What’s Cabot’s “Small Cap Medical Juggernaut?”

by Travis Johnson, Stock Gumshoe | June 10, 2016 6:20 pm

Solving a teaser pitch for the Friday File, plus a checkin on some REITs

Timothy Lutts is hinting at a new small cap stock in order to tantalize potential subscribers to Cabot Small-Cap Confidential 2.0 (which will run you $950/year), and the line that caught my eye was “A Rare Second Chance to Turn $5,000 into $40,000.”

That’s a reference to Tesla, which had such an 800% jump (over 2-1/2 years), and they make those kinds of comparisons all the time in their teaser ads — Cabot is generally a growth-focused publisher, and they use lines like “looks a lot like Tesla/Monster Beverage/Intuitive Surgical” to sell a great many of their ideas… so I wouldn’t take that Tesla comparison terribly literally, but I’m still curious to see who they’re recommending.

This newsletter, by the way, has been pretty quiet on the marketing front recently — they haven’t caught my attention in a couple years, not since they were pitching Cardiovascular Solutions (CSII) as the “stock of the decade” back in 2014. That was a different editor (Thomas Garrity, who is no longer with Cabot), and they’ve apparently moved on and “relaunched” the newsletter as version 2.0 with Tyler Laundon at the helm at some point in the last six months or so (he worked on a few newsletters for Ian Wyatt before moving to Cabot), but it’s still a letter that looks for “undiscovered companies with compelling stories.”

Laundon wasn’t the “name” guy behind many teaser stocks that we covered for Wyatt’s newsletters, so we don’t know a lot about what his favorite promoted picks have done (most of them that I spot checked are pretty flat over the past few years), but you can see some of our articles about his past ideas here[1] if you’re interested in checking up on him. What’s he talking up today?

“Why My Newest Recommendation Looks a Lot Like Tesla in the Early Days

“Just as Tesla’s battery breakthrough revolutionized the electric car industry, this small cap medical juggernaut is doing the same thing for the surgical treatment of cardio vascular diseases (CVD).

“With 20 million people worldwide suffering from CVD this is one medical stock on a growth trajectory that could easily surpass the big profits we made in Tesla.”

OK, so that provides some worry that they’re just again teasing Cardiovascular Solutions… but given the recent performance of that stock (it’s had a bad year), that’s probably not the case. Let’s see what other clues we get:

“… the bulk of our company’s surgical profits will be paid for by the government—AND the shareholders will reap massive profits along the way.

– A huge percentage of the 77 million Americans who turn 65 over the next 18 years will ultimately require these kinds of heart-saving treatments, as heart disease is one of the leading age-related illnesses in America, and the fact that
– Medicare insurance will shell out billions to pay for them.”

OK, but that’s true of any medical device or pharmaceutical company — people don’t pay for these things out of pocket (if they did, the economics of our healthcare system would be dramatically different… with a lot more customer service and competition, and a lot less filling out of forms by both doctors and patients).

So how about some specific clues? He doesn’t give a lot, but this is what we have to feed to the Thinkolator…

“This small-cap company’s surgical technology solution offers less discomfort and quicker recovery than traditional methods….

“The company is clearly the leading provider in its sector not only with a 30-year history in the space but also a whopping 79% market share….

“Shareholder—friendly and expert management has already handed investors nearly 100% gains over the past two years and looks to repeat this performance every two years for the next decade or so—all thanks to its growth platform that targets 10% annual sales growth and 20% annual profit growth.”

That’s enough to narrow it down a bit, but not to be absolutely certain. A little more, please?

“… it may also be the perfect takeover candidate, thanks to its $79 million in revenue, current 58% revenue growth and monopoly-like position in this growing field.”

OK, that gives us a pretty strong degree of certainty that the Thinkolator has the right answer today — this is LeMaitre Vascular (LMAT)… which, in some ways, is in a similar business to CSII, though they’re not really a tech driven one-product company like CSII, LMAT is much more of a diversified “platform” growth company that’s trying to roll up lots of little niche businesses and “own” the vascular surgery space, particularly disposables and implanted tools, with a strong sales force and a variety of products.

Why is this the match? LeMaitre’s latest investor presentation[2] (which has some good data, by the way, worth a look) includes the quote “We aspire to achieve 10% sales growth and 20% profit growth.” So that’s one check mark.

