The ad one everyone’s asking about today is from Louis Navellier, it’s a pitch for his Emerging Growth newsletter (currently $995/year) — and this might be the first time we’ve seen the “Tesla of XXX Sector” marketing spiel.
Perhaps it’s a changing of the guard, we used to be told we were looking at the “Apple of” whatever… including that spiel a few weeks ago from Navellier about the “Apple of Drone Stocks” and past pitches about the “Apple of Cancer Therapy” or “Apple of China,” among others… is Tesla ready to be the next great example?
Here’s the headline of the ad:
“250% Gains in 12 Months!
“Tesla of Medical Devices to Double Again With or Without You
“Buy it now and catch the next wave of profits”
Louis Navellier’s ad copywriters over at Investorplace seem to be in a bit of a rut… either that, or they’ve just hit upon a spiel that works really, really well and they keep using it. This promise that a stock is going to double “with or without you” is very common to Navellier pitches… strangely enough, there does not seem to be any strong correlation between the promise from Navellier that it will double in short order and the actuality of the stock rising 100% from that point.
This stock has apparently posted incredible gains already, though — not many investments are up 250% in 12 months, to be sure — so… will it continue?
Picture me shrugging my shoulders, if you will, but while soothsaying may not be in the cards for us we can at least ID the stock for you. Fair enough?
Here are our clues:
“… this company has corned the medical devices market for heart pumps and related heart-saving devices.
“The result has handed investors 250% gains over the past 12 months.
“The FDA has recently approved the company’s tiny heart pumps for use in high-risk and elderly patients who continue to flood emergency rooms.
“… cardiologists have found this company’s heart pumps to be the perfect solution for heart complications during surgeries.
“… the company’s family of less invasive catheters are being used in place of balloon pumps, which had been previously become the industry standard for helping weak hearts pump blood.
“Plus the company’s next generation heart pumps look even more exciting, as they are even smaller and can be expanded when they reach the heart.”
And, in a lovely bit of news for the Thinkolator (which adores precision), we get a few specifics about the company’s financials…
“quarterly revenue growth has soared 50%… it has registered four triple-digit consecutive earnings surprises… its share price has jumped 263% over the past 12 months….”
Thinkolator sez this is: Abiomed (ABMD)
Why? Well, they do make a line of tiny heart pumps that are designed to make surgery safer, particularly for elderly and high risk patients — they are inserted directly into the heart, and are more effective than existing balloon pumps for supporting heart flow during surgical procedures. This supposedly makes it safer to do things like insert stents for patients who otherwise would be considered at prohibitively high risk during any kind of surgical procedure.
And they have had posted roughly 50% year over year revenue growth for the past two quarters — the June quarter was almost exactly 50%< the September quarter slightly less. And, since that indicates the data Navellier's copywriters are using might be a few weeks out of date, you might not be surprised to hear that the stock has not gained 263% over the last twelve months... but it was at that 263% 12-month gain as of early October. Some days it's lower, some it's higher -- this has been a very volatile stock... depending on the day you pick, it has also recently posted 300%+ annual gains. The stock has surprised on the upside these past four quarters, too -- so that's another match. The surprises have grown less dramatic as the company's sales rollout has become a bit better-understood by analysts, I guess, because they beat by only a penny per share on earnings this last quarter, the previous three quarters were much more dramatic "beats." The analyst expectations now tell a story of a stock whose earnings explosion is going to start weakening over the next year -- they think that Abiomed's earnings will post another big year next year, with 50% earnings growth to about $1.10 a share, but that after that the pace of growth will slow to something in the 15-20% range. This is actually a fairly big company, with a market cap of $3.5 billion or so, and they've been around for decades -- but it heated up over the past year and was a darling of a momentum stock going into the last quarter. Even though it looks a bit expensive now with a trailing PE of about 82, it's actually just been stabilizing after a sharp dip -- the trailing PE was about 100 just a few weeks ago. The shares dropped by about 30% in a day after they had that last earnings "beat", almost entirely because they issued forward guidance that scared everyone into thinking their big earnings surge is over and that the next quarter or two won't leapfrog the past year's results. It wasn't even bad guidance, frankly, but it implied that investors should expect slower growth over the next few quarters than the 40% goal the company had mentioned as their "earnings growth" bogey back in August. When you get a PE around 100, people look really, really closely at what the growth expectations are, and the stock fluctuates dramatically when those expectations change -- even though they're not "real" numbers. There's a bit of a story about this from IBD here — as with many Navellier stocks, it’s a favorite of other growth investors, too, and IBD’s system tracks growth and momentum in a similar way to Navellier’s. The PortfolioGrader ABMD score from Navellier’s free site is an “A” as well, even though the “earnings momentum” and “analyst revisions” parts of that score are weak.
