Nosebleed stocks Worth the Price
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.