- ONE GHOUL'S
Sometimes a trick feels like a treat. I mean, how happy would Charlie Brown be if he didn't get a rock? Sure, he might enjoy some candy, too. But you know, we like it that he gets a rock. I think he'd start to miss 'em, too, if all he ever got was candy.
When is a trick a treat in investing? When you're a short-seller, aiming to sell a stock when it's high and then buy it back when it's low. Short-sellers love rocks, especially the kind that crash through the bottom of the Halloween bag and sink into the dust. Now, where a Fool stands clear of speculative rubble as an investment, a Fool can enjoy slumming it with such stocks if he takes on the cloak of the short-seller. After all, the best shorts are folks who do their homework, which is something that fills a Fool's heart with joy. Shorts also like a good story, the more intrigue the better. Fools like a good story, too. Nothing like having fun investing. Sometimes, though, the story itself is so interesting and full of danger that it's enough just to sit back and watch. My trick of a treat for you probably should fall into this category: eye candy in the form of a rock.
QUIGLEY CORP. (Nasdaq: QGLY) is a one-product company. That one product is Cold-Eeze, the patented zinc gluconate-glycine lozenge that, according to two clinical trials, reduces by 42% the severity and duration of symptoms associated with the common cold. The lozenges come in lemon, cherry, orange, and menthol. You can buy them at drug stores and discount stores, via QVC, or direct from the company, located in the basement of a church in Doylestown, Pennsylvania. A bag of 18 costs about $5. Take 'em at the first signs of a cold, and you may not get one. Some say they can help clear up cold sores caused by herpes as well as alleviate some allergy symptoms.
Quigley is one of the most extraordinary financial stories in recent years. A year and a half ago, the stock traded for less than a dollar. Today, it's at $16 1/2. It took off after a Cleveland Clinic study was published in the Annals of Internal Medicine, one of the most prestigious peer-reviewed medical journals. The media picked up on the study, and Cold-Eeze started flying off the shelves much faster than tiny Quigley could make it. The stock topped out at around $18 last January shortly before ABC's 20/20 ran a glowing report on Cold-Eeze that said it was one of the few cold remedies that actually worked. But the same weekend, Barron's ran a devastating article attacking both the product and management, listing a string of shady characters connected to the company.
The stock immediately collapsed to about $9 a share, with the company blaming phony press releases and the Barron's hatchet job on short-sellers. Then doubts were raised about the crucial Cleveland Clinic study because the lead investigator, as it turned out, had bought stock in the company after the study was finished but apparently before he had written up the results. The stock drifted lower, as management worked to clean house and prove its integrity. Quigley brought in Big Six accounting firm Coopers & Lybrand and ditched its auditor, whom Barron's said was connected to the mob. The company also beefed up its ultra-thin management team and paid big money to end bad relationships, including one with a PR firm called Diversified Corporate Consulting, which is under investigation by the SEC. Last I heard, the SEC was also looking into last winter's intrigue surrounding Quigley.
The stock's time in the wilderness ended July 7, though, when Quigley jumped from the scamville that is the OTC Bulletin Board to the more respectable Nasdaq SmallCap market. It's doubled since then, and has started making money. In the last four quarters, sales went from virtually nothing to $1.05 million, then $4.09 million, then $22.18 million, and then $4.08 million in the slower summer quarter ended June 30. With gross margins around 70%, Quigley has had no trouble turning a profit -- its 29% net margins leading to $0.47 a share for the first six months of the year. Respectable Emerald Research expects $1.16 EPS for FY97 and $1.52 for FY98. Once absolutely desperate for cash, Quigley has now stowed away $6.6 million and has healthy working capital of $11.65 million with essentially no debt.
After talking to the patent holders, reading the research papers, interviewing the highly respected critics, and trying the product, I'm actually convinced Cold-Eeze works. A "cure" for the common cold. Who woulda thunk it? And with radio ads appearing on the Rush Limbaugh, Dr. Laura, and Howard Stern radio shows, the brand name is already well known. With cold season on the way, the company could post some surprisingly large numbers over the next three quarters.
Even so, management has made some desperate, naive, and just plain stupid moves, some of which are coming back to haunt shareholders. In July, the company filed a SB-2 with the SEC, which will allow some 5.48 million shares connected to the exercise of warrants and options (with an average cost of $3.01 per share) to be sold as soon as the filing becomes effective -- which could be any day. With 17.2 million shares then outstanding and lots of folks holding sweet paper profits for doing virtually nothing, heavy selling could push the stock down.
Plus, the Hall's unit of WARNER LAMBERT (NYSE: WLA) has just introduced Zinc Defense, billed as a "cold season dietary supplement." Of Cold-Eeze's two patents, the less important is a use patent that allows the company to advertise its zinc gluconate product as a treatment for the common cold. That patent is held by Austin-based George Eby, who also holds a patent for the use of zinc acetate. Though only zinc gluconate has been clinically shown to work, even Dr. John Godfrey, the key gluconate-glycine patent holder, concedes that zinc acetate might work nearly as well, though taste may pose a problem. Of course, some people still find that Cold-Eeze tastes too metallic, but every other product that tastes better won't work against the cold: the citric acid that's added binds with the all-important zinc ions. In any case, Hall's can't make the claims Quigley makes for Cold-Eeze, but their marketing muscle makes them a serious threat. Finally, there's the added risk that Quigley might follow the pattern of CNS (Nasdaq: CNXS), makers of Breathe-Right nasal strips. That company's stock ran up as stores placed huge sales to fill the retail channel. The stock then dropped when sales fell back to normal replacement levels.
Both investors and shorts appear stuck between a rock and a hard place with Quigley. I'd suggest watching the tricks from the sidelines of the Fool's Quigley folder . For a treat, better stick to Cold-Eeze itself.
--Louis Corrigan (TMF Seymor@aol.com)
* A Ghoul Take represents the opinion of one Ghoul and in no way should be taken as the opinion of either the Motley Fool, Inc., the company in question or representative of anyone or anything else other than that specific Ghoul's thoughts.
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