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High-minded investors and analysts bristle with indignation at the suggestion that investing in a stock is little more than gambling.  The term “punting” has historically referred to activities like race track gambling; but it has entered the investing lexicon as a means of separating seemingly foolish speculation akin to gambling from “true” investing.  

Taking a punt, we are told by some experts, is a fool’s game played by the mindlessly fearless.  Similarly, those investors who see opportunity where others only see disaster are cautioned that investing in falling stocks is a high risk venture.  “Beware the falling knife” and “value trap” are two warning signals many analysts and experts cite for contrarian investors – those fearless enough to bet against the conventional wisdom of the share market majority.

In defense of punters, contrarians, and other fearless investors, all share market investing is in its essence a “bet.”  When you buy 1000 shares of one of the Big Four banks, you are betting over time you will make money.  Granted, the risks involved with one of the world’s premier banks are miniscule compared to the risks of investing in a junior resource exploration and development company that has yet to make a dime.   Similarly, investing in a company that could experience significant declines in revenue due to an unforeseen event is riskier than investing in a company operating in a sector with rising demand.  In both cases, however, it is due diligence that differentiates intelligent punting and contrarian investing from gambling on a stock without assessing the odds.

Intrepid investors see something others either don’t see or fail to appreciate.  And they win from time to time.  We have two recent examples to offer.

The first is a junior Oil & Gas exploration and development company operating in a space once thought to be the next resource boom here in Australia, but now out of favor with many analysts and experts.  The sector is Liquefied Natural Gas and the company goes by the name of the sector – Liquefied Natural Gas Limited (LNG). 

The stock was covered in a 17 March 2014 article on The Bull when the share price had more than doubled year over year, from around $0.28 per share to $0.57.  LNG was again featured in a 23 June article when the share price stood at $2.19, up from $0.14 per share one year prior.  The current share price is now around $3.65, up 1600% year over year.  Here is a price chart for LNG.

So what did the punters see that drew them to this stock before the institutional investors took notice?

LNG had a project underway in Gladstone called Fisherman’s Landing, but the company essentially put the project on hold due to loss of its supplier of natural gas feedstock needed for the liquefaction process.  Management shifted its focus to the US and announced a project called Magnolia located in the area of Louisiana that is already home to what will be the first LNG export terminal in the US.  The share price responded positively to repeated announcements of progress in securing the necessary regulatory approvals and pipeline agreements.  On 28 July LNG management set off on a road show to promote the company’s prospects and at the end of the month announced the acquisition of an additional LNG project in Nova Scotia, Canada from Anadarko Petroleum, with construction of the project already underway. The company had gone into a trading halt prior to the announcement and the share price shot up to $3.93 when trading resumed.  Two days later the company announced a $38.6 million dollar capital raise to fund the project.  Cost of shares to be sold is $2.60 per share and predictably the LNG share price has stuttered a bit since, dropping to around $3.49.

While the company’s expanded reach into the US and Canada have no doubt driven up the share price, we suspect underneath it all astute investors are looking at something else – LNG’s patented processing technology.  The Optimized Single Mix Refrigerant (OSMR) system supposedly yields a 30% increase in efficiency while at the same time reducing processing costs by 50%.   Two factors that soured investor taste for the shares of the big players in Australia’s burgeoning LNG sector were cost and competition from North America.  Liquefied Natural Gas Limited appears to be in the sweet spot on both counts.

Former darling of biotech investors, Acrux Limited (ACR) saw its share price cut in half, and more, when the market learned of potential trouble for the company’s flagship product, Axiron, a treatment for testosterone disorders.   On 31 January 2014, the U.S. Food and Drug Administration (FDA) issued a Drug Safety Communication (DSC) announcing an investigation of the risk of stroke and heart attack stemming from testosterone treatments.  

The review supposedly was prompted by two clinical studies released in 2013, including one published in the prestigious Journal of the American Medical Association (JAMA).  Acrux and others hotly contested at least one of the studies, but the market paid no attention and the share price continued to drop from its pre-announcement level of around $2.60 per share, reaching a 52 week low of $0.75 on 6 June.  Much to the delight of the bold contrarian investors who “took a punt” on this much maligned stock during the dark days, the share price has risen 80% over the last three months, now trading around $1.85.  Here is a three month chart for ACR.

So what did the contrarians, punters, and intrepid investors see that others didn’t?  

First, much of the concerns raised about Acrux could be seen as market “noise.”  For example, the FDA issued no warnings to stop using the drug and in fact, remained on record as stating the “benefits of testosterone therapy outweighed the risks.” In addition, the FDA investigation targets all forms of testosterone therapy, not just Axiron.

Second, those investors who took the risk may have believed Acrux management’s claim that one of the studies was flawed.  In fact, they appear to have been proven right, as on 2 July researchers at the University of Texas Medical Branch released a study finding no evidence of increased risk of heart attack associated with the use of testosterone therapy treatments.

Third, investors appear to have made their bets in the belief the market frenzy over the investigation would not hurt Axiron sales.  Again, they have been proven right.  Axiron net sales for the first quarter of 2014 increased to $39.5, up from $37.1 million in the previous corresponding period (PCP.)  Net sales for Q2 2014 rose to $47.1 million.

Finally, Axiron has two other approved treatments selling in the market place, and all three of the company’s products are delivered with an innovative technology – administered directly to the skin in spray or liquid form.

On 31 July a cumulative wall of worry washed over US markets, sending all three reeling.  The DJIA (Dow Jones Industrial Average) fell 1.88% while the S & P 500 shed 2% and the NASDAQ dropped 2.09%.  By midday on 1 August the ASX had fallen 1.13%.

