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July Magic Formula Newsletter Pick: A Growth Microcap Company Trades like in Terminal Decline

July 13, 2012

GuruFocus publishes three monthly newsletters. These newsletters are the included features for Premium Members.

1. Ben Graham: Net-Net Newsletter focuses on net-net stocks that Ben Graham would buy. It is released on the first Friday of each month.

2. Micro-Cap Magic Formula Newsletter picks companies that have high return on capital and high earnings yield. It is released on the second Friday of each month.

3. Buffett-Munger Best Bargains Newsletter recommends companies that have high business quality, but traded at undervalued prices. A younger Buffett would buy this kind of companies. It is published on the third Friday of each month.

This is the July issue of the Magic Formula Newsletter.

This month's stock is growing at over 25% per year. It owns a patent protected device that is the only device of its kind that Medicare will reimburse. And its product is both cheaper and more effective than competing technologies.

But, despite that, the company trades like a company in terminal decline.

That could be changing soon. The company's hit an inflection point where their growth seems to be accelerating, and the CEO (who also owns >20% of the stock) has suggested that the company could be an attractive acquisition target to a larger player looking to gain a toehold in the market. In fact, he's gone as far to say that it would be cheaper to buy the company than it would be for a competitor to actually develop the technology and go through all of the approval process.

Even without that, another year of 25% growth and some margin expansion could have the company trading at under 3x EBIT in the near future. Somehow, it seem unlikely the market can ignore such rapid growth for that long.

We will buy this week’s Magic Formula Newsletter pick on Monday, June 16.

Download this month’s Microcap Magic Formula Newsletter.

Also don’t miss:

June Ben Graham Net-Net Newsletter: A Ben Graham Net-Net with 19 Straight Years of Profits.

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