wee bit quicker than it’s coming in.

You can see the ELGX investor presentation here, which explains far better than I could exactly what their products are — they’re a variety of different stent-type things for aortic aneurysms, an area where there’s apparently a good amount of competition but where Endologix claims a technical lead. If I told you that Endologix was going to keep the lead and have better products over the next five years than Medtronic or the rest of the competition, well, I’d just be parrotting ELGX’s words or making it up, so you can check out their materials and see what you think.

Analysts are expecting Endologix to make money in 2013 … but just barely, a single cent per share of profit is the projection, and that was reduced following the third quarter results (they had previously expected three cents in profit next year). It can be profitable to invest in medical technology stocks when they’re on that cusp of profitability, since the typically very high profit margins mean that ramping up sales creates nicely leveraged earnings growth when it all comes together (with these kinds of companies that sell medical devices, typically the gross profit on the actual device is very high, in this case right around 75-80%, so the impact of SG&A and R&D expenses gets watered down once the investment in a sales force has been made and the products have gotten through expensive clinical trials. Medical devices face less daunting approval processes than drugs, generally speaking, but that doesn’t mean it’s always easy or guaranteed.

They are reporting that a few catalysts are in the pipeline over the next few months, though none of the immediate ones are likely to have an abrupt impact on sales — they hope for FDA approval for expanded labeling of their AFX design by the end of the year, and they’re also looking for a CE Mark (a European market approval) for two of their designs/systems, one in the next month or so and the other in the first half of next year. It sounds like these products require a fairly slow rollout, with the training of physicians and centers and the building of awareness, but they have built up their sales force in both Europe and the US so they’ve got what looks like a decent base to build from. You can see their take on this in the transcript of their last earnings call here.

And that’s about all I know about Endologix — it’s certainly possible that their news might bump the share price (up or down, depending) over the next couple quarters, but as to whether it’s going from $15 to $45 in the next year, well, that I can’t tell you … it would mean a lot more optimism for earnings growth than the stock is currently exhibiting. Even for a company of a decent size like this (just under a billion dollars) the market does seem to be large enough, particularly with our aging population in the US and Europe, to make it certainly possible for them to ramp up sales pretty dramatically if doctors and patients love the product … or, perhaps more likely, for a larger medical device company to buy them out at a nice fat premium before too long, since the projections would likely be that the much larger sales force and infrastructure of a Medtronic or a Johnson & Johnson could turn a successful product into profits far more quickly. But as to whether the science backs Endologix moving from a $1 billion company to a $3 billion one on the back of a better product, that I can’t help with. I’m sure there are plenty of folks out there in Gumshoe land, including some doctors, who have opinions about these vascular repair products, so feel free to chime in if you’ve got a thought or two to share.

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Share Your Thoughts

ShowHide Comments (15)
    1. Fireball
      Dec 13 2012, 04:29:27 pm

      Hi GS,
      Cabot kind of missed bad on mela and ldk. I still think they are better than most letters but it is always good to be cautious when e-advisors seem to sure and are in selling mode.
      They gave out lumber liquidaters and vance info technologies for free. both did very well.
      Travis do you like natdf or sfl? Both have ties to sdrl sort of. How about sdlp? Just curious. I am already in the first two and waiting and watching for sdlp to stumble or something and take a hit.

      • 3984 |
        Travis Johnson, Stock Gumshoe
        Dec 13 2012, 04:37:36 pm

        I was pretty heavily into the tanker stocks about five years ago, when the shortage of double hell tankers was starting to spike the day rates up, but after capacity caught up and most of the stocks got clobbered I’ve not gone back and taken another look. I much prefer SDRL to their captive MLP SDLP at this point, but that might change in the future — the parent yields more, still, and gets the better end of the bargain as I see it.

        And yes, I agree — like most growth-focused letters I’m sure Cabot stumbles badly sometimes, their picks often have extremely aggressive valuations as they’re on the move, though that’s not always true. I do remember MELA — Several letters teased that one very aggressively and it was an enticing story, I was thankful that I never quite got convinced that the device would catch the fancy of dermatologists (though I didn’t expect the FDA to hamstring them to quite the degree they did, leading to weak performance even now, a year after the approval thanks to what must have turned out to be a pretty limited market so far)

    2. Byron Mullen
      Dec 13 2012, 04:58:32 pm

      What will the new taxes from Obama Care on Medical Devices do to the profitablility of this up and coming Medical Device company?