And they did have $79 million in revenue in 2015… though one little hiccup is that they didn’t have 58% revenue growth. They DID have 58% earnings growth last quarter, so I suspect that’s either an intentional or accidental mistake from Laundon’s ad copywriter.

And while I don’t know that they have 79% market share in any particular segment (that data is always a little squishy anyway, and it depends who you ask and what they’re counting), but they do have a slide in their presentation indicating that they make 79% of their sales calls to vascular surgeons and focus on that market almost exclusively and try to “own” it. That’s not the same thing as “market share”, but perhaps it’s where they came up with that number.

LeMaitre Vascular was started a little over 30 years ago by George LeMaitre, a vascular surgeon who had an idea for a better tool and decided to try to sell it to his colleagues. He is still Chairman and CEO of the company, and still owns more than 20% of the outstanding shares (though he’s a pretty consistent seller of shares, there has been no insider buying). They have remained completely focused on serving vascular surgeons, developing some new tools through R&D along the way and acquiring many more — that level of specialization presumably gets them more attention from those vascular surgeons who make decisions about which products to use for their surgeries, and LeMaitre is very focused on being a direct seller to those surgeons — they have consistently increased their direct sales force, and now have 96 salespeople selling direct in 21 countries. Each new product, at least in theory, improves efficiency because it gives that sales force something additional to sell.

I don’t know whether their products are markedly better or different than their competitors’ offerings, but they must be doing something right — their gross margins are 70%, which is quite impressive (meaning that the direct cost of making and delivering a $100 tool is only $30), so even if the competition is significant for some of their products it’s not hurting their ability to sell profitably. Lately, the growth has largely been coming from their biologic products (grafts and such) more than the tools, and they’re looking to grow both in that area and in endovascular products and tools.

You can see the latest quarterly conference call transcript here[3]. They came in roughly in line with analyst estimates in that quarter, and continued to show pretty decent growth.

This one looks quite interesting to me, and the valuation is a little bit steep but perhaps reasonable if they can really hit those 10% revenue/20% profit growth numbers every year. Analysts are forecasting numbers slightly lower than that (like 8%/20% this year), so they’re in that general ballpark. The stock trades now at about 36X current year expected earnings, or 26X next year’s earnings forecast. Fairly steep, but they do have what looks like a pretty strong niche, and they seem confident that they have a pretty strong pipeline of possible small acquisitions that they can continue to make — their goal is to make an acquisition every year and to release a new internally designed product every year, and as that goes out to their very focused sales force the revenue growth pours in (or that’s the plan, at least).

The balance sheet is fantastic — they have $25 million in cash, which makes a nice war chest for acquisitions of the size that they’ve typically made (many of them are just a couple million dollars or less), they have no debt, and they pay a small but growing dividend (just over a 1% yield, but they’ve raised the dividend every year for five years). And it’s quite a small company, with a market cap of $275 million, so the cash is enough to sway things a little — if you back the cash out of the PE ratio it goes from 26 down to 24. Not a huge deal, but having a good balance sheet and making acquisitions without having to sell stock or borrow money can produce meaningful compounding over time — cash profit is spent on R&D and acquisitions, which increase the cash profit, which is spent on more growth.

It’s hard to buy a company that’s got a bit of a premium valuation like this and isn’t necessarily going to register show-off nosebleed growth like your latest tech stock darling, and I don’t know when they might see a lid put on their growth by better competition, or by failure to innovate more quickly than older products go stale, but I like the growth by aggregation model when you can do the acquiring by reinvesting your profits — and it looks to me like the niche products they’re buying become much more valuable in their hands than they were previously, thanks to the improved market access they can provide with their direct sales force.

I don’t own this stock and haven’t looked into it before today, but I like the model and might be able to stomach the valuation after I do a bit more research… I’ll let you know if I decide to do anything (not before at least three days, of course, per Stock Gumshoe’s trading rules).

Checking on my holdings:

I haven’t done much trading in my accounts this week, and haven’t changed my opinion on much, but I did post a note for the Irregulars earlier this week in case you missed it — that was about doing some rebalancing among my healthcare REITs[4] (selling a little more MPW, buying more of my other holdings in that sector).

