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  • Digirad - Value + Income + Growth

    Digirad logo

    Everyone knows that actions speak louder than words. At insider-alerts.com we watch those actions daily (with the assistance of a custom developed system) and interpret them to give us an advantage in finding companies to invest in, or stay away from. When the insiders paint a picture that shows the market is missing something important, we act on it. We fully reject the Efficient Market Hypothesis. We've found frequently enough, even after an insider makes a telling purchase or sale that there is pricing inefficiency in the markets. We act to capitalize on those situations.


    In contrast to most investment articles, we're not going to go into the details of Digirad's business, the history, or much of the details about the future. Though interesting, you can review all that from other resources - I don't need to rehash that information. I want to focus specifically on what's taken place over the past 18 months, where things are today, why the shares are brutally undervalued, and as a result why it's a good investment today.

    We originally took notice of DRAD early in 2013 when Jeff Eberwein (Lone Star Value Management) began buying shares with great frequency. This is standard procedure for him - buying 5,000 or 10,000 shares a day, every day for maybe a full month or two. At the time, we stood back and watched. Though successful with another Eberwein investment, at this point, we did not like the financial picture...the financials looked pretty grim with no end in sight.

    Over the next six months, the shares stayed in a fairly narrow trading range. Then in October and November things turned positive. A couple of Seeking Alpha articles were published just as the company posted results which indicated the business was indeed turning around. Further, management felt confident enough about the future outlook that they initiated a generous annual dividend of 20 cents/share. The two articles were published on October 28 and November 8. If you have PRO access, you can review the articles here:

    Oct 28, 2013: Forgotten Small Cap Digirad Corporation: Endless Stream Of Insider Buying And A Key Trial Win Indicate Deep Undervaluation

    Nov 8, 2013: Digirad: Fat Dividend Limits Risk, Operating Leverage Drives Potential 100% Upside

    By the titles of the articles, it's not difficult to envision what is contained in them. Looking at the stock price chart around those dates also indicates the frequent pump/dump which many Seeking Alpha articles instigate.

    (click to enlarge)DRAD chart

    Since then, as the chart shows, the shares have slowly trended down. However, in that time, the company has been paying the quarterly dividend, top line sales have been growing, profits are growing, and an acquisition has been made. All of this points to a company with renewed growth and profit prospects going forward. With about $1.15/share of cash and marketable securities combined with profits now being posted and going forward, we are extremely confident the dividend is secure - and that dividend is currently 6.25%!

    During the earnings conference call on August 1, CEO Matthew Molchan was very clear in his statements:

    I'd like to note 2 other important items covered in our press release today. First, this morning, we announced our regular quarterly cash dividend of $0.05 per share. The continued payment of our quarterly dividend at Digirad reflects the confidence we have in our business model and our ability to continue to generate cash and create value going forward. This also a reflection of our commitment to return a portion of the value we are creating to all our shareholders in the form of a quarterly cash dividend on an ongoing basis.

    Second, we believe we have reached a point in the implementation of our new business strategy that we are now able to provide greater insight into our business going forward. As a result, we have decided to begin providing annual top and bottom line guidance, which we plan to update periodically.

    The above statements point to a company which is now stable and clearly on a profitable growth path. Sporting that 6.25% dividend (at Friday August 8 close) DRAD is presenting a remarkable investment opportunity at this time. The only question you need to ask yourself is if you are a patient enough investor to buy and hold for a couple years to experience the full potential of the investment? As the Fed continues with it's near-zero interest rate policy, most everyone should be very happy to be collecting a 6.25% dividend.

    The timeline of events which have taken place is as follows:

    10/27/2013: Share price = $3.06

    10/28/2013: Seeking Alpha Article #1

    10/28/2013: Share price = $3.32

    11/1/2013: DRAD reports earnings of 14 cents/share (includes $1.6 million pre-tax gain), initiates 5 cents/share quarterly dividend.

    Jeffrey E. Eberwein, Digirad Chairman of the Board of Directors, said, "Since the beginning of our restructuring plan that was announced in late February 2013, we have made it clear that our go-forward strategy is to increase cash flow and maximize value to the shareholders. Now that the Company has returned to profitability and is generating positive cash flow, the Board is pleased to be able to pay a regular dividend as one additional way to return value directly to our shareholders."