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(As an aside: Be careful of relying on just the basic info from sites like Yahoo Finances who list this one as having a much-more-delightful trailing PE of 27 or so on $2.90 in earnings — that’s not from operating earnings, it includes a $2+ per share tax benefit, basically the accountants “releasing” their past tax deferrals as an asset they can use because they’ve reached sustainable profitability (deferred taxable losses aren’t worth anything until you’re reliably making a profit). Analysts rightly ignore that in building their earnings estimates, it’s really just a one-time non-cash boost for the income statement.)
Abiomed’s product is called the Impella, and it is in fairly wide use — the installed base ranges from 700-1,000 for their most popular models (there are a half dozen models for different flow levels and placements, some of which were approved back in 2009, but the biggest one now is the Impella 2.5 that was approved this year), and they are continuing to develop new iterations that use the somewhat standard system that their customers (surgeons) are now accustomed to (same size catheter, similar procedure, etc.) I don’t know if they’ll be successful at continuing to ramp up sales, but an aging population (read: more heart problems) seems to indicate a potential for more procedures — I haven’t seen any reporting in their quarterly releases about the number of procedures performed, which would be interesting to see, but I only skimmed through the press releases so that info may be elsewhere in their results.
If you’re curious about Abiomed, you might start with the webcast of their investor day, available here, to give you an idea of their plan and strategy before you start digging into their filings. I don’t know what the competitive landscape is like, there are other companies that make implantable pumps but they seem largely designed as support devices to be used, sort of like a partial artificial heart, to keep someone going until they’re healthy enough for surgery or for a transplant. Abiomed’s Impella devices are currently intended just for support during and immediately after surgery, though they have products in development that could go home with the patient for longer-term support.
Interested? The company has been around for a very long time, they commercialized early artificial external heart pumps 30 years ago (including the BVS 5000, which is no longer even mentioned on Abiomed’s website), but the stock really has come to prominence again only with this Impella line of pumps in recent years and, most dramatically, with the leap in sales as the new Impella 2.5 and Impella RP were approved over the past year. It’s hard for me to gauge what the continuing growth rate might be, but they have certainly grown nicely this year and are saying encouraging things about their long-term growth potential from their new products. The PEG ratio is very, very high, around four or five, so it’s not an easy valuation argument to make — but if they can really grow earnings 50% next year and close to 20% in future years the valuation catches up to reasonable fairly soon.
Navellier also promised back in June that Abiomed was one of the “Summer Stocks” that could make you rich by the end of the year, he was right that it would go up, though it’s only about 20% above where it was then… but I suppose there’s still another six weeks of hope left in 2015. The other stocks he touted back then did worse, IDTI up about 8% and MXDG down about 20%, so if you’d bought all three you’d be up about 4% versus a 3% drop in the S&P 500 for those five months to date. Not exactly building a fortune in the short term, which is what the growth stock pickers like to promise, but not bad compared to the alternative (and better than my personal portfolio over that time period, for whatever that’s worth).
It’s your money, so it’s your call — let us know if you think Abiomed deserves a place in your portfolio after this latest dip… will it, indeed, be the “Tesla of Medical Devices?” Just use the friendly little comment box below to share your thoughts.
P.S. The PEG ratio, if your’e curious or unaware, was popularized by Peter Lynch and is nice and tidy for quick answers but doesn’t necessarily mean anything — it’s just a way to compare companies with different growth rates and to give them credit for the growth. You take the forward Price/Earnings multiple and divide it by the expected five-year growth rate. If you use the forward PE of 70 and the expected long-term growth rate of 17%, you get a PEG of 4. Many growth investors typically look for a PEG in the 1-2 neighborhood, with anything below 1 a rare value and above 2 increasing the risk that you’re overpaying for growth… but it’s a rough indicator, not a line in the sand. As an example: Facebook (FB), a much, much larger and completely unrelated company (and my largest personal holding), has a similar trailing PE to ABMD in the 100 neighborhood, but the forward PE of 36 and estimated growth rate of 30% mean the PEG ratio is 1.7… so you can see that the analysts’ forecasts of five-year earnings growth, probably the thing they are least good at forecasting, has a huge impact on the PEG ratio.
P.P.S. Is Abiomed the next Tesla when it comes to valuation? Tesla (TSLA) has a forward PE of about 110 (some folks prefer using the trailing PE, which gives a more conservative number and takes some risk out, but you don’t have that flexibility with TSLA since they don’t have a trailing PE), and Elon Musk’s car company has a five year expected earnings growth rate of 100%, so you can calculate their PEG ratio as being a pretty tidy 1.1 if you like… way cheaper than Abiomed by that metric, though it doesn’t take away from the fact that comparing the two is utterly ridiculous.