Syneron Medical (ELOS) Update – Now a Growth and Value Investment

Folks who have read my blog earlier know that I am very bullish of Syneron Medical (ELOS) and have my money where my mouth is – maybe even a lot more than how much should be in one stock. I have received a number of questions on my thoughts on ELOS now that it has shed more than 50% of its value and if I am still holding on to the shares and I have seen my previous post on ELOS being actively discussed in StockArena.com, the Yahoo! Finance message boards, SeekingAlpha and other sites. Before I revisit ELOS and why I am still bullish on the stock and probably even more than before, let me say "YES", I still hold all my Syneron Medical shares and have either taken assignments on the naked put positions or rolled them forward to a Jan ’07 expiry. This is an investment and the only way to lose money on ELOS now would be to sell in panic or sell hoping to make the loss up through another equity. Its been 3 months since the last discussion on ELOS and there have been a few significant events in this time frame:

First, on March 7^th, CIBC who started the downturn in ELOS by cutting their rating on ELOS from Sector Outperform to Sector Perform on Dec 30th, came out with the upgrade and reversed their stance from a Sector Perform to a Sector Outperform and slapped a $40 price target on March 7th on really no new news.

The essence of that analyst report:
As of 3/06, we are raising our opinion on ELOS to Sector Outperform from Sector Perform due to feedback from the AAD that the market is remaining surprisingly strong. Syneron is also launching a new e-Line of laser and light source products for skin tightening,
non-ablative photorejuvenation and hair removal.

- This new family of products consists of the eLight, eLaser and eMax and is being launched here at the American Academy of Dermatology (AAD) in San Francisco. The new eLine is expected to give ELOS much better brand recognition and identity.

- In skin tightening, the eLight product, which combines intense pulse light with RF, is expected to allow Syneron to compete more effectively with the Titan product from Cutera (CUTR-not rated).

- We applied a 20X 2006 P/E multiple to our EPS est. of $2.00 to derive our $40 price target ELOS shares have been punished since the 4Q05 disappointment, but we believe the stock will begin to trade back toward the peer group avg. with these new products and market opportunities.

It is encouraging that CIBC whose “channel checks” suggested issues with sales came back within 3 months and have been thumping their table on ELOS.

On March 31^st, they came out with a follow-up report titled: Syneron Medical Ltd.: Update on ELOS' Deferred Revs; We Would Buy - Stock's Too Cheap In Our View but didn’t just stop there, and on April 27^th in their report titled: Syneron Medical Ltd.: Management Change to Be Smooth Transition; Sales Force Intact expressed a lack of concern on the management changes announced and reiterated their Sector Outperform rating on ELOS and went ahead to write:

We view today's weakness as a buying opportunity, as the stock now trades at 14X our 2006 EPS
estimate versus the peer group average multiple of 28X.

- The stock is off today after the company announced that its President of North America, Dominic Serafino, would be taking a leave of absence for personal reasons. Serafino has made a great contribution to Syneron over the past several years, but we believe he wanted to take a break.

- Based on our channel checks, we believe ELOS will hit consensus revenue estimates of $24M for the quarter, we expect guidance to remain the same for the year at $113-$120M, and we think the company should have a good second quarter given the recent launch of the eLine of products. As noted in the company s press release, Mr. Serafino's intention is to return to Syneron and work in the strategic planning and business development area. The recent changes in the global sales and marketing initiatives in the company may have also contributed to his decision.

We understand that there has been no unusual turnover at the company in sales. We spoke with the company, and it currently has 56 sales reps in place, up from 40 at the end of 4Q05. This is actually ahead of the company's guidance to have 55 reps in place at the end of 1Q06.

We believe that Syneron is attractively priced here, trading at half its peer group multiple, and we like the company's product pipeline.

The stock though is clearly in a rut and has not reacted to these positive reports as it did it to CIBC’s initial negative report. And I do not know when the turn around will begin and so those looking for a quick short term move may not be interested in ELOS but those who are looking for a solid investment should consider ELOS not only a great Value play with the stock trading at more than a 50% discount to its peer group, with results that are at the upper end of this peer group but also the growth play that it was when the previous article on ELOS was published on this blog – nothing has really changed dramatically in their growth story though clearly growth has slowed to 28% and that has some investors concerned.

I would like to also point to readers to another article - Growth Vs. Value – Real Distinction or Not? An excellent article that discusses the fact that some stocks like ELOS are value stocks trading a deep discount to their real value, but are also growth stocks at the same time. The author considered ELOS undervalued by about 30-40% to what he calculates as the true value of his stock and this was when ELOS was trading at $26. In other words ELOS is currently trading at about a 50% discount to his fair value.

