Nose­bleed stocks Worth the Price

Forbes - - Investing -

Shun­ning fast-growth small stocks that seem ob­scenely priced based on near-term P/E ra­tios could turn out to be a gi­gan­tic mis­take. Con­sider Face­book, Ap­ple and Google. Each looked ab­surdly ex­pen­sive just be­fore hit­ting its peak growth years. For com­pa­nies with ex­plo­sive long-term growth, us­ing a P/E ra­tio based on near-term earn­ings is ridicu­lous. Ad­di­tion­ally, re­mem­ber that in­vestors of­ten re­act more quickly than an­a­lysts, so some­times a high P/E based on an­a­lyst expectations is sim­ply telling us that expectations are far too low.

The ul­ti­mate driver of “value” for high-growth stocks will be earn­ings years out, not the one-year es­ti­mated or one-year trail­ing earn­ings that P/ES are typ­i­cally based upon. Fu­ture earn­ings are driven by rapidly grow­ing sales, healthy mar­gins and a mar­ket large enough to sup­port long-term growth. It also takes in­no­va­tion that can un­set­tle in­cum­bents and cre­ate a com­pet­i­tive moat. Nat­u­rally that tends to fa­vor in­dus­tries like health care and tech­nol­ogy, where man­u­fac­tur­ing chal­lenges, patents and reg­u­la­tory hur­dles keep out copy­cats. High gross mar­gins im­ply pric­ing power and the po­ten­tial to cre­ate im­pres­sive In­ter­net of Things. Log­mein’s prod­ucts are all driven by the frm’s “Grav­ity” plat­form of servers, soft­ware and data­bases. The com­pany has over a mil­lion cus­tomers, with 85% of rev­enues de­rived from small and medium-size busi­nesses. Shares trade for 40 times my for­ward es­ti­mate of $1.78 for 20% growth and 86% gross mar­gins.

San Diego’s makes a glu­cose mon­i­tor­ing sys­tem that pro­vides di­a­bet­ics with con­tin­u­ous glu­cose in­for­ma­tion. The com­pany’s lat­est G5 Mo­bile sys­tem, just ap­proved by the FDA, con­sists of a small sen­sor that mea­sures glu­cose lev­els just un­derneath the skin and a trans­mit­ter that sends data wire­lessly to com­pat­i­ble smart de­vices such as an iphone. Dexcom com­petes pri­mar­ily with Medtronic in this nascent mar­ket but has been tak­ing sig­nif­cant share (cur­rently es­ti­mated to be 60% for Type I diabetes pa­tients in the U.S.). Im­prove­ments over the next one to two years are likely to yield bet­ter ac­cu­racy, less fre­quent cal­i­bra­tion and FDA ap­proval for in­sulin dos­ing (re­duc­ing the need for fre­quent fnger-stick test­ing). If the com­pany is ap­proved for in­sulin dos­ing, I would also ex­pect to see Medi­care re­im­burse­ment to fol­low. Dexcom isn’t yet proftable and will con­tinue in­vest­ing for growth. Still, I ex­pect the frm to be in the black in 2016, with rev­enue growth of 40% to some $500 mil­lion and 68% gross mar­gins. Head­quar­tered in Dan­vers, Mass.,

de­vel­ops tech­nolo­gies to as­sist or re­place the life-sus­tain­ing pump­ing func­tion of a fail­ing heart. Abiomed’s main prod­uct, called Im­pella, is a tiny pump that’s 1/100 the size of the hu­man heart and can be in­serted into the heart via catheter. By mov­ing blood from the left ven­tri­cle of the heart to the body’s or­gans, Im­pella helps to relieve the dis­eased heart by in­creas­ing blood fow in pa­tients in car­dio­genic shock fol­low­ing a heart at­tack and in pa­tients un­der­go­ing car­diac surgery or high-risk an­gio­plasty. Shares trade for 80 times my for­ward es­ti­mate of $1, with 80% gross mar­gins and 30% rev­enue growth.

Newspapers in English

Newspapers from USA

© PressReader. All rights reserved.