This is the first time in the history of this blog that I am covering two companies in one week. The first is Electromed, which I will be de...

Weekly Superstock Scan 4 Apr 2016 - 8 Apr 2016: ELMD

This is the first time in the history of this blog that I am covering two companies in one week. The first is Electromed, which I will be describing in this post. The other company is China New Borun Corp, which I will be writing in a separate post.

Electromed, Inc. (ELMD) develops, manufactures and markets innovative airway clearance products that apply High Frequency Chest Wall Oscillation (HFCWO) therapy in pulmonary care for patients of all ages. The Company markets its products in the United States to the home health care and institutional markets for use by patients in personal residences, hospitals and clinics. The Company also sells internationally both directly and through distributors.

Their main product is the SmartVest Airway Clearance System, which includes the newest generation SmartVest SQL and previous generation SV2100. Together with related products, these are provided to patients with compromised pulmonary function.


Explosive Price Action on Earnings Breakout

When ELMD released its Q2 result in Feb 2016, its stock price doubled in a single session. It continue to climb another 60% in one month to above $5 before retracing to $4 in recent weeks. The volume on the day of breakout is an astonishing 20 times the average daily trading volume.

Price did bounce off the 10wMA last week. Will the 10wMA continue to serve as support for the explosive stock?


Flagship Product Entering New Markets

The SmartVest SQL System is ELMD's flagship product, being 25% smaller, 5db quieter and 25% lighter than the earlier generation SmartVest SV2100. Since its launch exclusively to the domestic home care market, it has rapidly gained traction.

In Q4 FY2015, the SmartVest SQL is launched into the institutional and certain international market. Although ELMD derive most of its revenue from the home care market, launching the SmartVest SQL will still help to boost sales and profit for ELMD.

Synergy Between Sales and Reimbursement Teams

The SmartVest is often prescribed for patients with bronchiectasis. While there are a large number of patients, the number of patients treated with HFCWO therapy remain small.

The reasons for the low percentage of treatment include the lack of awareness and cost. To overcome this, ELMD developed a strong sales team who will work together with the reimbursement department. The synergy between the sales and reimbursement teams was stated as a main reason for the strong earning and revenue growth in Q2 FY2016 and this will probably continue to deliver sustained growth for ELMD.

High Operating Leverage

ELMD has an amazingly high gross margin of 78% in Q2 FY2016. Even with the high level of sales, the variable cost is approximately one third of its fixed cost. Based on past trends, ELMD requires a revenue of 4.5 million to break even, Once revenue goes above the 4.5 million mark, earnings start to grow exponentially. That was exactly what happened in the last quarter.

Small Float

ELMD's float is extremely small at 5.5 million shares. In the past three months, average daily volume is around 300,000 shares. This puts the float at just 18 times average trading volume. With the small ratio, it is no wonder that the stock can easily double in one session with a set of good results. With another set of good result, ELMD can easily more with volatility equal or greater than the last run.

Risk Factors/ Things I do not like

  • Changes to Medicare, Medicaid, or Private Insurance Reimbursement Policies - Due to the high cost of HFCWO therapy, most of the clients require reimbursement by public and private insurers to be able to afford the treatment. When there are changes to policies, HFCWO therapy may not be affordable for most of the potential customers anymore.
  • Increase in Finished Goods - The total inventory has increased from 2.07 million in Jun 2015 to 2.39 million in Dec 2015. That is more or less in line with the level of sales growth. However, Finished goods increased at a much faster pace from 440,000 to 725,000 in the same period. While there are many possible reasons for the increase, it can possibly mean that ELMD is having difficulty clearing its inventory.

Potential Trade Setup

The catalysts for this stock are a little weak to ensure sustainable growth. If it does, the low float will make this trade very profitable.

As mentioned earlier, ELMD has bounced off the 10wMA recently. Potentially the 10wMA may be a magic line for the stock. When the stock strike the 10wMA again, I will trade when price bounce off the 10wMA again on a lower time frame.

PLPM (Posted on 27th Mar Watchlist)
Continued to close in tight range. Ready for entry. Personally I am holding off entry due to high valuation and lack of funds. I will enter if I exit other positions.

ATSG (Posted on 13th Mar Watchlist)
Going higher and higher, will cease coverage for time being.

SNC (Posted on 6th Mar 2016 Watchlist)
Consolidating, waiting for 10/30wMA to catch up.

BHQ.SI (Posted on 28th Feb 2016 Watchlist)
Price has moved more than 23% since I initiated coverage, without me. Stopping update for time being.

JRJC (Posted on 14th Feb 2016 Watchlist)
Looking to buy at upward trendline and 10wMA in the 4.90 region. Very close to entry.

EDUC (Posted on 24th Jan 2016 Watchlist)
Entered @ 9.95. Nice breakout in past week.

VRA (Posted on 11th Jan 2016 Watchlist)
Entered @ 14.4. Cleared 20 big round number, 6th week without touching magic line.

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