While this may send many investors scurrying for cover, the intrepid among you may see opportunity, as panic selling could drive down the share prices in the one sector where growing demand is unquestioned and in all probability unstoppable – healthcare.  You know the trend.  The world is awash in baby boomers who will be living longer.

So we have four small cap Healthcare stocks to look at.  Punters have already latched on to a few, but there may be room to run in all of them. Here is the table in alphabetical order.

Company

(CODE)

Market Cap

Share Price

52 Week % Change

Forward P/E

Total Debt

(MRQ)

Total Cash

(MRQ)

Current Ratio

AtCor Medical Holdings

(ACG)

$15.3m

$0.10

-20%

5.0

0

$4.1m

4.64

Ellex Medical Lasers

(ELX)

$39.1m

$0.36

+44%

12.0

$5.5m

$2.96m

2.5

Global Health Solutions

(GLH)

$16.9m

$0.52

+190%

$18.96k

540.06k

0.75

Imugene

(IMU)

$15.14

$0.016

+220%

0

$2.46m

2.26

 

AtCor Medical (ACG) has developed a high-tech product line of computer based diagnostic systems to test cardiovascular issues like central blood pressure, autonomic function, and arterial stiffness without the need for invasive procedures like catheterization.  The company sells the SphygmoCor ® family of four products worldwide through a distribution network.  In addition, AtCor has research partnerships focused on extending the use of its technology, which is currently used primarily in pharmaceutical clinical trials.  

According to some analysts, Clinical Specialists and General Practitioners have yet to adopt the system on a broad scale, but it doesn’t take a Certified Financial Analyst to see the SphygmoCor ® family of products has the potential to change the way some measures of cardiac functioning are performed.  

In August of 2013 AtCor reported its first ever profit of $2.7 million.  NPAT in FY 2012 showed a loss of $2.0 million.  Revenues increased from $6.4 million to $9.1 million.   An Investor Presentation in October of 2013 highlighted the company’s Achilles heel, as well as its growth potential.  AtCor has only 1% penetration with clinical specialists and no measurable presence with clinical primary care practitioners.  On 9 January 2014 the company issued a profit warning and the share price has been dropping ever since, with a slight recovery in late July.  Here is a one year chart.

The company began product sales in China in June and also added a US patent to bring total patents to 7, with an additional 2 patents applied for.  Companies with potentially disruptive technologies are often subject to competitive entries so patent protection is an important measure.

Ellex Medical Lasers Limited (ELX) makes and distributes laser and imaging systems for the diagnosis and treatment of eye disease.  The company has subsidiaries in the US, Germany and Japan as well as here in Australia.  What makes ELX especially seductive is the use of its products in the treatment of eye disease related to aging, including cataract surgeries, glaucoma, and age-related macular degeneration (AMD).  Today cataract surgeries are among the most common surgeries performed both in the US and here in Australia.  Although the share price is up 44% year over year, the last six months have seen the price of the stock drop from $0.44 to $0.38, a decline of close to 20%.  Here is the six month chart.

Debt is a major concern when considering early stage companies and Ellex is expanding its business through acquisitions.  Capital raises have funded the acquisitions in part but it appears the company’s balance sheet is on the weak side.  However, the Half Year 2014 Results reported in February showed the total borrowings dropped from $7.5 million in the previous reporting period to $5.5 million.  In addition, the company reported an 18% increase in revenues and an increase in NPAT of 171%.

Global Health Solutions (GLH) is uniquely positioned to benefit from two long term trends.  First the company is a provider of software solutions to a wide range of healthcare providers; and second, it is a leader in the emerging field of cloud based technology.  In February Global Health reported Half Year Results showing a 22% increase in revenue and a 38% increase in NPAT.  In addition, management announced 50% of its software applications now exist on the cloud and forecasted Full Year NPAT of between $1.5 and $1.7 million.

Although the share price has risen 190% year over year, it has cooled in the last few months, dropping from a 52 week high of $0.80 on 31 March to the current level around $0.52.  Here is a one year chart for GLH.

With a share price of only $.016 tiny Imugene Limited (IMU) appears to be nothing more than a penny dreadful in a promising sector.  Yet the share price has risen 220% year over year, from $0.005 a year ago to the current price.

Imugene had been lumbering along developing pig and poultry vaccines until its major customer, Swiss giant Novartis, terminated the relationship in late 2011.  However, Imugene was left with $2 million in cash and in May of 2012 the company was reborn with the purchase of the Linguet Tablet Technology, a system for delivering a variety of drugs directly into the bloodstream through placement under the tongue or in the cheek.  A successful capital raise helped fund the acquisition, and the company’s strategy now called for more diversification through additional acquisitions.  .  

On 23 October 2013 Imugene made good on its promise when it announced the acquisition of Australia based Biolife Science Qld Limited.  Biolife held the rights to a cancer treatment program developed at the University Medical School in Austria.  At the time of the acquisition Biolife had already completed a Phase 1 Study of the treatment for breast cancer, with a Phase II study for gastric cancer set to begin in 2015.  Investors liked what they heard.  Here is a one year chart for IMU.

The lead product is called HER-Vaxx.  The company has filed an Investigational New Drug (IND) application with the US Food and Drug Administration for the HER-Vaxx treatment of gastric cancer, the fourth most common form of cancer in the world.  On 24 March Israel granted Imugene a patent for HER-Vaxx and the company received a “Notice of Allowance” from the US patent office on 29 July, meaning a US patent will be forthcoming.

While all this sounds promising, potential punters should be aware of the fact HER-Vaxx has yet to begin its Phase 2 clinical trials.  This one has a long way to go.  

Click on the links below to read other articles from this week’s newsletter

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