SMTS 1st Q Results

We wrote about Somanetics (SMTS) on Feb. 28th here The Long Case for Somanetics, and felt that a good buying opportunity existed in the mid teens.   On Wednesday March 17th, the company announced first quarter results.  The results beat the analyst estimates handily and the company guided sales higher for the year.  The stock reacted by appreciating 19%.

 

We'll continue to monitor SMTS throughout the year and give important updates as they occur.  As for now, things look bullish for this small cap medical technology company.  Thank you for reading. 

 

The Hidden Cost of Mutual Funds

The Wall Street Journal had a great article detailing how expensive it truly is to own a mutual fund. The average investor knows that when investing in a mutual fund, they will need to pay an expense ratio to compensate the portfolio manager and cover operating expenses. Currently, the average annual expense ratio of a U.S. stock fund is 1.31%.
However, that's not the true bottom line. There are front-load costs not reflected in the annual expense ratio and those expenses can make a fund two or three times as costly as advertised. Unfortunately, the average investor has no idea what these additional costs amount to due to a lack of information. Some of these costs are hard to find, being buried in a thick prospectus. I did my own study of two popular mutual fund companies and ran charts to see how they correlate to the overall market, the S&P 500.  In other words, what makes these funds so special that they need to charge up to 6.48% and 6.80% respectively during the first year of ownership. The popular American Funds - Growth Fund of America sports a 5.75% front load fee on top of other miscellaneous expenses bringing the first year expense to 6.48%.  Below, let's see how the performance stacks up against the S&P 500 low cost index fund (SPY) which costs just .15% to own.

As expected this fund shows a high correlation and just tracks the low cost S&P 500 (SPY) fund that charges just $150.00 on every $100,000 invested, as opposed to an approximate $5,230 first year cost for the American Fund (AGTHX), which includes volume breakpoints.  Where's the value.

 

At Shaw Investments, we do not use high cost mutual funds that give kick backs from the mutual fund company to the advisor selling the fund.  We have a fiduciary duty first and foremost to our clients, and receive no commissions, kickbacks or referral fees and will always consider the costs associated.  Thank you for reading.

 

 

February Employment Report

Last month I wrote about the January employment report here January Employment Report.  That report had some positives as the trend for improved employment was heading in the right direction, to the plus side. Today the Bureau of Labor Statistics (BLS) released the February employment report. 
Nonfarm payroll employment was little changed (-36,000) in February, and the unemployment rate held at 9.7 percent, the U.S. Bureau of Labor Statistics reported today. Employment fell in construction and information, while temporary help services added jobs.  February lost -36K jobs compared to January's loss of -56K, so a slight improvement.  Within the report was this. Professional services contributed 51,00 jobs to the plus side, but 50,000 of them were part-time jobs! The quality of employment is not what it used to be, as many employers are only offering part time positions. The official unemployment rate is 9.7%. However, if you start counting all the people that want a job but gave up, all the people with part-time jobs that want a full-time job, all the people who dropped off the unemployment rolls because their unemployment benefits ran out, etc., you get a closer picture of what the unemployment rate is.  That rate is 16.8%, which is how unemployment feels to the average Joe on the street.  Thank you for reading.
 

