CNS (Nasdaq: CNXS)
Trading at $11.79 as of 2/6/04

This article is part of our annual Stocks Fools Love Valentine's Day special.

The great thing about working on Tom Gardner's Motley Fool Hidden Gems is the constant exposure to the guest analysts we host each month. Great as they've all been, I have to say my favorite was Matt Richey, a crack analyst and all-around smart guy.

No, this is not a Valentine to Matt, but to his Hidden Gems pick: CNS (Nasdaq: CNXS), maker of Breathe Right nasal strips, is a stock I love. Never heard of them? I bet you've seen them -- likely this month, too, if you watched the greatest Super Bowl ever. Besides looking cool, those little strips-across-the-bridge-of-the-nose help NFL players breathe. In fact, they're FDA approved for the treatment of cold-related congestion, deviated nasal septum, and snoring.

Unlike the Super Bowl, there's nothing overtly sexy about selling strips that help you breathe -- even if they are donned before millions 20 Sundays a year by the world's great athletes. Then again, there's rarely much that's sexy about selling the same product to the same people over and over. Just ask Procter & Gamble(NYSE: PG) or Johnson & Johnson(NYSE: JNJ), or heck, even Microsoft(Nasdaq: MSFT) and Dell(Nasdaq: DELL).

The attraction is financial (just ask early investors in any of these). And CNS's financials are a thing of beauty, starting with a pile of cash -- $46.87 million -- and not a penny of debt. But don't get the idea that management's stingy; over the past four years, the company has bought back more than 20% of the total shares outstanding. At the same time, a shareholder-friendly stock options program has kept dilution at just over 1% per year.

In the just-reported third quarter, CNS earned $1.2 million on net sales of $26.4 million. Both improved year over year (by 36% and 2%, respectively), even as an expected delay of Breathe Right shipments to Japan distorted year-over-year comparisons (the shipment boosted the December quarter last year, but won't show up till the March quarter this year). Domestic sales of Breathe Right jumped 13%, while sales of FiberChoice chewable fiber tablets ramped 37%.

After selling off more than 15% in reaction to the quarter -- which, frankly, surprised me -- CNS seems reasonable at roughly 19 times trailing earnings and 15 times forward estimates ($0.57 to $0.60 per share), which the company recently affirmed. It's not too much to expect earnings to grow 15% per year over the next few years, especially if new products catch on and that estimate proves conservative.

Beware back-of-the-envelope valuations; they are necessarily general and should serve only to help you decide whether a business is one you want to own. That being said, should CNS meet the 15% growth challenge, it will earn roughly $1.08 per share three years out, which at a 15 times multiple (again, what I consider reasonable), gets us past $16. On Friday, Feb. 6, the stock closed at $11.79.

A grand slam? Maybe not. On the other hand, I'm infatuated with biotechs such as ImClone(Nasdaq: IMCL) and Genzyme(Nasdaq: GENZ) and roll-the-dice turnarounds such as InfoSpace(Nasdaq: INSP). This strategy has served me well, but I am cognizant of the risks. For diversification, broad-market indexes and exchange-traded funds (ETFs) have done the job, but they're not quite hitting the spot. They're cheap and they feed the diversification bulldog, but that's part of the problem. They diversify too well.

For true balance, I'd prefer a stable of handpicked, steady, recession-proof growers in their stead. Especially if they offer some glimmer of upside beyond my expectations. Unlike most stocks highlighted in Hidden Gems, which are up on average more than 40%, CNS trades only modestly higher today than when it was recommended back in September.

The trouble is, digging up that particular breed of gem -- like CNS, which did I mention, actually pays a dividend? -- isn't exactly my forte. But I like to think I know 'em when I see 'em. Or I should say when our Hidden Gems guest analysts bring them to my attention?

Thanks, guys.

Paul Elliott is the editor of Motley Fool Hidden Gems. Take a free trial and see him at work. The Motley Fool is investors writing for investors.

Stocks Fools Love represents the opinion of one Fool and should in no way be taken as the opinion of either The Motley Fool, Inc. or the company in question or as representative of anyone or anything other than that specific Fool's thoughts.