The Best and Worst
Stocks of 1997
Winner -- Arterial Vascular Engineering
The Company's Biz. Arterial Vascular makes balloon-tipped catheters and stents that are combined in the angioplasty procedure to clear clogged blood vessels in the heart.
Balloon-tipped catheter -- A small tube-shaped thingy that gets pushed into the heart's blood vessels. The balloon, which sits at the end of the tube, is inflated and deflated inside the blood vessel. This puts pressure on the walls of the blood vessel, thereby loosening up all the plaque and junk collected there. You see, after you've eaten 5,000 pizzas and 20,000 Twinkies, plaque builds up and starts hardening the arteries. The balloon-tipped catheter is designed to break all that stuff up and get the blood flowing back to your heart.
Stent -- After the doctors clean out the blood vessels, they need a way to make sure that the vessels stay open. A stent is a small, metal prosthesis that is inserted inside the blood vessel to make sure it stays open properly and doesn't close from plaque buildup again.
Angioplasty -- The entire, lovely process described above.
The Story. Arterial Vascular came public in April 1996 at $21 a share and has been on a roller coaster ride ever since. Within a month of the offering, the shares had climbed to $50, only to fall to $9 by the end of 1996. In 1997, the shares have steadily risen again, closing recently at $59 1/4 per share.
Why such wild swings? Basically, there was a lot of excitement surrounding the company when it came public, which sent the shares soaring in the weeks following the IPO. The stent market is huge around the world, and Arterial Vascular is a solid competitor for the likes of Johnson & Johnson, Medtronic, and Boston Scientific.
Couple the excitement of the IPO with a successful product and a profitable company and you have an explosion. (If you recall, smaller-cap companies were also out of control at the time.) Shares rose as high as $50 and then fell through the end of the year. The enthusiasm for the shares had died down after the initial excitement despite the fact that the company continued to report huge numbers and had virtually no bad news. Perhaps this is the key to the stock's success in 1997: the stock fell almost 80% from its high on no bad news and great earnings and revenue numbers.
The Plot Thickens. Arterial Vascular receives all of its revenue from foreign countries. The company's products have not been approved by the FDA for sale in the U.S. In August, the company filed for pre-market approval of its coronary and peripheral stent systems. This just means that it threw its hat into the regulatory ring and is working with the FDA to gain approval for sale in the U.S.
The U.S. stent market is currently valued somewhere in the neighborhood of $800 million and is owned almost exclusively by Johnson & Johnson and Medtronic. Arterial Vascular tells investors that they should not expect any sort of approval for the stent system in the U.S. until 1998. However, it doesn't say when in 1998. Some analysts think that the product is so terrific that approval is almost a forgone conclusion. Investors seem to agree. Shares have risen 409% this year.
Where Are We Now. Arterial Vascular continues to increase market share in the 40 countries around the world in which it operates. It has begun building a sales force for the U.S. market in anticipation of FDA approval. I'm no heart surgeon, so I won't pass judgement on the quality of the product, but everything I read says that Arterial Vascular's stent systems are superior. I imagine that this is why it has been able to increase market share in the fiercely competitive European market. Shareholders are also waiting for reimbursement approval in Japan. This means that Arterial Vascular has permission to market the product in Japan, but the government hasn't approved any reimbursement for it yet. Kind of a Catch-22.
The Future. How great a value is Arterial Vascular at $60? Even if the company gets all of the approvals it is waiting for, and most think it will, is that already built into the stock price? Insiders have been filing to sell shares pretty heavily lately and I wonder if they don't think the stock has come too far, too fast.
Earning estimates for fiscal 1999 (ending in June 1999) are for $2.07 a share. If the stock can maintain a 50 P/E multiple, shares will trade at $103, or 36% annualized growth. Not too shabby. Before you go and buy, however, you'd better realize that if anything goes wrong, even slightly, the stock will implode. If you don't believe me, just look at Electronics for Imaging (Nasdaq: EFII), which saw its shares lose 62% of their value in one day after announcing unfortunate earnings news. Be careful. The risk-reward equation would be much more attractive if shares pulled back into the low $40 range.
How Could You Have Found This Winner. For starters, if you were reading the Motley Fool message boards you'd have been interested in a post by reader Ntervene4u who wrote, "I feel I made the buy of a lifetime as I personally can't see how this stock got this low." After reading the post, you would probably want to look at the company further, and you would have seen that the stock had fallen 80% from its highs on virtually no bad news.
Lessons Learned. When a company's stock falls 80% on absolutely no bad news, one of two things is usually true -- either a whopper of a bad news announcement is right around the corner or the market is being seriously inefficient. Do some research, make your own decisions, and capitalize on situations like that.
[Fool Articles: Daily Double, 08/13/97: Arterial Vascular Engineering]
--David Forrest (TMF Bogey)
Next Article: Winner -- Spire Corp.