Editors' Note: This article covers a stock trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.
Perhaps the best method of finding such stocks is by examining companies who have experienced recent declines in share price, while the fundamentals remain the same - or even appear more positive.
Let me introduce you to Venaxis, Inc. (NASDAQ:APPY), if you are not already acquainted, a stock that adheres to the well-known rule of "buy on the rumor, sell on the news".
- The News
On January 24, 2014, APPY announced the completion of patient enrollment within its clinical study of APPY1. The "APPY1" is the "what", but we can discuss that later. What needs to be focused on now, is the pricing of APPY shares over the more recent trading sessions.
Just prior to the announcement, shares of APPY were trading at highs of $2.80-$2.85. On the day of announcement, APPY shares plummeted to a close of $2.49 per share. The following trading day, the drop continued for a final close of $2.38 per share. Each of these red days for APPY were coupled with red days for the overall biotech market (as measured by the NASDAQ Biotechnology Index (^NBI)).
To recap this, a positive company announcement has resulted in a share devaluation of approximately 15-20%. It is of my opinion that now would be a well-timed buy into APPY.
- The Why to Buy
From a technical standpoint, we have seen a sharp decline in APPY share value. In my eyes, this has largely resulted from the ever-common "buy on the rumor, sell on the news". However, the discounted share price now offered provides an additional buy point. Although the sample size is relatively small, due to the recency of events, we can guess that shares of APPY are trending bullish. As shown below, APPY shares are currently on a pattern of setting higher highs and higher lows.
From a fundamental standpoint, APPY is coming off of positive news. The completion of patient enrollment in its APPY1 clinical study is a major milestone in bringing the product to market.
- The "What" for Value
The valuation of APPY holds significant potential within the APPY1 test. APPY1 is a diagnostic tool that is able to identify patients who have a low risk of acute appendicitis. The usefulness and profit potential for such a product is not initially obvious. To many outside investors, the need for this device within hospitals may seem unnecessary.
However, allow me to persuade you otherwise. The modern-day emergency room contains a triage system, where patients are evaluated, prioritized and sorted based on need. Within this system, next steps for the patient are also determined. Each year in the United States, upwards of 10 million cases occur in the emergency room where the patient complains of abdominal pain. This "abdominal pain", can be appendicitis, or, more likely, it is completely unrelated. A major issue arises from the possibility of appendicitis - since if left untreated, the patient runs a risk of dying. The result is a high priority for patients suffering from abdominal pain within the emergency room. The next steps are to perform additional tests in order to determine if appendicitis is the true cause of pain for the patient. Overall, there is a waste of hospital resources while the patient is subjected to tests that may be unnecessary, and in some cases damaging, such as radioactive X-ray computed tomography scans.
From the mentioned above, two things should be clear. 1) The need for a separate diagnostic tool for appendicitis is necessary for a more efficient healthcare system. 2) The market potential for such a tool is very large due to the sheer number of abdominal pain cases per year.
APPY initially intends to use its product, APPY1, as a diagnostic tool for children and adolescents before scaling it up for the general population. The current difficulty in assessing children and adolescents for appendicitis adds an extra edge for APPY's diagnostic tool. This extra edge should add an even greater advantage in achieving market penetration.
Source: Company presentation
The targeting of this device for a large market, coupled with the small market cap for APPY, allows for extreme growth potential. As shown below, a modest 30% market penetration in around 15% of all abdominal pain cases annually would account for estimated earnings of $33-52.5 million. Compared to the current APPY market cap of $51.5 million, one can easily see the significant potential - and upside - for APPY investors.
Source: Company Presentation
- The Risk to Consider
Any equity within the market carries with it a certain amount of risk. In the case of APPY, the most significant risk is contained within the FDA's decision on APPY1. This risk will present itself when APPY releases data for its clinical trial on APPY1, which is expected March 2014. From now until that timeframe, I believe the share prices for APPY will appreciate considerably in value. This is because other buyers will be looking at the current discount as a buy point as well. Furthermore, anticipation of data release in March 2014 will lead to a price run-up. I expect the data from APPY1 to be positive, primarily because it has already been cleared for sale in Europe.
I'd like to conclude this article by recapping my reasons for being bullish on APPY. The recent loss of stock price (~15-20%) has provided investors with a discounted point to buy in at. Furthermore, since the drop, the chart technicals show bullish behavior with higher highs and higher lows occurring. Lastly, from a fundamental perspective, the company holds great potential in possible revenue. The addition of an upcoming catalyst within the next month or two will further drive the price up at an accelerated rate.
Disclosure: I am long APPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.