So if this stock can double, then why is it stuck in that rut and achieving new 52-week lows every week? A couple of reasons:

- Stocks move on more than just fundamentals. In ELOS's case the discount in stock price can be attributed to management incompetence. As we know, they missed Q4 revenue estimated by $3M and that did not show up in Q1 as they missed again. But they have not taken down their guidance and are not following a UPOD (under promise over deliver) strategy. In fact management came out and raised guidance and in Q1 delivered results which were a little ahead of the original estimates but fell short of their “mis”guidance. So this stock is probably going to remain beaten down until ELOS delivers on a couple of good quarters meeting/beating estimates and we get a few strong upgrades. In other words, management needs to regain credibility.

- In addition to missing their guidance and management credibility issues, there is the fear of discretionary spending in a recession. ELOS targets baby boomer vanity and folks may not be spending on discretionary items like cellulose when they are facing a recession. This is a fundamental risk of investing in Syneron Medical - this is a good economy stock, the market conditions are not favorable right now for ELOS and we need for that to improve and hopefully for baby boomers to live up to the vanity we expect them to demonstrate.

So though it seems nonsensical for the company to earn more than originally anticipated (but less than the revision) and yet trade for less than it did before the revision, there are at least a couple of reasons for the same. ELOS now needs to prove itself and regain credibility over the next 2-3 quarters. If they deliver on their numbers I can't imagine that the stock will not go up, especially with the prospect of some huge new product releases in 2007. The company has great margins – 47%, its technology offers a concrete differentiating factor, its target market should keep growing at a brisk rate over the next decade, it is growing at 28% and is trading at a P/E of 11.

ELOS may not be a sure thing, because I can see the case where everything goes wrong for the company (after all they have missed numbers 2 quarters in a row now and management credibility Is under serious questioning), but I think the risk-reward is about 90-10 in favor of the long investors - a bet I am willing to take as of today.

I will be watching this company closely and making sure they are not falling short in any of the big assumptions being made in classifying this as an investment for the future and I suggest other readers who invest in ELOS do the same. The company does still show a healthy 69% institutional holding as of 3/31/06. As a reader pointed out (I am yet to verify this data):
- As of May 2006, Fidelity owns 14.5% of shares, more than triple what they owned in October 2005
- Timessquare opened a new position with 1,239,500 shares
- Barclays International added almost 1M shares to their holdings
- 4,161,856 reported shares are short, the highest in 12 months

To conclude, I remain Long and Bullish on ELOS, with the assumption that the sales and marketing costs they incurred in Q1 will help sales and revenues in Q2 and beyond and is a worthwhile investment. The CIBC analyst seems to agree.

Disclosure: I maintain my “very” long position in ELOS and yes, it is hurting but I remain bullish on the company and am hoping for a recovery late 2006, 2007.

Last Updated: May 20^th 2006

ViroPharma Inc., - VPHM

ViroPharma (VPHM) is a profitable biotech company that engages in the development and commercialization of products that address serious diseases. It markets and sells Vancocin capsules for the treatment of antibiotic-associated pseudomembranous colitis; and HCl, the oral capsule formulation of vancomycin hydrochloride in the United States and its territories. The company’s product pipeline includes Maribavir, a Phase 2 product for the treatment of cytomegalovirus infection; HCV-796, a Phase 1b product for hepatitis C virus infection; and Intranasal pleconaril, a Phase 2 product candidate for common cold and asthma exacerbations. It serves pharmacies, hospitals, clinics, and other facilities licensed to dispense prescription medications. The company was incorporated in 1994 and is based in Exton, Pennsylvania.

The company has been under severe selling pressure for a while thanks to a lack of response from the FDA and question marks surrounding this company’s portfolio of products and on what they are planning to do with their healthy $200+M cash balance but mainly thanks to FDA approvals around their $200M drug Vancocin (though even with such approval, the generic versions will hit the market prior to 2009). The shares of VPHM say a healthy bounce after they announced Positive Phase 2 results demonstrating that Maribavir significantly reduces CMV reactivation in late March but even that bounce was certainly short lived as VPHM slowly drifted back to the $11 levels a month after that positive announcement.