The Long Case for Somanetics

Somanetics (Nasdaq SMTS) Troy Michigan, is the pioneer and leader of cerebral and somatic (of the body) oximetry, providing U.S. clinicians with the first adult cerebral oximeter, the first pediatric cerebral oximeter and the first simultaneous brain and body oximeter.  Known as the INVOS Cerebral/Somatic Oximeter, this noninvasive patient monitor continuously measures changes in blood oxygen levels in the brain and in the body of patients who are at risk for restricted blood flow so clinicians can detect and correct a variety of threatening complications. Today, the INVOS System is in use at 700+ U.S. hospitals, including 80% of centers performing pediatric cardiac surgery.  They have placed a total of 2,927 monitors worldwide.
I have been following SMTS for 10 years. Today, I feel more confident in purchasing shares then anytime in the past. The INVOS System is being accepted by the medical community as a necessity at a faster clip than at any previous time.
The financial crisis has caused the cost of capital to increase to the point that all businesses including hospitals are hoarding cash. New technology has a harder time getting a piece of the limited capital spending budgets and that has and will continue to effect sales of the INVOS System. However, there is a growing level of pent up demand, which should result in a catch up quarter down the road.
Vital Sync System:
The Vital Sync System aquisition makes Somanetics a two-product company answering one of the risks (one product company) sighted by analysts over the years. Several companies market bedside devices that display data from monitoring devices. All of the products on the market today only collect information from their own products. Somanetics’ Vital Sync System is patented and it integrates data from a broad array of hospital bedside devices, such as physiological monitors and ventilators, into a single bedside display for comparison, data management and storage. It has the latest touch screen technology and is extremely user friendly. The system takes the entire patient data collection and management process paperless (something President Obama is pushing very hard for the entire Health Care system). The Vital Sync System is priced at $25,000, which is an acceptable price point for hospitals. The parts are “off the shelf” and the technology is software driven which translates into high margins. Somanetics has placed 8 devices with key customers for feedback.
The potential market for the Vital Sync System relates to the number of hospital beds in this country, not the number of hospital beds designated for adult cardiac surgery. The INVOS monitors are sold or placed initially with a stream of recurring revenue from the sale of the deposable somasensors. The Vital Sync System is sold initially with only a small maintenance contract to provide the latest software enhancements.
The Vital Sync System provides Somanetics a second access point to obtain funds from hospitals. The bedside displays are recognized as a cost saving device and is on every “wish list” for capital. The INVOS System and the Vital Sync System will be marketed separately initially, but clearly combining the two together provides a compelling value proposition for the hospitals. The company does not view CAS Medical (CASM) as a serious threat to their business. The company announced they were suing CAS Medical for patent infringement and false and damaging claims. The purpose of the lawsuit seems tactical in several ways. CAS Medical has been claiming that their FORE-SIGHT Absolute Cerebral Oximeter showed measurements to be three times more accurate than those of the INVOS System. The company believes these claims are false and misleading and are based on an unscientific study that will never be published. The numbers that we hear on the quarterly conference calls refer to monitors that have been placed or sold to hospital accounts under contract. There are numerous monitors installed in many other hospitals that have not been included in the “installed base” because the training period has not been concluded and there has been no sale or somasensor contract signed.
Technical Analysis:
The chart of SMTS looks ok with an upward trendline from the March lows and resistance at around 18.50.  Buying in the mid teens make sense on a risk / reward basis with limited downside due to over $6.00 per share of cash.

 

Investment Strengths:

Somanetics has experienced double-digit sales growth for the last 12 years, including record revenue in 2009 of $50 million.

• Gross profit margins exceeding 85%.
• Over $6.00 in cash per share.
• Extremely high barriers to entry.
• Established and longstanding management team.
• Takeover target as a potential catalyst.

To Summarize:
We remain confident in the future of Somanetics Corporation. They are making a lot more headway than the quarterly numbers suggest. The financial crisis has slowed their growth rate in a year that should have shown acceleration. They are doing all of the right things to be successful.
They have or are:

• Adding new valuable products to their line.
• Constantly upgrading their technology and applications for its use.
• Investing at the right time to be prepared for accelerating demand.
• Gaining clinical support and evidence critical to the adoption of their technology by the medical community (FDA 510k).
• Defending their technology and intellectual property.
• Negotiated a three-year extension to their exclusive distribution deal with Covidien for Europe, the Middle East and Africa.
• Have set aside 13.5M for potential share buyback. 

January Employment Report

We wrote about the December Employment Report here.  There was not much to like in that report.On Friday the Bureau of Labor Statistics released the January 2010 employment report. The unemployment rate fell from 10.0 to 9.7 percent in January, and nonfarm payroll employment was essentially unchanged (-20,000), the U.S. Bureau of Labor Statistics reported today. Employment fell in construction and in transportation and warehousing, while temporary help services and retail trade added jobs. A total of 60,000 goods producing jobs were lost (higher paying jobs). Professional services contributed 44,000 jobs to the plus side, but 42,000 of them were part-time jobs!

The official unemployment rate is 9.7%. However, if you start counting all the people that want a job but gave up, all the people with part-time jobs that want a full-time job, all the people who dropped off the unemployment rolls because their unemployment benefits ran out, etc., you get a closer picture of what the unemployment rate is. That number is listed in the above chart under the U-6 column, which is 16.5%.

The trend is heading in the right direction, but jobs are still being lost, although at a much slower rate and close to break even.  We need to create 200k jobs monthly just to have a sustainable recovery.  The unemployment rate went down from 10.0% to 9.7%, but that percentage can be misleading due to the fact that discouraged people have left the pool of the unemployed while jobs are still being lost. Thank you for reading.

 

 

Target Date Retirement Funds

Target date funds, also known as lifecycle funds, move money from riskier investments like stocks to more conservative alternatives like bonds as an investor approaches retirement.  Last year 7.3 million Americans held target date-funds, according to The Employee Benefit Research Institute's database of 24 million 401k participants.
Investors in some target-date lifestyle funds, supposedly targeted to be more conservative as one approaches retirement, are unaware that fund managers are chasing performance at exactly the wrong time.
The main reason that these funds are chasing riskier yield is because many charge a sales fee of up to 5%.  It is extremely difficult to make that 5% back without taking on more risk then should be necessary for someone entering into retirement.