And In other REIT news, our data center REIT Coresite (COR) has been off to the races — at an inconvenient time for me, personally, since I sold some covered calls against much of my position last month. To some degree that’s a catch-up to what has been extraordinary growth in funds from operations per share from COR for five years — as of mid-2015 they had grown FFO per share by almost 400% from 2012 but the shares had only gone up by 200%, so the latest surge over the past year has really closed that gap.

Over just the past year, though, the FFO per share has been tailing off. The trailing Price/FFO ratio (akin to a PE ratio for a non-REIT) for COR was languishing down in the 6-8 neighborhood for a few years despite the growth, and now it’s back to the highest it has been since COR was just beginning to be profitable (and since I first suggested it) in 2010 and 2011. I’ve been wrong about this so far, since I keep thinking that COR has run to valuations that were too high, and I’m fine with being wrong — even if it means taking some profits by selling much of my stake at $76-77 if the shares are still above that number next month at options expiration.

Some of the latest surge was because of positive commentary about most of the data center REITs coming out of recent REIT conferences, and the latest analyst call out from Canaccord on COR helped bump it up another 5% or so — this is the note from Briefing.com:

“CoreSite Realty (COR) initiated with a Buy at Canaccord Genuity; tgt $92. Firm views co as well positioned to capitalize on its vibrant customer ecosystem, with key verticals — cloud, digital media, enterprise, and network — that are increasingly seeking to interconnect in network- and cloud-dense data center campuses. High-margin revenues from customer cross-connects (14% of total revenues and growing) help fuel top-line growth and margin expansion, while $246M of expansion projects accommodate strong demand at campuses such as Santa Clara in Silicon Valley. As cloud adoption accelerates, they believe COR’s valuation multiple can be sustained or even improved, setting the stock up for 20%+ total returns.”

Add that to the fact that now no one is at all worried about interest rates rising (which makes the paltry 2-3% yield on these REITs seem more impressive), and that these REITs, like the healthcare REITs, avoid some of the fears that many people have about both the residential and commercial real estate markets but still provide some yield, and I guess we shouldn’t be surprised that pretty much everything with growth and a sustainable above-market yield is getting bid up.

As regards my personal position, I’ll still have a position in COR even if my option sale means the majority of the position is called away, and it will no longer be one of my top five holdings. If that happens next month, I’m likely to either look for an opportunity to sell puts in COR to re-establish some of that position, or to investigate the valuations of some of the other data center REITs… but I’m also being pretty cautious these days and letting my cash balance rise, so perhaps I’ll just sit and be petulant as I demand lower prices to buy.

I still like the sector as a play on the increased demand for interconnection, cloud and increased internet data demand overall, and Coresite is still very well run and growing nicely, but I’m trying to be disciplined and take some profits when I’m not comfortable with lofty valuations, even with dividend growth companies that I generally prefer not to ever sell. And yes, one of my “cheating” ways of taking profits is the repeated sale of covered calls on stocks that I think have gotten too overvalued. I’ve sold calls against my COR position a few times now, this is the first time they’ve been hit — so I’ll cry a bit in my beer about selling a $83 (or higher) stock for $77 if it comes to that in late July, but also remind myself that I paid an average of $34 for my shares (and suggested it to you at $13), so it worked out OK. And if the shares dip down to the low $70s before option expiration because Janet Yellen unleashes a Twitter tirade or shocks everyone with a rate rise and crushes income stocks, well, it will remain a large holding. Life could be worse.

Have a wonderful weekend, everyone. As always, I’ll let you know when my opinions change… and I’ll be back to blather on for you again on Monday.

Endnotes:
  1. see some of our articles about his past ideas here: http://www.stockgumshoe.com/tag/tyler-laundon/
  2. latest investor presentation: http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NjExNzQ3fENoaWxkSUQ9MzQwMDY3fFR5cGU9MQ==&t=1
  3. see the latest quarterly conference call transcript here: http://seekingalpha.com/article/3970390-lemaitre-vasculars-lmat-ceo-george-lemaitre-q1-2016-results-earnings-call-transcript?part=single
  4. doing some rebalancing among my healthcare REITs: http://www.stockgumshoe.com/2016/06/barrons-wishy-washy-on-medical-properties-reminds-me-to-look-at-rebalancing/

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