Monday, September 7, 2020

CEMI: Potential, Hope, and Hype

I like to buy the forgotten, lonely, and broken then sell the exuberant and frothy.  As a once treasured stock tarnishes the masses move on to the next shiny toy, leaving destruction in their wake.  That's when I get excited.  I try to find what has been tossed aside, knowing that if the sun hits just right the sparkle may bring them back.

Chembio Diagnostics, Inc (CEMI) is a medical diagnostic test developer.  On Mar 16, 2020 the stock closed at $2.36, it's lowest point in 9 years.  Four days later CEMI announced a $4M order for a COVID-19 test.  Eleven days after that CEMI launched their DPP COVID-19 test, triggering the highest volume day ever.  The stock peaked at $15.89 a month later.    

Alas it was not meant to be as the FDA rejected their test on June 17 and the stock instantly gapped down from $10 to $4.  What a change of heart.  

CEMI is not giving up.  On July 6 they announced a US FDA contract to develop a COVID point-of-care antigen system.  They also announced they are revising the system and will seek EUA approval from the FDA for their system.  The question is what happens if they get that FDA clearance.

Check out this chart.  You can see the dip in March matching the rest of the market.  That huge volume spike on Apr 1 is the COVID test launch press release.  Look at that rise!  I'm betting it's not the last.



I'm always looking for stock movement and that can come from many things.  I try to stay open to the possibilities and stay optimistic.  Doesn't much matter to me why a stock is moving as long as I can hang on for the ride.  Sometimes a stock goes up because the world finally sees the value that was there all along (see SIMA rising from $0.65 to $10).  Sometimes new management takes over and pushes the company to new heights (see IEHC tripling since the son took over).   Sometimes a new product or division rains profit upon the failing company (see HEMA).  

And then there's the less glamorous movement...rumors.  Pumps and press releases.  Hype and hope deliver dollars bills just as green as those earned with a high ROIC and detailed business analytics (see CLSI running up 65x as an empty shell with no operations).  

When a theme befalls the market you can make a lot of money getting in front of the hype.  There is always something on the fore front of the market's brain.  When natural disasters strike you'll see movement in construction and generators.  As legislation has moved to de-criminalize marijuana you see stock spikes in companies that just mention it in a press release.  There doesn't even have to be anything material behind the announcement, if the market is hot on a theme you may see a spike.

As corona virus has moved around the world and uprooted our lives, many stocks have shot to the moon on news, rumors, and announcements.  

Earlier this year DYNT tripled just because people realized they sell masks, wipes, and sanitizing spray.  When the quarterlies revealed sales didn't live up to the hope the stock fell back down.  I sold some on the spike and bought back on the fall.  


Take a look at VODG.  Some well worded COVID press releases pushed this little stem cell stock as high as a dollar from the $0.20 range.   I like the company and still hold the stock because it's full of potential.  News can really move a stock if the starting point is small, ignored, and illiquid.  


My favorite type of stock is a small, unloved company with lots of potential.  One that is not expensive yet holds the possibility of becoming very expensive.  A real company with real products and revenue.  Real value and real development.  Ideally it has the added option of an exciting field that may yield a press release that shoots it to the moon.  That way I might capture stock increases from the company performing as well as from the hype crowd reaching.  Remember, stock price = company value + public perception.  I try to find stocks that may win from either company value or public perception increasing.  One home run of this type was BMRA earlier this year.  It's a real company with a super exciting, high potential product plus many other things in the works.  In the middle of waiting for product development and FDA approval the company put out a COVID press release that shot the stock up 8x in 24 hours.  I sold out and am now waiting for a drop so I can buy back in.  


There are many more examples.  It happens all the time, but back to CEMI.  A real company with real potential and a real big option in COVID testing.  Here's a description from the most recent 10K:
We are a leading provider of point-of-care diagnostic products for the detection and diagnosis of infectious diseases. We have been expanding our product portfolio based upon our proprietary Dual Path Platform, which we refer to as DPP, which uses a small drop of blood from the fingertip to provide high-quality, cost-effective diagnostic results in approximately 15 minutes. We seek to build additional revenue streams by entering into technology collaborations with leading global healthcare companies to leverage the DPP technology platform.

