by Travis Johnson, Stock Gumshoe | June 1, 2016 2:58 pm
A few sharp-eyed readers have asked about a teaser ad now circulating from Bill Patalon, and that headline is taken from the ad — a few other stocks are teased as hot “secret” recommendations of Patalon’s Private Briefing service, but it’s that “biggest medical breakthrough of the decade” bit that seems to be catching the most attention.
So what is it?
Well, before we get into the clues we first have to sit through an intro that has Patalon describing himself as, literally, the “World’s Greatest Stock Picker” — that claim is based on the fact that he says he has “217 double- and triple-peak gain winners since I began keeping track in August 2011.”
I expect that’s at least a reasonable facsimile of the truth, since big publishers are pretty careful not to publish falsehoods and risk their golden goose, but I don’t know why having 217 double-digit or triple-digit (stocks that rose to a peak of at least 10% or 100% after being recommended) in five years makes you the “world’s greatest stock picker.” I guess you can make that call on your own.
Note that “peak” returns are obviously quite different than “actual” returns — actual returns are when you sell a stock and book a profit, or, in the case of a pundit, you recommend a sale of a stock. “Peak” return just measures the highest point a stock hits after you recommend it… and it’s quite rare to hear about a pundit actually recommending the sale of a stock at the peak (just like you and I are rarely able to buy at the bottom or sell at the top).
But anyway, that’s his claim, that he’s the “World’s Greatest Stock Picker” and that his system will identify fantastic stocks for you for $99 a year… here’s a little taste of the “formula” he uses:
“While I can’t reveal the precise formula behind my proprietary stock-ranking system, I can tell you this: It must first score in the top 5% across seven model variables that include:
- Price-to-Cash Ratio < 10. If a company's stock price is high relative to the cash it's generating, I won't touch it. The average Price to Cash Flow (P/CF) for stocks is 14.06. For me a stock's P/CF ratio needs to be below 10...
- Insider Buying Activity > 3 Executives. I look for at least three or more major insider buying transactions before I recommend any stock.
- PEG Ratio < 1. One of the quickest ways to tell if a company is over or undervalued is to look at its price-to-earnings ratio (P/E). For me, a company's ratio needs to be below 1, which means the stock is priced lower than its earnings growth.
Those are certainly reasonable things to look for — patterns of insider buying, reasonable cash flow multiples, low PEG ratios. No argument there.
What, then, has this system identified?
“Let me show you what my method is pinpointing next. It’s a big one. In fact…Are you getting our free Daily Update
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“It could be the biggest medical breakthrough of the decade….
“Because I’ve found a tiny biotech lab and research firm…
“Which has developed a paradigm shifting technology I am 100% convinced is on the verge of changing medicine forever.
“This technology is not only game-changing – it’s life-changing.
“It’s a noninvasive, nonsurgical system for detecting cancer and other deadly diseases – painlessly.
“Even more exciting, the system can detect cancer months, and in some cases, even years before the disease fully metastasizes.”
Ah, you know what that means — we’re looking at another diagnostics stock… and since we get that “noninvasive” bit and it’s about cancer, I’m guessing it’s one of the several “liquid biopsy” stocks that have been occasionally been hot tickets over the past couple years.
Here’s more from the ad:
“Instead of having to cut into someone to see if he or she has cancer, this new technology makes it possible for doctors to administer a simple, noninvasive, pain-free test to achieve the same result.
“In fact, this one company has already demonstrated in clinical studies the ability to identify and track melanoma, lung, colorectal, and pancreatic cancers using this advanced proprietary technology.
“How does it work exactly?
“By a completely revolutionary method of looking for ‘cancer markers’ in a patient’s bodily fluids.”
Yep, there you have it — liquid biopsy. Lots of companies are already selling these tests, or are in the process of trying to get them approved. It’s a segment in pretty serious flux, from what I can tell. Which stock does Patalon like?
“The firm just inked four major deals with national healthcare providers.
“One is a proprietary PPO (preferred provider organization) which boasts 550,000 doctors, 4,000 hospitals, and 40 million Americans within their network.
“Another is an Arizona-based provider with over four million covered subscribers.
