When Mr. Market is acting like this, flopping around like a dying fish on the dock, I must admit that promises to “snag an easy double” catch my attention more than they otherwise might. After all, a double — just a 100% return — is much tamer than the promises of 2,000%, or 16,000% gains that spew from so many newsletter teaser ads every day … maybe I just appreciate the down to earth promise of “just” doubling your money.
This “snag a double” ad is from the folks at the White Cap Report, which generally focuses on rapid growth stocks, often smaller ones … and it’s all about bringing the fiction of CSI into the mainstream … here are some of the clues to get you warmed up:
“One small forensic investigation company is tackling the toughest cases on an international level…
“Now, thanks to a recent FBI announcement, it’s gearing up for explosive profits in the coming months…
“… with recent hiring freezes at state crime labs due to the economic crisis, the backlogs keep piling up. (Unsolved case files have increased by 130% in the past decade.)
“So the FBI and public crime labs are contracting private forensic labs to handle the overflow.
“Most people don’t know these institutions exist. Which is great news for us, since business for these private labs is booming.
“We’ve got our sights set on one lab in particular… Owned by a tiny Dallas, Texas-based company that’s trusted by law enforcement agencies from New York, to Sydney, to London.
“And a recent announcement from an FBI official could boost this small company’s business tenfold… Sending shares soaring in the coming months.
“(Early investors could be on track for a double in the short term.)”
So that sounds intriguing, no? Why this particular private lab? Here’s some more from the ad:
“And the Dallas company I’m talking about today is leading the charge… According to The Daily Telegraph, this company has ‘the world’s most advanced analytical laboratories’ for DNA testing.
“Working alongside federal, state, local and international governments, this company implements a full range of human DNA testing technologies.
“Just look at what its research can do…
“The company’s analysis linked a leading suspect in the Texas “Truett Street Murders” of 2004 to DNA found on a latex glove… Five years after the murders took place…
“Research from this company led to the exoneration of one New Jersey native who had been wrongfully accused of sexual assault 22 years ago…
“The company’s advanced identification technology (known as the Single Nucleotide Polymorphism test) was able to identify victims of the 9/11 World Trade Center tragedy when no other lab could…
“These are just a few of the tens of thousands of cases this company has investigated over the past 20 years.”
So that’s nice, and it certainly is enough info for us to narrow down the search for you to the right company. But the push for this stock, and the reason for the “snag an easy double” teaser hype is that they expect dramatic increases in government work that was formerly done (or not done) by FBI crime labs… the “easy double” is clarified a bit, with the teaser ad later including the caveat, “if the FBI loosens its grip on DNA testing.”
So who is this little company? The Thinkolator needs only a few moments to tell us that today we’re looking at:
Orchid Cellmark (ORCH — click here for the free trend analysis from MarketClub, one of my advertising partners)
This is an itsy bitsy teeny weenie company, with a share price of about $1.60 and a market cap of just under $50 million. It is also a company that has certainly not been a delight for investors over the last decade — the shares were as high as $300 or so in 2002, in what I can only imagine was some kind of DNA testing mania (I can’t say that I ever noted them during that time, nor have they come across my screen since). This is essentially a large lab network, built through dozens of small acquisitions and mergers with small regional labs, that does paternity and forensic DNA testing (they also do lots of smaller-profile stuff, proving distant kinship, proving aboriginal status, etc — they even do paternity/maternity testing for the Canadian immigration service). And yes, they have been involved in some high profile projects, including the testing of the 9/11 victims remains for identification purposes, some high profile convictions and exonerations, as teased, and some interesting headline stuff like identifying the remains of Billy the Kid … not to mention involvement with the OJ Simpson case and the JonBenet Ramsey fiasco, though for some reason they feel the need to mention both of those.
But that high profile work and gee-whiz technology hasn’t led to an investment in Orchid Cellmark being particularly remunerative for investors — which is probably part of the reason why some activist and “distressed” hedge funds are now significant holders, including Bridger Management and Accipiter Capital Management, which each own about 12-13% of the outstanding shares (though the company is so small that you’d still have to consider it a minor position for those funds).
And it’s easy to see why investors would find it appealing at this price — management did say that 2009 was their best year ever as a public company, with continuing growth in revenue (though they still lost money), so they didn’t get completely pancaked by the economy. And they have a big cash cushion, with about $19 million in cash and no debt (that’s 67 cents per share in cash, meaning that at the current price you pay less than $1 for the operating company and its assets). They have a substantial market share in the UK, where forensic DNA testing is apparently more established and privatized, and it’s clear that the company sees the regulatory tide slowly changing in the US to give more business to private labs over time (the business is about half UK/half North America right now).
The last quarter included some restructuring costs as they merged a couple large labs, which helped to make sure that they lost even more in the quarter than they had in the first quarter of 2009 … and the revenues grew, but only slightly, with the UK growing revenues by about 23% and the US operations actually shrinking by 25% (and actually it looks, at a quick glance, as though the growth they booked — and more — can be explained entirely by the fall of the British Pound). It does seem like the company should be more profitable, and that revenues should be climbing more quickly … or at least that they should be able to turn their 30%+ operating margins into actual bottom-of-the-page profits for shareholders, but for whatever reason that hasn’t happened.
Still, if this is a bet you feel like taking there is the possibility of two different catalysts: a shakeup on the board, if the two big hedge fund owners get more representation and push for some changes; and an increase in revenues and attention if the FBI does free up private labs to do more work to help close the massive backlog in untested DNA samples (or the nation moves more significantly to overhaul police procedures to create a full DNA fingerprint ID infrastructure). It’s hard to promise a double in the shares by September, but it does seem like there’s some potential for share price appreciation if they can juice revenues with more gummint work (especially if paternity and other work tails off, as it did last quarter) and they somehow turn their growing market presence into profits … or at least the promise of future profits.
What do you think? Feel like taking a flyer on an “easy double” from the White Cap folks, or does it all look a bit too much like a morass? Let us know with a comment below.