The DPP technology platform addresses the lateral flow test market, which includes infectious diseases, cardiac markers, cholesterol and lipids, pregnancy and fertility, and drugs of abuse. Based on our review of third-party reports and other information, we estimate that the market for lateral flow tests will increase from $5.5 billion in 2017 to $8.2 billion in 2022, representing a compound annual growth rate of 8.2%.

Infectious disease tests constitute the largest and fastest growing, segment of the lateral flow test market.

We have obtained FDA approvals and, directly or through our partners, international regulatory approvals for infectious disease tests as follows: 

Several tests in our infectious disease pipeline are approaching commercialization, and several have received initial regulatory approvals:


How's that for hype!  It's no wonder they spiked on COVID news.  Infectious disease is what CEMI has done for years.  They already have a 15 min test platform available.  They have customers and distribution around the world.  

Numbers from the 2019 10K
  • 17.7M shares outstanding vs 17.2M in 2018
    • no preferred
    • 550k warrants outstanding exercisable at $5.22
  • Cash 18.3M vs 12.5
  • BV $24M vs 33.3
  • revenue $34.5M vs 34.6
  • EPS -$0.81 vs -$0.54
Since then, COVID turned the world upside down.  It didn't take long for CEMI to announce a contract and launch a test.  The stock quickly moved up 5x from about $3 and CEMI did a secondary.  Call that what you will but they netted $28.4M selling shares at $11.  After the FDA rejected their test the share priced cratered all the way back down.  But the company did not stop, noting "We intend to continue working with the FDA with respect to the modification of the DPP COVID-19 System and of the revocation of the EUA for our test system."

The most recent 10Q shows revenue down.  The company explains it is due to the impacts of COVID and the FDA rejection.  You can see results from the secondary:
  • Cash $36.4M
  • shares 20.2M
If you read over the most recent conference call transcript you'll see they are going hard at COVID.  They are modifying their system and resubmitting to the FDA.  Sounds very exciting!
Now, I would like to discuss our plans to leverage Chembio's technology to develop a portfolio of COVID-19 tests. We are encouraged by the exponential market growth observed as a result of the immense demand for various types of COVID-19 tests across a wide variety of settings and providers. This interest includes demand from areas outside of traditional health care verticals, such as companies seeking to establish back to work programs. We feel the advantages and versatility provided by our DPP assays and micro readers, creates an opportunity for us to take share and build a meaningful position in this market. Our success here is dependent on 3 factors: product development, regulatory clearance and commercial execution.

In product development, we are working on a complementary set of COVID-19 tests with unique capabilities to assist clinicians in all phases of virus detection and infection monitoring. We have 2 tests currently under development, the revised DPP CPVOD-19 IgM/IgG system for antibody detection, and the DPP COVID-19 antigen system for viral protein detection. Further prolonging development is a revised DPP COVID-19 IgM/IgG systems, serology test for the detection of 2 types of COVID-19 antibodies.
With the share price now at $3.51 I'd put CEMI into the not-expensive category.  Given the numbers it's not super cheap.  But think about that recent raise at 3x current price.  Historically CEMI has focused on infectious disease and they are pushing hard on COVID right now.  The opportunity is there.  This company has serious business potential and this stock has serious hype potential.  

Now take a look at the chart.  On the negative side we do not have a long base.  On the positive we sit at support in the 3s.  


The risk here is CEMI does not come out with a successful COVID test and the hype I yearn for is not realized.  Or another company beats them to it.  But given how much CEMI has going on I think it's just a matter of time before the stock sits materially higher than it is now.  COVID testing is just the icing on the cake.  The company is losing money and will likely continue to do so.  But they spend a lot on R&D and as we know, it only takes one press release to give a good return.