“Yet another is a multispecialty provider in the U.S., Canada, Mexico, and the Caribbean that provides in-network coverage to 22 million individuals.
“And the fourth is the biggest of all – a giant provider with almost 900,000 doctors and an estimated 68 million consumers.
“All four of these deals just happened within a few weeks of each other this year. And all four pretty much guarantee one thing:
“This firms’ Early Warning Detection system is set to be rolled out to millions of doctor’s offices and hospitals – and its revenue is about to explode.
“Meaning early investors could start reaping huge fortunes – not years from now – but in the months, weeks or even days ahead.”
Holy cow! In the days ahead? Like tomorrow? Or is this, perhaps, just one of those empty phrases that could mean, “in the next couple thousand days?”
Who knows… but copywriters love to use squishy terms like “in the days ahead” and “before too long” and “about to,” perhaps because those terms don’t have a settled legal definition.
A few more clues that we can feed into the Thinkolator? I thought you’d never ask!
“… one tiny little lab trading for under $5 is at the center of it all.
“In fact, the firm has carved a deep moat around its competitors already.
“As I’ll show you in this report, the firm has issued 87 patents with another 61 applications pending.
“A vast majority of these patents are directly related to its proprietary Early Warning Detection technology and the way it hunts out and detects ‘cancer markers’ without using invasive devices or surgery.”
And then a couple more tidbits to get your palms sweating…
“This is one of the biggest no-brainers I’ve ever seen….
“It’s a huge disruptor that’s about to explode with profits as it upends the status quo….
“Insiders are buying shares in huge bunches recently – including a top director (10,000 shares), the Chief Financial Officer (who grabbed 15,000 shares), even the CEO (who grabbed 20,000 shares).
“In addition, a hedge fund that specializes in this type of high-reward stock play recently loaded up the truck… with an astounding 3.29 million shares….
“The global in vitro diagnostic (IVD) market for medical tests is already enormous – expected to reach three quarters of a trillion dollars by 2020….
“Every person on planet Earth could one day use this technology to screen for cancer.
“But even if we stay conservative and say that this one company only grabs 25% of the market share, I estimate its revenue will still grow by 4,709%.”
Wait a minute, going from nothing to grabbing 25% of a $750 billion market in five years is conservative? Seriously?
Well, you can believe that projection if you want to — but it sounds like optimistic poppycock to me.
The company is real, though, and I doubt they’re putting that kind of forecast out themselves — the stock Patalon is teasing here is, once again, Trovagene (TROV), which he also pitched eight or nine months ago.
Yes, there are insiders who have bought shares — though the last insider buying was in the Summer of 2015.
And there is a fund that owns 3.29 million shares… that’s Bridger Management, which files as a 10%+ owner of the shares. I don’t know Bridger’s track record, but it looks like they had a bit of a flameout over the past couple years in Response Genetics, another small cancer diagnostics company in which they were a reporting shareholder — that’s doesn’t necessarily mean anything, but it gives me some pause in assuming great things just because of Bridger’s ownership.
Trovagene is one of many “liquid biopsy” stocks trying to get approval for and market their tests, with cancer being generally the most sought-after diagnostics market for most of them. Their differentiating factor is that they use urine, not blood, so they claim better results partly because it’s easier to repeatedly test larger volumes.
It does seem that the noninvasive cancer diagnostics market, full of companies which test for circulating tumor DNA or other cancer markers in either blood or urine, is likely to grow — blood and urine tests should be cheaper and safer than biopsies, and early detection and screening should improve both overall health care costs and actual patient outcomes over time.
But whether that means Trovagene will be a big winner, and turn into a dominant diagnostics company with 25% of the market, I don’t know. Their first tests are aimed at genetic mutations and trying to diagnose and track different variations of a few specific cancers, and those are for sale now and have been for a little while. From what it says on Trovagene’s website, they don’t appear to require FDA approval… and they have arranged for preferred provider status with some large healthcare organizations and insurance companies.
The money is not yet rolling in. They released their first product, an HPV test, about three years ago, and their first cancer mutation tests about two years ago. Sales have not been overwhelming, though that’s probably because they have been trying to build a case for their product by testing it in the clinic — they don’t need FDA approval, I guess, but they do need validation of the test as genuinely important and accurate before providers will order it and before insurers will pay for it, and they need to continue adding new assays and tests if they want to expand the potential market.
