My Secret Recipe: Shopping and a Taste Test

Mike Schellinger Blog, Educational 2 Comments

In my first installment I discussed the recipe of what I look for in a stock.  While it is one thing to have a formula to select good stocks, it is quite another to actually find stocks that meet that formula.  So, in this second installment I’ll talk a little bit about how I go shopping for stocks and then we will test out some of my cooking.

Here are some ways that I go shopping for stocks:

  1. I scan through hundreds of PRs and SEC filings each day to look for gems.  I’m looking for something that catches my eye before I will dig in deeper.  Some things that catch my eye are:  Current earnings that are high relative to the current stock price. Announcement of a new contract, new customer, increased backlog, or a new product. Insider buying.
  2. I also get some of my ideas from friends that have good stock picking abilities.
  3. I find that stock message boards such as MicroCapClub are a good source of ideas.
  4. I sometimes uses stock screeners but usually by the time the stock comes up on a screener I have found it through other means.

All this talk of food is making me hungry so we will enter the kitchen and taste a sample of my cooking.  Sit back and drink a glass of wine while I tell you about a company that fits my recipe.  That company is BioSyent.

BioSyent trades as RX.V in Canada and BIOYF in the US.  They are a rapidly growing pharmacuetical company that also has a small, stable, legacy insecticide business.  I first started discussing them on MicroCapClub in February of this year when they traded at C$0.55.  At the time of this writing they last traded at C$1.01.  I will now discuss how BioSyent has all of the essential ingredients of my recipe as discussed in my first installment.

  1. Profitability – BioSyent made $0.024/share in the second quarter and $0.044/share for the first six months.  I am also estimating earnings of $0.04/share in the third quarter.
  2. Sustainable growth – BioSyent has had an astounding 11 consecutive quarters of sequential growth in revenue in their pharmaceutical division.  This type of a track record is almost unheard of in the microcap space.  This revenue increase has been driven by the growth of their FeraMAX product.  While this division has basically been a one product division, they have now laid the groundwork to expand it to five products.  In May of this year they started selling Cathejell Jelly 2% and quickly obtained two long-term hospital supply contracts which cover approximately 2/3 of the Canadian market.  They also just introduced a product called FeraMax Powder which is a dissolvable powder that is targeted at infants and children as well as adults having difficulty swallowing pills.  Finally, in August, BioSyent announced that they signed exclusive licensing and distribution agreements for two new drugs which will be launched after Health Canada approval.  So, in short order they will have expanded their pharmaceutical division from one product to five products and the original product, FeraMAX, appears to be continuing to grow.
  3. Compelling valuation – My estimate is that they will make $0.12/share in 2012 thus they are trading at slightly more than 8 times forward earnings which is cheap for a rapidly growing company.

While BioSyent has all of the essential ingredients of my recipe, it also contains all of the secondary ingredients.  I will now discuss each of those ingredients:

  1. High gross margin business – Their GM in each of the last two quarters has exceeded 79% which makes their business very high GM.  As they add new revenue it drops rapidly to the bottom line.
  2. Strong balance sheet – BioSyent has a nice balance sheet with a tangible book value of C$0.14/share, cash of C$0.09/share, and no debt.  Having no debt is remarkable for a company at this point in their development.  They have no need to raise capital.  While they have a nice balance sheet it is far from the best one I have seen.
  3. Attractive share structure – BioSyent has a modest share count with little in the way of potentially dilution.  As of June 30, 2012 they had 12,791,195 shares outstanding.  Also, as of June 30, 2012, they have 1,670,000 stock options with a weighted average exercise price of C$0.14.  They have no convertible debt.
  4. Insider buying – Insiders have been buying shares on the open market for over a year.  Recent BioSyent insider purchases of 23,676 shares happened on September 17th at prices of C$1.19 and C$1.25.
  5. Sexy story/sector – I am always attracted to growing medical companies as I don’t have to worry about how changes in the economy might impact their business.  Additionally, I really like that they have a roadmap that shows them rapidly growing from a one product pharmaceutical business to a five product pharmaceutical business.

BioSyent is rare in that not only does it contain all of the essential ingredients, it also contains all of the secondary ingredients.  There aren’t many companies like that.  I find it is impossible to build a complete portfolio of stocks that contain all of the essential and secondary ingredients.  What I find is that I have to weigh all of the variables across the recipe and determine if the stock is a compelling buy.  It doesn’t have to have all of the secondary ingredients especially if the stock is very cheap.  This is one place where my recipe transitions from a science to somewhat of an art.

My Secret Recipe Series:

Part 1: The Index Card

Part 3: Inspecting the Ingredients

Part 4: The Bargain Rack

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Comments 2

  1. Hi – i just came across this post after listening to the recent podcast where you mentioned it. i’m curious – you say that spend alot of time reading press releases and filings. Could you go into more detail? are you saying that you just go to the SEC site and do a recent filings search for 8ks and read all the 8ks that come out every day?

    thanks

  2. I don’t generally use the SEC site but I scan all of the filings for roughly the smallest half of the market in terms of market capitalization. Mainly I look at 10-K’s and 10-Q’s but I also look at some 8-K’s. I do the same for press releases. Each 10-Q or 10-K is looked at for roughly a half a minute to see if there is anything interesting. Of course the companies that interest me are followed more closely.

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