    11/7/2013: Share price = $3.60 (ex-dividend 5 cents/share)

    11/8/2013: Seeking Alpha Article #2 (embargo)

    11/8/2013: Share price = $3.81

    11/9/2013 (Saturday): Seeking Alpha Article #2 (general release)

    11/11/2013: Share price = $4.38

    2/25/2014: Share price = $3.84

    2/26/2014: DRAD reports earnings of 4 cents/share, declares dividend

    3/13/2014: Share price = $3.35

    3/14/2014: DRAD acquires Telerhythmics - immediately accretive to EBITDA

    4/30/2014: Share price = $3.18

    5/1/2014: DRAD reports GAAP loss of 1 cent/share, revenues up 13% yoy, declares dividend

    5/13/2014: Share price = $3.36

    5/14/2014: Lone Star reports 5.2% ownership

    7/31/2014: Share price = $3.30

    8/1/2014: DRAD reports GAAP earnings of 4 cents/share, revenues up 13% yoy, declares dividend

    8/8/2014: Share price = $3.21

    As you review the timeline of events, it's clear that the company is now profitable and performing (FY2015 analyst estimate is currently 25 cents/share - though that might be a little high), making regular dividend payments, and is on a growth path going forward. Along the way, various officers and directors have made periodic share purchases (up to $4.36/share), and yet the shares still languish. This is a dream investment for patient buy and hold investors who are looking for value, income, and growth all wrapped up into one.

    The market has made it very clear that the company/shares are not of interest for one reason or another. Why that might be, we have no idea. DRAD is now profitable, growing, has absolutely no debt of any kind, has $21 million ($1.15/share) cash/securities on the balance sheet, and is paying a 6.25% dividend. Further, you have Jeff Eberwein/Lone Star with the 5.2% stake. Eberwein is an activist, he's worked for Soros, he looks to create value. Over the past year or two you can review his investments in NTS, CRDS, and a few others to see that he shakes things up and does create enormous value for shareholders. At this time, in our view, DRAD is a jaw-dropping opportunity - the heavy lifting has been done, now it's time to reap the benefits.

    If you do not like this kind of investment, everyone has his own tastes/preferences and that is your own business. But, please comment below and give some of those reasons because we're really curious to hear them.


    In general, we believe in never buying your entire position all at one time. Buy a half, a third, or a quarter of what you really ultimately want. If the price goes lower and the investment thesis still holds, then buy more. In most cases, based on what we look at when deciding on an investment, the probability is that we aren't catching the stock at the absolute bottom where it's immediately going to take off after we buy. That being the case, we've learned to never take a full position with the initial purchase. No matter how low the price, it can always go lower. So, instead of possibly being unhappy about a losing position right after purchasing, it becomes an opportunity for continued close monitoring and getting in to your desired position at a lower cost.


    Insider-Alerts does not make any buy or sell recommendations with respect to the stock or companies we write about. The reader accepts full liability and responsibility for acting on information we provide and any losses which may result.

    Insider-Alerts does not receive any compensation whatsoever for the articles we write and research we publish. We have no relationship of any kind with either the companies we report on, or the forum which we provide our research.

    Insider-Alerts may hold positions in the securities of the companies we write about, and if so, that position is disclosed.

    Insider-Alerts provides a free daily report of the top insider trades and is available via the Subscribe link on our homepage at insider-alerts.com

    Disclosure: The author is long DRAD.

    Aug 09 5:15 PM | Link | 1 Comment
  • Insider Buying Is Great, But This Is Even Better

    Everyone knows that actions speak louder than words. At insider-alerts.com we watch those actions daily (with the assistance of a custom developed system) and interpret them to give us an advantage in finding companies to invest in, or stay away from. When the insiders paint a picture that shows the market is missing something important, we act on it. We fully reject the Efficient Market Hypothesis. We've found frequently enough, even after an insider makes a telling purchase or sale that there is pricing inefficiency in the markets. We act to capitalize on those situations.


    We are very strong proponents of monitoring officer and director buy and sell transactions. We only own shares of companies where there is insider buying, solid fundamentals, and potential catalysts on the horizon which most investors are missing. We will not buy shares in any company, no matter how cheap it appears, if there are no insiders buying. Why should we? Who knows more about the company - us or them? We could review every public filing ever made, read every industry article about every product the company produces, and even work for the company - at the end of the day, all of that information gathered from whatever means are available to us is still worthless compared to what those officers and directors know. Anyone who says he/she knows more should be ignored immediately - whether an analyst, or even someone you know and trust. We know this is true - it is a fact, there is no reason to even waste time discussing it.

