Volatility is an undesired companion for investors eager to see dividends accumulate and stock prices grow steadily and predictably. For traders, volatility is a dangerous friend, one as likely to offer giddy pleasures and thrilling gains as to drag you into prison or the dungeon of lost speculations.
But when looking at new stocks, volatility is the norm, and it provides opportunity for profit. Last week, I introduced the idea of the "post-hype sleeper," applying the term to companies that have recently held an initial public offering and have since had disappointing performance as a stock. In cases where that performance stems from limited or misunderstood information, there are opportunities for good speculative investments. In other cases, there's a chance of catching a wave as analysts and institutional investors thrash against buy and sell urges over the young stock, not yet sure how to feel about the company. For further explanation, check the link above.
I spotted 26 companies that have held an IPO this year, are forecast to turn a profit no later than 2013, and are trading at the low end of their 52-week range. Before turning to those 26 companies, however, I'd like to cover one other interesting company that I've had on my radar screen for awhile. Whereas Tornier (TRNX), the company I covered in the first article of this series, had a typical volatile trajectory that suggested the market wasn't really sure if the stock was coming or going, this company is more typical of an IPO bust, with a hot start and high notoriety, then plummeting credentials. That said, it is, in some way, more of a value and might be an interesting trade.
A Doctor's (And Med School Student's) Best Friend
The company in question is Epocrates (EPOC). Founded by two Stanford graduate students in 1997, Epocrates is essentially a provider of information to health care professionals. The company's main business is to offer, via online and app pipelines, a digital database full of medical information -- on drug interactions, pill ids, diseases, etc. The company's annual report states that 80% of revenue comes from, "providing healthcare companies with interactive services to communicate with our network of users and by leveraging our network of healthcare professionals for market research services." The remaining 20% of revenue comes from subscriptions sold directly to healthcare professionals.
Epocrates provides one of the leading databases for healthcare professionals. It has been termed a leader in providing information to the industry and boasts of having the top mobile app for physicians. I have heard anecdotally that the company's information is a much-relied upon resource for med school students, and former CEO Kirk Loevner alluded to Epocrates' user base as consisting of, "Pharmacists, nurses, medical students, and over 25% of the physicians in the country," in 2009. Current CEO and President Andrew Hurd stated, "Epocrates is the first place many physicians turn for concise, trusted information."
(click images to enlarge)
The company has struggled, however, and as mentioned, typifies a post-IPO bust. After popping 37% on its IPO day and peaking two days later in February 2011, the company sputtered out quickly, and now trades 52% below its IPO price of $16/share after Friday's market surge. In fact, the company's trading hasn't been all that volatile, as the stock has mostly flat lined near the bottom of its 52-week range.
There are challenges Epocrates faces that explain its underperformance. While mobile health is a growing market, like other mobile markets, it is still in a wooly, difficult-profit environment. Epocrates has made missteps along the way. The company has taken criticism of its approach, especially advertising for pharmaceutical companies while providing information to physicians, something that is viewed as possibly an impure influence on the medical science at hand. Epocrates also failed in an effort to create an Electronic Health Records business last year, a move that greatly damaged the company's credibility and share prices (and led to some groan-worthy article titles).
Heads rolled in response to this fiasco, which led to a slowdown in Epocrates's earnings and revenue growth. Former CEO Rose Crane stepped down in November, and Epocrates eventually hired Hurd in March of this year. Hurd comes with a successful background in the healthcare information industry, having been CEO and Chairman at Carefx for six years, and previously having worked at WebMD (WBMD), among other companies. Still, with word that Epocrates' COO has also left in recent months, questions about stability in the company's leadership during this transitional time should be asked and kept in mind.
Total Debt-Equity Ratio
Avg. Trading Volume (last 10 days)
43,500 shares daily
Epocrates has begun to stabilize in 2012 after the EHR misadventure. The company reported largely in-line results for the first quarter, with revenues meeting expectations. Additionally, it further maintained guidance for revenues at $105-115 million, which at the midpoint, would mark a slight decline from last year's results.
In a transitional period, the company is holding the line. Alexander Draper, an analyst for Raymond James, maintained a hold rating on the company, while noting the potential catalyst of a native iPad app and highlighting Epocrates' renewed focus on its core business as promising signs going forward.
For all its foibles, Epocrates is, in many measures, not an expensive stock. Compared to rivals such as Healthstream (HSTM), Mediware Inc. (MEDW), and broader companies such as WebMD and Athena Health (ATHN), Epocrates has a few advantages in valuation:
(Sources: TDAmeritrade, WSJ, Yahoo Finance, respective companies' financial reports)
As of Q1 2012
Revenue TTM (in thousands)
Quarterly Revenue Growth (Q-over-Q)
Quarterly Revenue Growth (Y-over-Y)
Yearly Revenue Growth (1 year prior)
Gross Margin (Q1)
Gross Margin Growth, Q-over-Q (in BPs)
Gross Margin Growth, Y-over-Y (in BPs)
EPS Growth (Annual 1 year prior)
Estimated Earnings Growth (next 5 years)
Earnings 2012 (Est.)
Earnings 2013 (Est.)
Free Cash Flow TTM
P/S for TTM
PEG Ratio (for 2011 P/E)
Price (as of 07/27 close)
(Note: Though HSTM, WBMD, and ATHN have reported Q2 results, all figures based on Q1 results for consistency. MEDW's fiscal year runs July-June (so this uses its FY2012 Q3 results). All future growth rates are sourced from Yahoo. I'm not crazy about using Yahoo for this, but it was the easiest way to have a consistent metric)
While Epocrates scores poorly on current revenue growth, EPS growth, and P/E ratios, most of the companies on this list either have the same pricey valuations or slow revenue growth (Mediware is the exception). The company also has negative free cash flow, which is not necessarily surprising, but also a red flag.
Where Epocrates scores well is in the other ratios and on gross margin. As a service provider of information, Epocrates can operate with a low natural overhead, which gives it room to do well as revenue grows. In addition to having the highest gross margin in this group, Epocrates also has strong revenue in both absolute terms and on a per share basis, which leads it to having the lowest Price/Sales ratio in this group. The company's PEG ratio is also pretty solid, and lower than its peers.
That discount is there for a reason, of course. The misstep with the EHR business and the overall slowdown in revenues and earnings are significant and do not leave the best aftertaste. Epocrates could well be a modern online/mobile bust, another of the carcasses left behind on the road to the future.
Epocrates appears to have found an operational base, however, and the stock has been hovering near bottom for a while. There is no doubt that this level could just be a stop on the way down to total loss. At the same time, with a new management team and a renewed focus on its core business, Epocrates could have a second life.
It's not a sure bet, and I wouldn't swear by any oath on its likelihood, but the chance for growth or a quick trade is there. That chance is what looking into these post-hype sleepers is about.