But then came the killer. ViroPharma announced their quarterly results pre-market today and the stock plummeted on extremely disappointing earnings. First-quarter profit plunged 53 percent and missed Wall Street's expectations. Net income shrunk to $8.2 million, or 12 cents per share in the first quarter, from $17.4 million, or 36 cents per share, a year ago. The decline was due to a lack of license fee revenue in the latest quarter and a $5.5 million tax expense the company did not have last year. Revenue rose 8 percent to $29.4 million from $27.2 million last year. The vast majority of the recent revenue -- $29.2 million -- was from sales of the antibiotic Vancocin – the drug facing threats of generic competition.

As one of top posters in StockArena.com summarized today (edited):

***
Today was a big miss for sure. I have stayed with ViroPharma because I felt the management was making all the right decisions and felt the market was not giving the company enough credit for their performance and potential.

Today was a wakeup call. I knew that the income taxes were coming but the impact is pretty brutal when you see the year to year comparisons. I think the company has done a good job of analyzing why sales were off. I think the reason for wholesalers may have been that ViroPharma raised prices but modestly which probably lead wholesalers to not worry so much about future price increases. Last year the price increases were aggressive and wholesalers probably felt they were behind the eight ball and they were rewarded for ordering aggressively to benefit from having Vancocin in inventory when prices increased. The blowup over some future generic threat may have also given wholesalers the confidence that ViroPharma would not raise prices aggressively – since the talk was that this generic policy by the FDA was due to them being irritated that ViroPharma was "taking advantage" of the c.dificile epidemic to raise prices.

The bottom line is that with prescriptions written up 39%, this inventory adjustment can't go on forever and Vancocin should return to sales growth in Q2 and onwards.

***

To summarize, ViroPharma has a couple of drugs moving nicely thru their trials and have mentioned they have good cash levels and are narrowing their search for a second or third contributor to current drug sales. With the 20+% haircut in VPHM prices today, I believe VPHM presents a compelling value purchase in the sub $10 levels. Maybe TheStreet.com Stocks Under $10 gang should give ViroPharma a very serious look.


Disclosure: I currently have a long equity position in VPHM and have elected to maintain is through this drop. I do not plan to add on to this position as of now as I have a pretty full position in this company but fully plan to hold my current position. I had also previously written naked Puts with a strike of $10 and a May expiry for a premium of $.45 which are currently trading at $1.15 with about a buck in intrinsic value given the stock is trading close to $9. Unless VPHM recovers to over $9.55 by the May Options expiry date, I will be rolling these naked Puts out to June or August with the same strike price.

Last Updated: May 4^th 2006

SeekingAlpha: This blog also appears in the Biotech Stocks Blog of SeekingAlpha at http://biotechstockblog.com/article/10123

Playboy's Cybergirl 2005

To continue the new "quick blurbs" blogging style, here's one that's bound to generate interest given the buzzwords tagged to it: Barron's, Playboy, Cybergirl, Morningstar, stock-picking contest, Bill Miller :-)

Some of you may have read the update on Amy Sue Cooper's stellar performance in stock picks at the end of Q1. This week's Barron's just printed an article titled "Brains and Booty" on Amy Sue Cooper, Playboy's Cybergirl 2005. Ms. Cooper apparently has quite a penchant for the stock market and is the runaway leader in a Playboy/Tradingmarkets.com stock-picking contest. She has outperformed all 9,771 Morningstar 5 star-rated mutual fund managers with a model portfolio that is up 53.17% YTD!! And she even presents her reasons for the pick and so this may not have been a dart-throw victory:

Amy Sue Cooper's Reasoning: (quoted)

1. Amgen (AMGN), the world's largest biotechnology company, and Abgenix (ABGX), a company specializing in the discovery, development and manufacture of human therapeutic antibodies, announced that they have signed a definitive merger agreement under which Amgen will acquire Abgenix for approximately $2.2 billion in cash plus the assumption of debt. This merger could possibly benefit this company tremendously. I am a nurse so this only makes sense.

2. Indevus Pharmaceuticals (IDEV) this is a pharmaceutical company that has new drugs in the third FDA approval phase. The drugs could possibly prevent against STD's and HIV. This is a risky company, but you have to take a gamble once in a while. Again I am in the health care profession and consider drug companies to be fun investments.

3. Microsoft (MSFT) The reason I am choosing this company is that I wanted a strong technology company. There are currently 600 million personal computers and this number is projected to increase to the billions. Microsoft did well last year and will hopefully continue this trend with new technology ideas that will help enhance the company. Plus Bill Gates is the Man.

4. Dril Quip (DRQ) is a company that manufactures oil-drilling equipment. This company has a chance of doing very well. Especially considering the fact that so many countries are industrializing. Plus it's a drilling company that just sounds exciting.