--Dan
disclosure: long CEMI

19 comments:

  1. As always liked very much the idea. Thanks for sharing.

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  2. Just more pump and dump stocks

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    1. It's unfortunate that you don't understand the difference between a pump and dump and thoughtful analysis. This was the latter and very well written.

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    2. Look at the charts man.. spike and then back to the lows.. if the stock was high quality or with any moat it should keep trending and not come back down

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    3. stock movement is all that matters. Moats and quality are but one way to get there

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    4. you're certainly the best speculator I've ever come across

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  3. VEry nice article. thanks
    The Covid 19 Is tricky. Look at OPK. has already approved testing and distrubution spiked and fell back due to so many other companies developing Tests and 5 min testes.
    By the way - regarding DYNT: you are not worried to hol it as deregistration from NQ is coming EOY if they dont go above 1

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    1. on DYNT if the stock keeps going down I'll probably buy some more. It's a smaller position as almost all of mine are.

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  4. I have a few problems:

    1. Abbott already made a contract with the US gov for 150 million antigen test for $5 each, they work in 15 minutes. I doubt CEMI can compete with any of those areas (manufacturing capability, speed, price). 2. The company is incorporated in Nevada, bad. 3. They have barely ever made a profit in their operating history, like you said this isn't likely to change unless something happens. It's not particularly cheap and there is dilution risk.

    But one interesting thing I came across is that this guy Norman Pessin owns 7% of shares as of pretty recently, and he is apparently an activist investor. It says "He also served on the Board of Governors of the National Association of Securities Dealers and was a director of the Nasdaq Stock Market." Also the new CEO has a background in private equity health care and worked at Abott.

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    1. that is interesting. I hadn't looked closely at the large shareholders or executive team. thanks

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  5. There are many companies that develop Covid tests. In this sense the company is not so special. What I do not like is the low quality of the company, for example the negative cash flows, high debts and the long history of losses. It also does not seem to be favorably valued (Price to book of 2, EV / Sales of 2.3) and the Market Cap is too big. Highly distressed company based on Altman Z score.
    However, I like the chart (but I would not buy the stock).

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    1. In this case I'm thinking more about potential and where it has recently been and where it could go. I find 'quality' very hard to evaluate

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  6. CEMI just put out a press release announcing their re-application of the test to the FDA. good timing

    http://www.globenewswire.com/news-release/2020/09/08/2090497/0/en/Chembio-Submits-EUA-Application-for-New-DPP-SARS-CoV-2-IgM-IgG-Test-System.html

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    1. Yes that sounds interesting.

      By the way, I don't really know if an interesting product is important. Recently I bought Eve Sleep PLC and have achieved several 100% returns. The company from UK sells online sleep products. There is hardly a more boring business.

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    2. congratulations on that return!

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  7. Have you actually never had the case that a stock was no longer tradable? That could be a considerable risk with very small stocks.

    An example: I hold stocks in the company MNC MEDIA INVESTMENT LTD, which is listed in Australia and is current in their reporting. Only a small part of the stocks is listed, the rest is held directly. I received the stocks due to a stock conversion. There are only 9 shareholders. That means there are no buyers for my "crappy" stocks at all. Last trade was in 2014! So the stock has currently a cero value for me.

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    1. yes I have just realized I'm in the same situation with my CUO stock

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  8. Do you have an opinion on canabis companies? An example would be Captor Capital (CPTR). It is a tiny stock (MC of 7 Mio) with a P/B of 0.3 and a lot of cash. I like the chart. The stock was trading much higher not so long ago.
    see also here: https://www.nanalyze.com/2018/02/medmen-billion-dollar-marijuana-startup/

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    1. well that certainly fits the 'hype' theme of this blog post. I don't own anything cannabis myself. Hard for me to tell what is real versus a scammy fraud. I have not put in the time to learn

      With CEMI I see this potential for a hype spike on top of a real business that itself I think has potential to be priced much higher in say 5 or 10 years

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