Cabot’s “$15 Health Care Stock to Hit $45”

Sniffing out a tease from Cabot's Small Cap Confidential -- one reader says, "I've never seen these guys so confident on a recommendation"

By Travis Johnson, Stock Gumshoe, December 13, 2012

The folks at Cabot are no stranger to promises of doubles and triples — and they especially like to trot out specific pitches like this one, that a health care stock is going from $15 to $45 … and that, of course, makes us quite curious about just what stock they’re talking about.

You too? Great, well then let’s figure out who this is.

The tease is in service of Cabot’s Small Cap Confidential newsletter, which is one of those limited-circulation, high price letters that focuses on less liquid stocks. It’s admirable to keep circulation low when you’re touting small stocks, since that way you have less impact on the shares when your subscribers buy and sell … but that doesn’t mean we’re giddy about ponying up $1,200 for a “test drive.” So let’s see how they spin it and find out if we can ID this health care pick for you:

“We’re recommending a breakthrough $15 health care stock that our research shows could hit $45 in the next 12 months–with 20% to 30%
gains coming in the 90 days.

“We’re not just guessing here, either.

“The stock’s share price is up 383% and looks to be rising faster than the 974% we made in Monster Beverage a few years back….

“Just like Monster’s breakthrough natural drink products revolutionized the beverage industry, this small-cap medical juggernaut is doing the same thing for the surgical treatment of vascular diseases that are a leading cause of age-related death in the United States.

“With 10,000 Americans turning 65 every day for the next 19 years, this is one medical stock on a growth trajectory that could easily surpass the big profits we made in Monster Beverage.”

So in case you haven’t guessed, they made a lot of money on Monster Beverage. All letters like to take credit for their past wins in their ads, but the Cabot copywriters push this more than most (almost every stock teaser pick of theirs is the “Next Medifast” or the next Monster, First Solar, etc.)

The Cabot system is heavily reliant on technical indicators, momentum, and growth, though Thomas Garrity, who runs Small Cap Confidential, is a bit more into the fundamentals than some of the Cabot editors — here’s how he says he does it:

“… our proprietary stock selection system has been designed not only to identify breakout sales, earnings, and profit margin expansion factors…

“… but also to identify the specific disruptive, game-changing technologies that most analysts miss and that will ensure a company’s market share and technical superiority for years to come.”

So that’s the strategy. Most of the picks he takes credit for are truly small or obscure, unlike Monster Beverage … or at least, obscure enough that I’ve never heard of them before. So how about some more clues about the specific stock he’s pitching now?

  • “This small-cap company’s surgical technology solution offers less discomfort and quicker recovery than traditional methods.
  • 18 already-FDA-approved patents will keep competitors out of this sector for decades.
  • Again, demand for this company’s surgical products will only grow larger every day as 77 million baby boomers turn 65 over the next 19 years.
  • The company is clearly the leading provider in its sector over both the short and long terms, with analysts projecting 104% growth next year vs. 13% for the sector. Shareholder-friendly and expert management combined with 175 years of medical device experience has already handed investors nearly 250% gains over the past two and one-half years and looks to repeat this performance every two years for the next decade or so.
  • PLUS it may also be the perfect takeover candidate, thanks to its $82 million in revenue, 27% revenue growth and monopoly-like position in this growing field.

That actually sounds a little bit familiar, so I went back into the Gumshoe Vault and found that they used almost exactly this same language to tease a stock back in the Spring of this year … did the Thinkolator give us a good answer that time? (It almost always does, you know, but we claim only to get 99% of the picks right in a given year … which means we’re allowed to be wrong once or twice).

And yes, the Thinkolator is on track again — this is once again Endologix (ELGX)

Endologix does indeed have 18 patents, 104% growth for next year projected by analysts, and, actually, more than $82 million in revenue now (trailing annual revenue just hit $100 million) … so it looks like ELGX is still our “almost certain” bet to be this pick, but they didn’t update all the clues with the latest numbers.

And no, they’re not profitable just yet … they have been growing revenue nicely as their products get into the marketplace, they have a pipeline of additional products in the approval process now around the world, and they expect 20%+ compound annual sales growth, which should enable them to become very profitable if it happens, given their very good gross profit margins … but so far, they’re still sending money out the door just a wee bit quicker than it’s coming in.

You can see the ELGX investor presentation here, which explains far better than I could exactly what their products are — they’re a variety of different stent-type things for aortic aneurysms, an area where there’s apparently a good amount of competition but where Endologix claims a technical lead. If I told you that Endologix was going to keep the lead and have better products over the next five years than Medtronic or the rest of the competition, well, I’d just be parrotting ELGX’s words or making it up, so you can check out their materials and see what you think.

Analysts are expecting Endologix to make money in 2013 … but just barely, a single cent per share of profit is the projection, and that was reduced following the third quarter results (they had previously expected three cents in profit next year). It can be profitable to invest in medical technology stocks when they’re on that cusp of profitability, since the typically very high profit margins mean that ramping up sales creates nicely leveraged earnings growth when it all comes together (with these kinds of companies that sell medical devices, typically the gross profit on the actual device is very high, in this case right around 75-80%, so the impact of SG&A and R&D expenses gets watered down once the investment in a sales force has been made and the products have gotten through expensive clinical trials. Medical devices face less daunting approval processes than drugs, generally speaking, but that doesn’t mean it’s always easy or guaranteed.

They are reporting that a few catalysts are in the pipeline over the next few months, though none of the immediate ones are likely to have an abrupt impact on sales — they hope for FDA approval for expanded labeling of their AFX design by the end of the year, and they’re also looking for a CE Mark (a European market approval) for two of their designs/systems, one in the next month or so and the other in the first half of next year. It sounds like these products require a fairly slow rollout, with the training of physicians and centers and the building of awareness, but they have built up their sales force in both Europe and the US so they’ve got what looks like a decent base to build from. You can see their take on this in the transcript of their last earnings call here.

And that’s about all I know about Endologix — it’s certainly possible that their news might bump the share price (up or down, depending) over the next couple quarters, but as to whether it’s going from $15 to $45 in the next year, well, that I can’t tell you … it would mean a lot more optimism for earnings growth than the stock is currently exhibiting. Even for a company of a decent size like this (just under a billion dollars) the market does seem to be large enough, particularly with our aging population in the US and Europe, to make it certainly possible for them to ramp up sales pretty dramatically if doctors and patients love the product … or, perhaps more likely, for a larger medical device company to buy them out at a nice fat premium before too long, since the projections would likely be that the much larger sales force and infrastructure of a Medtronic or a Johnson & Johnson could turn a successful product into profits far more quickly. But as to whether the science backs Endologix moving from a $1 billion company to a $3 billion one on the back of a better product, that I can’t help with. I’m sure there are plenty of folks out there in Gumshoe land, including some doctors, who have opinions about these vascular repair products, so feel free to chime in if you’ve got a thought or two to share.

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