5. Pacific Ethanol (PEIX). When it comes down to it, I am a tree hugger. We all have to live and breathe in this world why not and make it a better place to live. Recently Bill Gates has invested in this company, hopefully because he is a tree hugger as well. I am hoping that the trend will be to move towards better fuel-efficient cars and this company will benefit from that trend.


Now the question in everyone's minds - will Playboy give Ms. Cooper a financial column and finally validate the tired excuse of "I just buy it for the articles".

"Bill Miller, looking for a fund manager to help maintain your record?"

Last Updated: May 3rd 2006

SeekingAlpha: This blog also appears in the Media Stocks Blog of SeekingAlpha at http://mediastockblog.com/article/10062

Bodisen Biotech Inc., - BBC

Wanted to quickly profile this company as I embrace the new motto of just getting the message across and not worrying about the format.

Bodisen Biotech is not a Biotech firm (I guess one should be happy about that of late or at least until there is much anticipated reversal of the biotech slump - mainly driven by money coming out of the sector and into Gold, Copper and other metals that are enjoying a fascinating bull market!). Bodisen Biotech, Inc. engages in the development, manufacture, and sale of pesticides and compound organic fertilizers in China. The company manufactures approximately 60 packaged products in 4 product categories: organic compound fertilizer, organic liquid fertilizers, pesticides and insecticides, and agricultural raw materials. Its products address grains, vegetables, and fruit crops. Bodisen Biotech sells its products to wholesalers.

The stock enjoyed a great bull run until yesterday benfiting from being profiled on Jim Cramer's Real Money radio show in November 2005 and the market being enthralled with the company's proclamation of "accelerating growth," along with the comment that Bodisen does not anticipate any need to tap the equity markets to fuel future growth. Here are some useful links and required reading about this company if you are planning an investment in this one:

Bodisen Biotech Sees Accelerated Earnings Growth in 2006, Company Has a Strong Balance Sheet with Approximately $26 Million in Cash

The company owns a stake in China Natural Gas Inc. that announced that it will report record revenues and profitability for 2005

And the company has been doing very well, beating estimates consistently and recently announced that they see 'record' 1Q earnings on strong sales

Combine all this with a new product launch and it leads me to believe that BBC's potential market is huge. The company is currently a very small player in China, but if its products really do boost yields by up to 35% while being competitively priced, this could be a lovely story that will unfold over the next decade. This is not a stock for the faint of heart though, as there is loads of volatility and uncertainty, but it could be a massive gainer over time.

Why profile BBC all of a sudden? Well, after having been in and out of BBC for a 2400% annualized return in 2005, I have watched the stock's uptick and languished about having taken it all off the table. But the market presented this retail investor with a second chance yesterday - A top poster in StockArena.com brought the significant downward action on BBC on Monday to my attention and I wanted to share some of his discussion here (edited)

***
BBC's stock got hammered yesterday thanks to an article in the NY Post which questioned the legitimacy of the company because of its relationship with a NY investment firm. The article questions how the company's margins can be so strong if it is selling organic fertilizer, and also questioned motives of a director (a former mayor from Massachusetts) who is serving on the boards of several China-based companies.

With Chinese companies there is always greater potential for corporate malfeasance, but this article did not really raise any true red flags (several points in the article have already been changed - one of the most important being that the article claimed that the company's private placement was "under the table," when in fact it was completely legitimate).

I do not want to completely discount the chance that there could be something ugly going on with the company but I am counting on the fact that there are an awful lot of eyes on the company -- D&T is the reporting accountant, Forbes has twice listed the company in it's "Fastest growing China list," the company is current with its SEC filings, the corporate website is very professional, the company is listed on several stock exchanges (domestic and London), and the private placement previously mentioned was gobbled up quickly. This company just doesn't seem like the farce the article suggests it to be. The CBOE also recently listed options on this equity.

With the precipitous drop yesterday, the company now trades at 9 times analyst earnings estimates for the year. With revenue growth in the 100% range, if the company delivers on its guidance and this article is proven largely innocuous, this stock could be a great pick. There is a great deal of speculation in this play, but for disclosure purposes, I am viewing this as the market giving me a second chance and am grabbing this opportunity.
***

Disclosure: Initiated a position in BBC at market open today at $10.18 and wrote naked puts with a Strike of $10 and a May expiry for a $0.45 premium.


Last Updated: May 2nd 2006


SeekingAlpha: This blog also appears in the China Stocks Blog of SeekingAlpha at http://chinastockblog.com/article/10063