    Now, what we also know, is that you can't simply buy shares solely because some insider is buying shares. You have to dig deeper. When friends or family ask me what I do, I tell them "think Gordon Gekko in the digital age". The insider buying is really just the tip off. Once you see it, that's when your real research begins.

    I frequently butt heads with asset managers who ignore insider buying and selling, are emphatic that the information is of little or no value, they know better how to pick stocks and tell me I have no idea what I'm doing. One asset manager on Seeking Alpha told me point blank that he knows how to invest better than the officers and directors. I've had lunch with a few asset managers just having casual discussion throwing around ideas and to be honest, I was quite surprised at how shallow most of their ideas were.

    So, I've given my philosophy and made somewhat of a case for why insider transactions are valuable information. Does my approach work? I know it does - the performance of my portfolio says so. I don't need validation from an asset manager when I trump their annual performance by multiples while taking less risk.


    As discussed above, I start with the insiders purchases, then dig deeper looking at the fundamentals and catalysts that other investors may be missing, which has led to a mispricing of the shares, and have done extremely well with this approach. Now, over the past few months, I've noticed a new type of situation taking place. I am seeing a more frequent bias for insiders to exercise options that are not necessarily even close to expiry, and not selling the shares. It's very common for an insider to exercise options which have been awarded, and then immediately sell the shares. We see this taking place all the time, and most people who follow insider transactions say to ignore this - options-related selling is of no interest. However, how about when the insider exercises the option, paying for it with money out of his/her own pocket? We've seen somewhat regularly insiders exercising options, and handing over other shares that they own to cover the cost of exercising along with the tax withholding. But again, think about the situation where the insider exercises, pulls money out of his/her pocket to pay for those shares and the taxes due, and holds the shares. Does this sound like something which may provide some insight? I think so - very much so.

    A common situation where we've specifically seen this take place - companies whose shares have seen a recent significant price decline for incorrect reasons. My theory goes like this - the insider knows that the shares are currently undervalued, they've seen the shares trading significantly higher recently, they know that the future looks good. Now, they decide that if they exercise options now, the taxes that they will be responsible for at the time of exercising is going to be less than if they exercised when the shares are much higher (which they saw recently). This is because the taxes due on the option exercise is the difference between the strike price and the current market price. Further, if they hold the shares for at least a year, when they sell the shares, they will be subject to long-term capital gains taxes as opposed to short-term which they would be subject to if they followed the norm of exercising plus immediately selling the shares. So, the theory is that the insider is quite confident the shares are going to be trading higher a year or more from the date they exercise. There is no reason for the insider to exercise and hold the shares otherwise - why subject himself/herself to having to pay taxes now without any gain? If anything, the insider is risking that the shares could go down in value - no?

    What I've done to provide a jumpstart on research for anyone who may be following me and is interested in this, is to provide an extract from our database which you can use to uncover potentially good investments with reduced risk where you have insiders guiding you. This is the type of investment we like. We own some of the names in the extract, but I won't say which they are as my objective in this article is not to pump my own stocks, but to provide some good insights which others can use.

    I've saved the dump file as an Excel spreadsheet - you can either use it as is, or edit/manipulate to allow you to load into your own database.

    The criteria I've used for the extract is as follows:

    1. For the past 18 months

    2. Option exercise transactions where the person exercising has not sold shares the same day, or indicated disposing of shares the same day for tax purposes.

    3. Exercise price > $0

    4. Data is sorted by the stock symbol, then by transaction date, then by the insider's name.

    As always, this is only a starting point - you need to go and dig further. However, I can assure you, that using the extract as a starting point, you will significantly increase your probability for a successful investment.

    Enjoy!

    The extract is located here:

    www.insider-alerts.com/Sample/CodeM.xls

    May 11 4:34 PM | Link | 2 Comments
  • Electromed: It's Always Darkest Before The Dawn

    Everyone knows that actions speak louder than words. At insider-alerts.com we watch those actions daily (with the assistance of a custom developed system) and interpret them to give us an advantage in finding companies to invest in, or stay away from. When the insiders paint a picture that shows the market is missing something important, we act on it. We fully reject the Efficient Market Hypothesis. We've found frequently enough, even after an insider makes a telling purchase or sale that there is pricing inefficiency in the markets. We act to capitalize on those situations.


    You just have to take a quick glance at the stock chart of Electromed (NYSEMKT:ELMD) to see that it's had a rough time over the past two years. The company has had its difficulties through the recession and there's no sign that things have turned the corner yet.