So that work appears to be continuing — they reported on pancreatic cancer testing at AACR last month, and will be presenting something at ASCO. This doesn’t strike me as the kind of thing that is likely to create blockbuster news, since it’s generally the “cure” that makes dollar signs dance in the eyes of investors, not the “slightly better or different diagnostic test.” That might not be fair or accurate, it’s just my personal sense of the situation — and I say that as someone who has written about Trovagene a couple times over the years, but does not have an expert understanding of their clinical or research work.
The financials do not inspire great things — as I said, there are some perhaps good reasons why they’ve not generated meaningful revenue despite trying to build a market for their tests for a few years, but the numbers are the numbers. The revenue level has been pretty constant at about $300,000 a year for the past 2-1/2 years, and in years when that revenue has been tied to product sales the cost of goods for the products is more than twice what they’re getting in revenue, so the business plan must be to sell at much higher volume in order to cut into the per-test costs — these are genetic tests, so they may not be cheap to run (even if you’re testing urine instead of blood).
They do have plenty of cash after a couple offerings last year, so they can continue at the current “cash burn” pace for more than a year even if the revenue doesn’t climb — though they will presumably have to keep R&D and selling costs rising to try to build the business.
So if I were considering this stock, I’d want to get a good understanding of where that large increase in volume that they need might come from, and how long it might take to arrive. From TROV’s past couple years, it doesn’t look to me like this should be thought of as a research-driven stock where a big breakthrough at a medical conference will cause shares to skyrocket or get bought out by a bigger company for some huge gain… I’d think of it more as a company slowly trying to build a market for its products by making deals with insurers and big medical groups and trying to build their case with oncologists to stoke demand.
Analysts are pretty optimistic about the near-term growth, though I don’t know who the analysts are on this one or if they’ve been accurate in the past — the analysts who have forecasts expect an average of $1.1 million in sales this year and $11 million in sales next year, though the range is huge. Getting anywhere near that would mean pretty dramatic revenue growth, even $1.1 million would be almost 300% growth from last year… and I guess all of that growth is still in the uncertain future, since the first quarter of this year was about the same, revenue-wise, as the first quarter of 2015. For Bill Patalon to be right about his prediction for a 4,209% jump in revenue they’d have to go from the current pace of about $300,000 a year to about $13 million a year… which is within the realm of possibility, though it could be, since the analysts are forecasting something similar, that investors are already counting on that kind of growth in 2017 and it’s “baked in” at this valuation. Starting at a very low sales level makes huge percentage increases feasible, but even the analysts don’t think that they’ll be close to profitability after that big anticipated revenue ramp (they forecast continued losses of about $1 per share next year, a slight improvement over 2016).
Presumably their costs will not rise as quickly as sales, but if the cost of goods stays well above revenue that could speed up the cash burn (I have no idea whether they’ll get economies of scale by bumping up sales by 300% or 3,000%, hopefully they would… but if not, and if it continues to cost them $2 to process a test they sell for $1, roughly speaking, then selling more means they’d need more cash).
They also have a new CEO on board this year, so perhaps there will be meaningful changes… I’m skeptical about a near-term breakthrough, but that’s an easy stance for me to take because I don’t generally get involved with pre-commercial biotech companies anyway (I leave that to Dr. KSS and his legion of bio-investing readers — and in case you’re curious, I’d describe Dr. KSS’s most recent comment on TROV as “mildly positive”).
I could certainly be wrong, and perhaps I’ll be proven wrong when they release more results at ASCO next week (though the presentation they’re making looks relatively tepid to me) … but that’s the impression I get of this one. If you’ve got a thought to share on TROV, I’m sure we’d all be delighted to hear it… feel free to pitch it on the pile with a comment below.
P.S. If you’re curious about some of the other “liquid biopsy” stocks that have been teased by newsletters, the most recent big push I saw was over the winter when a couple newsletters touted OCX and FMI — though there are certainly several other contenders in the “new and aspiring diagnostics” space, and I expect we’ll continue to see at least several diagnostics and testing companies, from new-age breathalyzers to advanced blood tests, pitched each year.
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