Aspect Medical Systems, Inc. (ASPM)
(November 11, 2004)
Dear readers, please note that while we currently have a 25% short position in our DJIA Timing System, we are still bullish in the longer-run. This cyclical bull market is not over yet. The market is now very overbought on a short-term basis and even an intermediate term basis, and thus I believe this position will work out. I am confident but I am also cautious at the same time. It is always difficult to time a correction in the midst of a cyclical bull market and therefore, I will be looking for exit points – possibly quite soon. Readers please stayed tuned.
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Please note that even though I am bullish on the market in the longer-run, I do not want to buy stocks that are the popular speculations of today – that is, while everyone is still wishing or hoping for further spectacular gains in the wireless, internet content, or semiconductor sectors, I will shy away from it. Interestingly, one sector that has been overlooked by a lot of investors or traders is the medical products sector – this is particularly interesting since the medical products sector has been the best performing sector recently, both on a fundamental and technical basis.
One particular company that I like in the medical products sector is Aspect Medical Systems, Inc. I am going to discuss Aspect Medical Systems, Inc. (ASPM) in this commentary.
From the Yahoo! Business description: “Aspect Medical Systems, Inc. is engaged in the development, manufacturing and marketing of an anesthesia monitoring system called the BIS system, which provides information that allows clinicians to assess and manage a patient's level of consciousness in the operating room and intensive care settings, and administer the precise amount of anesthesia needed by each patient. The BIS system includes the BIS monitor (BIS module kit) and single-use disposable BIS sensors. The Company derives its revenue primarily from sales of monitors, BIS module kits, related accessories (equipments) and BIS Sensors. During the year ended December 31, 2003, revenue from the sale of equipment represented approximately 31% of the Company's revenue, and revenue from the sale of BIS sensors represented the remaining 69%. The Company's customers include anesthesia providers, hospitals, outpatient surgical centers and individual practitioners in office-based practice located in the United States and overseas.”
Readers who are interested can read the expanded description of the company at the Reuters website.
For the latest quarter ending October 2nd, the company reported a worldwide revenue growth of 22%, along with an increase in income from a net loss of $1.4 million (-$0.07 per share) to a net profit of $520,000 ($0.02 per share) compared to the same year-ago quarter. Gross margins also increased from 75.3% to 76.2%.
The company is growing rapidly, and its revenues are projected to increase 20% while its net income is projected to increase to 15 cents a share in 2005.
The main business of this company is based on its BIS technology, which is used to monitor brain activity in patients who undergo general anesthesia. Cleared by the FDA, the company’s BIS technology is the only clinically-proven brain-monitoring technology that is accepted to be able to reduce a patient’s risk awareness during general anesthesia – statistically about 80% or so. While the probability of risk awareness in a patient is statistically low, the company claims that approximately twenty to fort thousand of all patients who undergo general anesthesia will suffer awareness with recall every year. The psychological consequences of awareness can be devastating and debilitating (not to mention costly if/when the patient chooses to sue). An 80% decrease in the probability of risk awareness results in both huge social and monetary cost savings.
Today, nine million patients around the world have utilized this technology to some extent, and this number if projected to grow very quickly. The technology also leads to other benefits, such as a reduction in overall drug costs, faster wakeup times for patients (people tend to be oversedated as well), and faster discharges from PACUs (Post-Anesthetic Care Unit).
The company also has a huge insider ownership, as 38% of all outstanding shares are owned by insiders. Moreover, there was a huge surge in insider buying activity during the June to September period – all of it coming from Boston Scientific Corporation. Boston Scientific now possesses 25% of all outstanding shares of the company, and there are some who are speculating that the company may be on the verge of a buyout from Boston Scientific.
Technically, the stock also looks good as it broke out to a new all-time high yesterday on nearly three times the average daily trading volume:
The stock has also broken out of a double top on the following P&F chart from StockCharts.com:
On a short-term basis, the stock is definitely overbought. Nimble traders may want to wait for a slight pullback before buying. I am optimistic about the medical product industry, and I believe Aspect Medical Systems will benefit from both the improvement fundamental of this industry as well as the overall stock market.
Henry To, CFA
P.S. Please discuss this stock in our individual stocks discussion forum.