    (click to enlarge)

    However, there comes a time when you see actions taking place and it becomes clear that the changes implemented will lead to a rebound. The investor's job is to figure out when is the appropriate time to jump in. Do you want to make your move when you see the changes taking place before the rest of the crowd realizes? Or do you want to wait until you see numbers posted that confirm the changes are having the desired effect, and the stock possibly already on the move higher?


    Our approach with Electromed was simple. We didn't look extremely deeply into the numbers, simply that they weren't losing money hand over fist, and that the balance sheet remained healthy. What caught our attention was (as always) the insider purchasing, along with key personnel changes.

    As far as the business - Electromed produces the SmartVest airway clearance system. It's a real product, it has a real customer base, and it generates real sales and profits. If you have interest, you can jump over to smartvest.com and read all about it.

    We leveraged the research which was done for us at no cost by Zacks Investment Research Senior Medical Device / Diagnostics Analyst Brian Marckx - as he has posted regular updates on Seeking Alpha for some time. If you go and check his prior posts/coverage, even with his last update in May 2012, he had good forward looking estimates and stock price targets out to 2015. Below I've provided Brian's May 2011 Valuation and Recommendation followed by his May 2012 statement, afterwhich coverage stopped (at least as far as being posted to Seeking Alpha).

    May 2011

    Valuation and Recommendation

    We are raising our price target on ELMD due to a combination of moving our 2011 EPS estimate from $0.13 prior to Q3 results to $0.15 currently and comparable valuations moving higher since our last update. We are also moving our investment recommendation from Hold to Outperform due to the discrepancy between ELMD's current share price ($3.51) and our new target ($5.50).

    We continue to value Electromed using Hill-Rom's (NYSE:HRC) long-term PE/G ratio as a comparable. Hill-Rom's long-term PE/G currently sits at 1.64 (up from 1.32 since our last update on ELMD). We model ELMD to post EPS of $0.34 in 2014, implying four-year CAGR of 22.4%. Backing this growth rate into the 1.64 PE/G results in a near-term P/E multiple of 37x. We look for ELMD to earn $0.15/share in fiscal 2011 which values the company at approximately $5.50 per share.

    May 2012

    Valuation and Recommendation

    We now look for EPS of approximately $0.09 (excluding expected severance expenses in Q4) in fiscal 2012, down from $0.12 prior to Q3 results. EPS in our out-years have moved from $0.25 to $0.21 in 2013, $0.33 to $0.30 in 2014, and $0.41 to $0.38 in 2015.

    We continue to value Electromed using Hill-Rom's (HRC) long-term PE/G ratio as a comparable. Hill-Rom's long-term PE/G currently sits at 1.31. We model ELMD to post EPS of $0.38 in 2015, implying a four-year CAGR of 31%. Based on a 1.31 PE/G, ELMD should trade at about 41x 2012 EPS - or ~ $3.70/share. We are moving our price target from $4.00/share to $3.70. The stock currently trades at about $2.50. We are maintaining our Outperform rating.

    So, Zacks did all the research, things turned South, we have the stock price decimated, and Zacks disappeared. The company has been left for dead by both Zacks and investors.

    Our view is that Electromed is extremely small, the EPS numbers used as the basis for the Zacks estimates are miniscule, and going forward with even minimal profitability the company will easily eclipse these estimates. Assuming the company rights itself and gets back on a path to growth (which we believe will happen), the share price will go significantly higher than the $1.40/share where it sits today and likely above the price targets Zacks previously indicated.


    As for the personnel changes mentioned earlier, there have been two high-level additions. We have Kathleen Skarvan who was named CEO in November and Carlo Micheletti who was named General Manager of Electromed's international business just a few weeks ago. Both of these folks have extensive industry experience and are expected to help Electromed get back on track with increased sales and margins going forward.

    Now, on to the insider stock purchases...

