Here’s what got some Gumshoe readers’ attention in the latest ad from Cabot Small Cap Confidential:

“The $1.3 billion medical device company I’m about to name will soon be an $80 stock that you must snap up today for $38.

“The stock jumped 146% in the last 12 months and is set to double again this year.”

And, of course, they’re only “about to name” the stock if you pony up $950/year (the “teaser” sale offer is $175/quarter, but that’s only for your first quarter and it renews at $350/quarter, so we’re being conservative and going with the annual rate instead of the $1,225 the first year would cost you at the quarterly rate). So, thankfully, you’ve taken a moment to join your friendly neighborhood Gumshoe as we see if we can name that stock for you at a far friendlier price. How does $0 sound?

(Yes, we’ll happily accept your $59 if you want to become an Irregular and help keep Stock Gumshoe humming for another ten years… and those Irregulars get that “quick take” summary box up above, so wouldn’t have even had to read this far to know the solution to the teaser… but 80% of our articles are free, and we do love our free members).

What else do we get by way of clues from Timothy Lutts? (He’s the one who signed the ad, and is the majordomo at Cabot, though Small Cap Confidential is actually helmed by Tyler Laundon). Here you go:

“Just like Tesla’s battery breakthrough revolutionized the electric car industry, this small-cap medical juggernaut is doing the same thing for the surgical treatment of peripheral nerve damage.”

Practically every Cabot newsletter teaser uses an odd comparison like that — “just like Tesla”… only a completely different kind of company in a completely different industry. That’s just to give you some perspective, hoping to plant the seed of hoped-for massive returns in your noggin, sometimes they use Tesla, sometimes Amazon or Priceline or Dr. Reddy’s, all are pretty much irrelevant.

Back to the subject at hand … what clues do we get about the actual company? They say it’s addressing a large market…

“1.4 million Americans suffering nerve damage every year and 900,000 requiring surgical intervention”

OK, that’s a start. More info, please!

“… this company is the only—I repeat, the only company that:

1. Is focused on peripheral nerve repair solutions
2. Possesses a product portfolio that addresses all surgical peripheral nerve reconstruction needs
3. Has aggressive sales and marketing staff in place to take advantage of this $1.6B+ medical market opportunity”

And a few other tidbits I gleaned from the ad, all cleaned up and ready to be fed into the gaping maw of the Mighty, Mighty Thinkolator…

“75% gross margins….

“… the world’s shrewdest institutions own millions of shares worth over $1 billion…

“… stock price has risen 275% over the past 12 months and 602% over the past two years”

Wait, which is it, the 146% in the headline or the 275% they quote here? Either is impressive, of course, but the disparity probably means they’ve written up similar pieces at different times.

The “millions of shares worth over $1 billion” really just serves to call our attention to the fact that this is a decent-sized company — if institutions own a billion dollars worth of shares, then it’s at least a billion dollar company.

So… as of today, this stock has gone up 206% in the past year and 586% in the past two years (it’s been growing for a while, it’s up over 1,000% in the past three years). And, of course, I had never looked at it before today — it’s amazing how many of the thousands of publicly traded stocks there are that stay below your radar, and how many great performers you miss.

And by “you,” of course, I mean “I.” I have no idea whether this one’s a stock you’ve been trading or not.

So what is it? I’ve put the cart before the horse — the Thinkolator had to come out of the garage for this one, so we had to move the cart to make room — but once we got the tarp off and brushed away a few mouse nests, it started up just like the day it was born… and our answer came out pretty quick, this is AxoGen (AXGN).

AxoGen is, in their own words, “a global leader in developing and marketing innovative surgical solutions for peripheral nerves.”

And yes, it’s close to $38 a share ($39 as I type), so a move to $80 would certainly be enthralling for shareholders — whether or not it gets there, I don’t know. This one, like most biotech stocks, is priced based on future expectations — they do have some revenue, and it’s been growing, but if the recent trends continue they are still quite a ways from being profitable, and the share price growth has far outpaced the growth in revenue. Revenue and gross profit per share have both roughly doubled over the past three years… but the stock price has gone up 1,000%.

So what’s the hope for the future? Analysts see the revenue growing about 30% in 2018 and then doubling from that level by 2020 (though that’s just two analysts, so we should take that with some skepticism). That would mean $160 million in sales, a far cry from the $1.3 billion number thrown around in the headlines in the ad but still meaningful.

If it happens as those analysts expect, that will bring profitability in 2020, with 16 cents per share in earnings for that year — so considered as a purely numbers-based investment based on the foreseeable future, that’s dumb. You don’t pay 250X expected 2020 profits for a company, not even if it’s expected to double sales over the next couple years.

I’m not saying this is a dumb stock, just that it would be dumb to buy it based on those financials — so there must be some other reason to buy. What might it be?

Well, as luck would have it, AxoGen just released earnings yesterday — so we can get a pretty fresh look. Investors sold off the shares by a little bit on the news, perhaps because the losses were a little larger even though revenue increased more than expected. That seems to be because they’ve invested in their sales force and in marketing to surgeons.

Their investor presentation slide deck is here, and you can review the transcript of the conference call here. When I look those over as a non-expert, the “story” that initially occurs to me is one of steady growth as they build markets, mostly for their nerve graft materials and, to a lesser extent, for their testing equipment — but whether or not that kind of growth, without profits, should trade at 20X sales, I don’t know. That’s a call you’ll have to make based on your understanding of their market and their products.

I don’t know if they have any strong competitors to be wary of, and these markets are not massive so it could be that they can gradually grow their sales and keep gross margins high… but they’re also investing a lot to try to build sales, so clearly the money is not rushing in on its own, which means there’s some level of entrenched product that limits the thirst the market might have for the next new big thing. Either that, or it’s just a market that’s slow to change — which can certainly happen in many professions, though I don’t know much about neurological surgeons.

They note in their presentation that their target markets for the major products they sell tally up to $2.2 billion, so at $60 million in trailing revenue they’re almost a rounding error when it comes to what they see as the total market — and they’ve noted elsewhere that only about 10% of US hospitals who do nerve repair surgery are using AxoGen products right now, so whether you dismiss that as “small and irrelevant” or as a huge opportunity as they try to take market share from more traditional nerve grafts (often using nerves moved from another part of the body, instead of new material like AxoGen provides)

But anyway… Cabot sez they’re going to $80 and continuing this fantastic share price performance, and now the ball passes over to you. Whadda ya think? Ready to invest in some next-generation nerve grafts? Think it’s a great opportunity, or too pricey for the growth rate? Let us know with a comment below.

P.S. I should note that this newsletter’s last teased niche biotech stock, LeMaitre Vascular (LMAT) about two years ago, early in Laundon’s tenure, did in fact do as well as they predicted and double in about a year — though that one is still a lot cheaper and smaller than AXGN. Laundon’s more recent teased stocks included Aqua Metals (AQMS), which I thought sounded pretty appealing at first glance but was apparently a disaster in the making, Aspen Aerogels (ASPN), which has been flat since the teaser pitch, and Q2 Holdings (QTWO), a momentum stock that I couldn’t talk myself into given the competition in banking services… but that has performed very well recently.