“Don’t Let this 10-Bagger Pass You By” Phase 1 Investor

By Travis Johnson, Stock Gumshoe, October 21, 2008

I haven’t written much about Rob Fannon and his Phase 1 Investor newsletter lately — this is the high end newsletter published by the folks at Stansberry and Associates, it’ll run you about $4,500 a year, and it’s largely focused on biotech companies.

So is their advice worth more than the advice from less expensive newsletters? I can’t tell you that — I’ve written about half a dozen or so teaser stocks that Fannon has put out there for us, and most of them have not done terribly well, but they certainly haven’t done as badly as many, many other stocks. Everything’s relative, and biotech is more hit-and-miss than most sectors — his picks for the Medical Investor newsletter, which he runs with George Huang, have done a little better, largely because they include several health care REITs that have held some value during this awful year. And Phase 1 isn’t tracked by Hulbert, so there’s no objective report of performance that I know of.

But that’s all really beside the point — If there are some Phase 1 subscribers who’d like to share with us their experience with that newsletter, I’d be delighted to hear it. But what I really want to know is: What stock does he think we should buy today?

Or, put more bluntly, which stock is he talking about when he says, “Don’t let this chance at a 10-bagger pass you by.”

Boy, that terminology really got into the vernacular, didn’t it? It’s a Peter Lynch term, itself stolen from baseball — a one bagger is a single, which Lynch would call a 100% gain. A 10-bagger is a 1,000% gain, a stock that goes up to 10X the price you paid.

And yes, we all like those. Heck, in this environment we’d probably be happy with a one-bagger. So what is this potential “ten bagger”?

Some clues:

It’s a cancer fighter, which is always good for business.

It’s a machine or device, not a drug.

The letter is generally based on the premise that Rob is kicking himself for missing the huge returns from Intuitive Surgical over the last few years, and tells us that “Rob just discovered another opportunity exactly like Intuitive Surgical five years ago.”

And here’s the spiel where they share their clues:

“The company that invented this miracle machine raked in $210 million in sales last year… not including any of the $647 million in backlog orders as well.

“Demand from patients is soaring… hospitals are eager to earn the revenue these machines will generate… and doctors are now recommending its use whenever they can.

“Based on demand and figures, we conservatively predict 35 to 55 of these machines will be installed per year over the next five years.

“Even with the current U.S. economic problems, installations should be on the high end of this spectrum.

“So, by 2013, somewhere around 400 machines should be installed and ready for use.

“And as all of this happens, the value of the company stands to increase in value by up to five times… generating huge gains for investors.

“You could earn as much as the 2,800% Rob Fannon missed out on five years ago… turning a small $5,000 stake into an incredible $146,000.”

Sounds good, huh?

Some of you can probably guess this one based on those clues, but the rest of the ad is a little bit interesting and shares some more thoughts about the company, so let’s have a look at some more of the ad:

“Imagine lying down peacefully…

“Dozing off while your favorite music plays in the background… thinking about the tennis match you’ll play later.

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“Now, imagine while you’re doing this, a machine is eliminating prostate cancer from your body.
You might think that sounds far-fetched. But Darrell Walker sure doesn’t…

“‘I didn’t have pain,’ says Darrell. ‘I didn’t require a hospital stay, and I had no lingering effects.’

“Instead of being a depressed, 71-year-old who had just been diagnosed with a life-threatening disease, Darrell simply opted to let the newest technology in medicine heal him.

“In fact, it was the second time he’s had cancer and been cured. He also had a brain tumor removed, using the very same technology.”

So, just to cut through the tension as you wait for the answer, the machine is called the Cyberknife, and the company is Accuray (ARAY).

And those clues are all true — and the estimates may well be reasonable. Accuray has sold about 30 Cyberknife systems in each of the last two years, and does have a nice big backlog, so they may be able to reach those numbers of 35+ installations per year. These are expensive machines, running at something like $4 million, so a couple machines either way makes a big difference for a company that has annual sales (last year, at least) of just about $210 million.

Analysts are not all that optimistic about ARAY right now, but they do see them becoming more profitable over the coming year, giving them a forward PE that’s just a bit higher than pseudo-competitor Intuitive Surgical — ARAY has a forward PE of 31, ISRG is 26. They don’t have any debt, thanks to their IPO about 18 months ago (at about five times the current price, so OUCH for those IPO investors).

The Cyberknife is essentially a radiation treatment machine — they call it “radiosurgery” — that’s mounted on a robotic arm and controlled by computer. The machine’s promise is that it can allow doctors to more closely target tumors and to allow the robotic arm to track the slight movements of tumors during treatment, reducing the “extra” radiation that hits other nearby parts of the body, giving “surgical” precision to radiation treatment.

And that story about Darrell is actually one that Accuray uses in their marketing campaigns — though of course, since this is a newsletter teaser a