    Our system shows the following insider purchases since January 2012:

    WhoDateSharesPriceShares Owned
    SKARVAN KATHLEEN02/21/20131,450$1.3523,950
    SKARVAN KATHLEEN02/20/20134,600$1.3522,500
    SKARVAN KATHLEEN02/15/20132,900$1.3517,900
    CRANEY STEPHEN H.12/14/20126,600$1.50315,730
    SKARVAN KATHLEEN12/14/20128,000$1.4715,000
    CRANEY STEPHEN H.12/13/201212,200$1.49309,130
    CRANEY STEPHEN H.12/12/20121,200$1.39296,930
    SKARVAN KATHLEEN12/11/20127,000$1.417,000
    ECKLES WILLIAM11/15/20129,311$1.5685,311
    KLOECKNER DARREL L05/21/20129,375$2.6550,000
    ECKLES WILLIAM05/16/201210,000$2.5276,000
    CRANEY STEPHEN H.03/12/20126,931$3.00295,730
    CRANEY STEPHEN H.03/08/20121,520$3.00288,799
    CRANEY STEPHEN H.03/07/20122,300$3.00287,279
    CRANEY STEPHEN H.03/05/2012395$3.00284,979
    CRANEY STEPHEN H.03/02/2012100$3.00284,584
    CRANEY STEPHEN H.03/01/201210,150$2.93284,484
    HAGEDORN THOMAS M.02/22/201210,000$3.01874,250
    ECKLES WILLIAM02/15/20123,300$3.104,300
    ECKLES WILLIAM02/15/2012200$3.044,500

    Kathleen Skarvan = CEO, Stephen Craney = Director, William Eckles = Director, Darrel Kloeckner = Director, Thomas Hagedorn = Director

    In addition to the insider purchases over the past year indicated above, insiders hold over 40% of the outstanding shares. So, of the roughly 8.1 million shares outstanding, there's only about 5 million in the float.


    In general, we've seen the shares of most companies bottom during December with the year end tax selling. However, for Electromed, shares continued moving lower as the earnings announcement two weeks ago were not impressive with a minor loss announced.

    With the key personnel changes, we believe that we've hit bottom as far as the company performance goes. Maybe we'll see one more quarter of weakness, but we expect the back half of 2013 to be stronger as we see the results of new business plans and strategies being put into place now.

    CEO Kathleen Skarvan commented in the earnings announcement:

    While our results this quarter are disappointing, we are gaining momentum and positioning ourselves for sales growth going into fiscal year 2014. Our positive momentum is attributable to our re-branding strategy, hiring a veteran International sales manager focused on broadening our footprint in Latin America and the Middle East, our U.S. sales force being fully staffed in all strategic regions and realigning our reimbursement function to create a stronger focus on payer contracts and greater efficiencies. Additionally, it is important to highlight the strength of our balance sheet, which is strong enough to support us while we work through our current challenges.

    We've been impressed by what Ms. Skarvan has stated since taking the CEO position in November, as well as the push to expand international sales. Based on her own willingness to purchase shares since coming onboard, we're willing to give her lots of latitude as it's clear that her priorities to increase sales and margins are well aligned with increasing shareholder value - for all shareholders.


    As mentioned above, Electromed has about 8.1 million shares outstanding with average daily trading volume at an extremely thin 5,000 shares. As a result, being very thinly traded, the bid/ask spread can be 5 cents or 10 cents at times. This is quite large for a stock trading at under $1.50/share. Anyone who considers purchasing or selling the stock should do themselves a favor, and before trading, review how the stock trades on a day to day basis, always place a limit order, and even go so far as considering buying/selling in small batches and/or utilizing All or None (AON) on your orders.


    In general, we believe in never buying your entire position all at one time. Buy a half, a third, or a quarter of what you really ultimately want. If the price goes lower and the investment thesis still holds, then buy more. In most cases, based on what we look at when deciding on an investment, the probability is that we aren't catching the stock at the absolute bottom where it's immediately going to take off after we buy. That being the case, we've learned to never take a full position with the initial purchase. No matter how low the price, it can always go lower. So, instead of possibly being unhappy about a losing position right after purchasing, it becomes an opportunity for continued close monitoring and getting in to your desired position at a lower cost.


    Insider-Alerts does not make any buy or sell recommendations with respect to the stock or companies we write about. The reader accepts full liability and responsibility for acting on information we provide and any losses which may result.

    Insider-Alerts does not receive any compensation whatsoever for the articles we write and research we publish. We have no relationship of any kind with either the companies we report on, or the forum which we provide our research.

    Insider-Alerts may hold positions in the securities of the companies we write about, and if so, that position is disclosed.

    Insider-Alerts provides a free daily report of the top insider trades and is available via the Subscribe link on our homepage at insider-alerts.com

    Disclosure: I am long ELMD.

    Additional disclosure: We intend to buy more on any further share price weakness.

    Feb 25 8:19 PM | Link | 3 Comments
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