American Funds 2010 Target Date Retirement Fund
Lost -27.5% in 2008, and the fund sports a 5.75% maximum sales charge.  Both the -27.5% portfolio loss and the sales charge is unheard of for someone entering into retirement.
These funds are doing one thing, making big commissions for the sales staff offering the plans. Target date funds may present greater risks then consumers have been aware of, says Morningstar's mutual-fund research group.  An investor receiving a semi-annual report from Fidelity's Freedom 2010 Fund, for example would need to read through to page 20 to find the allocation in it's high yield fixed-income funds.  The report does not break down the percentages of bonds rated below investment grade.

November Employment Report

The unemployment rate edged down to 10.0% in November from 10.2% in October. Non-Farm unemployment was essentially unchanged down just -11,000 the US Bureau of Labor Statistics reported today. In the prior three months payroll job losses have averaged -(135,000) a month.

In November employment fell in construction, manufacturing and information, while temporary help services and health care added jobs.

The table below gives us a better approximate of what the unemployment rate really feels like to the average Joe on the street. Last row U-6, lower right hand corner, 17.2%.

 



If you count all the people that want a job but gave up, all the people with part-time jobs that want a full-time job, all the people who dropped off of the unemployment rolls, because their unemployment benefits ran out, you get a closer picture of what the unemployment rate really is. The number is in the last row labeled U-6, and that number is 17.2%.

Bottom Line: Although this report was a step in the right direction, we will have to see some follow through for the December and January unemployment situation reports. Also, would like to see more manufacturing related jobs instead of the lower paying service sector jobs that were added. Thank you for reading. 

US Dollar Index

Today the US Dollar Index fell to a yearly low. What are the implications?
The dollar rises and falls based on the strength of the US economy-and the confidence investors have in it's future. With other economies in Asia and South America growing more rapidly and the outlook for the US economy slowing, the dollar has been weakening.
What does the dollar decline mean for US consumers, and what happens if the dollar keeps sliding?
Americans buy more stuff from other countries then we sell to them. The weaker dollar raises the net cost for a typical Americans shopping basket. Paying more each year for the same basket of goods is the text book definition of inflation. So a weak dollar could push US inflation higher and create another tax on the already overburdened consumer.
A weak currency also comes with an important trade benefit. It makes everything based on that currency much cheaper in the global market place. That tends to help American
companies sell more of their products around the world, which boosts the US economy. That, in turn, should help create more jobs. In theory, all that expanded economic activity should help re-strengthen the dollar.  Thank you for reading.

Stocks and the US Dollar

click image to enlarge

The falling US Dollar against other currencies is what's driving the stock market higher. From the chart above, as the dollar losses value (red line) US stocks gain in value (blue line).

Partly driving this unusual trend is the dollar's newfound status as one of the cheapest currencies to borrow among the developed nations. Thanks to the Federal Reserve's moves to drive interest rates to near zero percent, the U.S. dollar carries a low yield, particularly compared to currencies in Brazil and other emerging markets, where rates are much higher.

With U.S. rates on hold, more investors overseas are engaging in bets that the dollar will decline further -- in other words, taking short positions. Or, they're borrowing in the currency to buy higher-yielding assets just to profit from the difference between them, in what's known as the carry trade.

Other strategies may involve using a stronger currency such as the Euro and funding investments in the US stock market. Another reason for a higher stock market.

Result: We get a higher stock market when the dollar continues to fall. We get a lower stock market when the carry trade unwinds from the dollar moving higher.

Expect plenty of volatility going forward especially if we get a carry trade unwinding. Traders will have to cover their positions if the dollar rallies. To fund their losses or cover their margin call they will have to sell assets such as US stocks. The main reason for the inverse correlation when we see the dollar trend up.

Given what's driving the stock market higher, should you still be invested in this market? Maybe, if risk management strategies are used properly, such as automated hard stops, trailing stops, or portfolio hedging strategies. If a carry trade unwinding does occur, we could see stocks head lower in a hurry.  Thank you for reading.

 

U.S. Dollar Weakness and the Markets

The dollar rises and falls based on the strength of our economy — and the confidence investors have in its future. With other economies in Asia and South America growing more rapidly and the outlook for the U.S economy slowing, the dollar has been weakening.
What does the dollar decline mean for U.S. consumers, and what happens if the dollar keeps sliding?
Americans buy more stuff from other countries than we sell to them, the weaker dollar raises the net cost for a typical American’s shopping basket. Paying more each year for the same basket of goods is the textbook definition of inflation. So a weak dollar could push U.S. inflation higher and become a tax on the already overburdened consumer.
A weak currency also comes with an important trade benefit. It makes everything based on that currency much cheaper in the global marketplace. That tends to help American companies sell more of their products around the world, which boosts the U.S. economy. That, in turn, should create more jobs. In theory, all that expanded economic activity should help re-strengthen the dollar.
A few dollar based charts have alerted me to what’s really driving the overall market and oil higher. Notice the inverse relationship that the dollar and the overall market have taken on.

The dollar and oil have an inverse relationship.

As economic recovery hopes grow, risk aversion trades will diminish, which could also lead to U.S. dollar weakness and higher inverse markets.  Thank you for reading.