      • George Maida
        Dec 13 2012, 05:15:36 pm

        My guess is that even with new taxes on medical equipment, Obamacare will increase profitability of medical device producers and all other healthcare stocks. Remember that it also brings many more people with health insurance to the market, and more potential customers can only help.

    3. Steve Steinfeldt
      Dec 13 2012, 07:15:12 pm

      Aortic stents have been around for awhile now. Yes they are very neat, but aortic aneurysms, although potentially very dangerous, are not that common. Stents for coronary arteries and peripheral arteries are technically simpler devices and have much, much wider applicability. They too have been around for longer than aortic stents and used in the very common “angioplasty” procedure.

    4. John Halebian DPM
      Dec 14 2012, 11:08:02 am

      AAA is more common in men and in individuals aged 65 years and older. AAA is less common in women and with black race/ethnicity.5 AAA (from 2.9–4.9cm diameter) are present in 1.3% of men aged 45–54 years and 12.5% of men aged 75–84 years. Equivalent figures for women are 0% and 5.2% in each age group, respectively.

      Lloyd-Jones D, Adams RJ, Brown TM, et al. Heart disease and stroke statistics—2010 update: a report from the American Heart Association. Circulation. 2010;121(7):e46–e215.

    5. dmg
      Dec 14 2012, 11:13:09 am

      This item offers suh crucial understanding that it bears repeating…
      “It can be profitable to invest in medical technology stocks when they’re on that cusp of profitability, since the typically very high profit margins mean that ramping up sales creates nicely leveraged earnings growth when it all comes together (with these kinds of companies that sell medical devices, typically the gross profit on the actual device is very high, in this case right around 75-80%, so the impact of SG&A and R&D expenses gets watered down once the investment in a sales force has been made and the products have gotten through expensive clinical trials. Medical devices face less daunting approval processes than drugs, generally speaking, but that doesn’t mean it’s always easy or guaranteed.”

      Everyone knows this; not everyone knows this. The point is to find the sweet spot in the market so as to invest in a timely manner.

      Apart from the above, I believe it insufficient to say a $15 stock will rise to $45, if it should decline first to $10 before the rise (to $45). The memory of the drop will pale to insignificance – IF you held (or bought more) during the decline. More likely is you stop out for the small loss, chalk it all up as another boneheaded call made by Cabot, forget about it, and then a few years from now, notice that the Cabot folks now mention ELGX in their marketing literature (rather than MNST or FSLR, et alii).

      iow, these open recommendations that pay no heed of an investor’s objectives and risk tolerances, and include no sell stop info – especially damning for a TA-oriented service, as you noted – are not merely reckless, but irresponsible. They give Wall St a bad name, not that Wall St does not do a good job of that for itself.

      • bob
        Dec 16 2012, 02:50:53 pm

        Very interesting posting. I would agree if your comment about “..should decline first to $10 before the rise to $45…” is intended to suggest consolidation is needed before the next leg up, but a drop to $10 from the current level of $13.27 would be too bearish to qualify for consolidation. However, it is interesting to note that ELGX actually has been consolidating favorably since August.

        As an old-time point and figure chart checker, I believe that ELGX is now at a critical level. If it was last touted in May, the price down somewhat — it topped bit over 16.5 in June, going down to around a bearish $11.5 in July, then rising in a “low-pole buy” P&F formation in August to a little above $13.5, around where it is today.

        But the most important current P&F formation is the penetration of a highly favorable “triple-top”last month at around $14.5, followed by a pullback, which may represent a nice buying opportunity. However, if it now falls below $12.5, it will be approaching a triple-bottom penetration, and then can create an extremely bearish signal should the penetration occurs at $12.

        So take your pick — will it resume upward movement by reinforcing the triple-top, or will the current formation turn into a “bull trap” and proceed on down through a triple-bottom?

    6. 12
      Philip Perlman
      Dec 15 2012, 12:16:49 am

      I followed ELGX over 5 years ago and again about three years ago when Elliott International and Elliott Associates had approx 5.7 million shares. As one who spent many years studying biotechs and made a decent profit doing so I am not particularly fond of ELGX nor are there any major scientists-medical personnel currently associated with the co. If I were to gamble again on biotech, I would first use Edgar to look up the following biotechnology major investorment outfitss: Orbimed, Baker Bros., BVF investments, etc. I have a long list of the latter if anyone is interested.

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