Which "Losers" To End?
I am looking at my in-the-red picks again. I often look at a few and I seem to rarely end them...
I really want to end some because I see other picks I really want to add, but I am up to the limit, so I look.
So, I randomly picked DexCom to look at today. I have had an under perform on it since July 2nd and I am currently -12.91 on that pick.
And what do I find, $1.56 per year loss. In the last year the shareholder's equity has gone from $66 million to $17 million and with losing $11 million per quarter they will need to raise capital again in about a year. They have wisely managed to get their hands on $74 million when the getting was good, but they also have $61 million of long term debt.
An investing trick of the big guys that I only recently became aware of is they go for convertible bonds discounted at enormous rates of interest, making their entry price effectively much less than existing shareholders. It has the appearance of an equity issue, however, because they are a bond, should the company fail, they are at the front of the line to get what might be left from the fire sale of assets, and the existing long term share holder are left holding the bag. I can't see this one raising cash again unless it is with this kind of deal.
So, they have a market cap of about $256 million, annual sales of $4 million and they spend about $45 million more than they take in.
When I look at what their product does, it is impressive, but what do I know of the costs of diabeties? It looks like it will cost the user $1-2k to purchase the monitor and then about $250/month for replacement sensors.
I can just see it, health care insurance plans taking on an extra $250/month costs to monitor diabeties? And with the rise in type II diabeties the market is huge, but at $3k/year per client I can't see health insurance plans giving this one a go when there are far cheaper methods of monitoring diabeties.
So, how do I look at this cost as an individual. Well, first, I could afford it, but how many could actually afford it? And, even though I could afford it there would be no way I'd take on that cost. At best I'd use it for a month and really learn how my body responds to the foods I eat and then I'd probably only use it a couple times per year to make sure I am staying on track, so after the first year I am a $125/year customer, maybe $250 as I might make a point of using it during festive times, or times I've learned I make more mistakes.
And seriously, health insurance plans are maxed out, everything is maxed out.
So, now the question becomes just how much in sales do these guys need to to cover $45 million per year in losses, and how much more cost would there be to expand the operation to that level?
Right now they have $22 million in selling and general administration expenses, they have $12 million in cost of revenue expenses and another $16 million in research expenses.
And what of competition. If they can develop this kind of system, why can't others? It doesn't seem that unique.
The other thing, if cell phones can cost just a couple hundred dollars, for sure there is lots of room for competition to under cut that $1-2k user capital costs.
The more I look at this one the only way I see them making it is with mass production and bring the cost down to reflect mass production.
And this one is up today...