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Combimatrix Fourth Quarter Update: I don’t think the market has this one right

When you are speculating in small cap stocks that have only 3rd or 4th tier analyst coverage (if that), it’s always an adventure when an earnings report comes out.

The market reaction is not always immediate, nor is the first one always correct.  Short term considerations; a heavy short interest, a big holder who wants to use the volume to reduce an overweight position, or a long or short pump by a pennystock newsletter, can overwhelm the otherwise expected response.

Unlike large market capitalization companies that generally are well understood and where the news is quickly reflected in the stock price, the sort of tiny micro-caps I play in have responses to news that can be erratic for days or weeks after a news event.

In the face of noisy feedback, you just have to trust in your work.

I first wrote about Combimatrix a little under a month ago.  The company performs a number of diagnostic tests centered around reproductive health.  Combimatrix has been around a long time and only recently has started to gain traction on insurance coverage with their tests, which in turn has begun to translate into earnings.  The reported results last Tuesday.

My thesis centers around the company’s claim that they will be cash flow positive by the fourth quarter of this year. I just don’t think the stock is anywhere near pricing in that possibility.

Combimatrix has a history of burning through cash.  The stock trades at a level that says nothing has changed.  Even after the recent run-up (when I first looked at Combimatrix it was a $3 stock versus the current price over $4) the stock trades at 0.5x revenue.  If they achieve their goal of becoming cash flow positive they should trade at multiples of that.

The fourth quarter results moved them closer to the goal.  Revenues were up 32% year over year and 10% sequentially.  EBITDA continued its upward march toward the black.  They are on track to exceed guidance and be cash flow positive even earlier.

ebitdaq4

The stock’s immediate after hours response was what I expected.  It quickly ran above $5 and my expectation was we would soon see $6.

But that wasn’t to be, at least not yet.  After opening a little under $5 the next morning it was pressured the rest of the day and only closed up about 5%.  There was more pressure on Friday, it actually got below its pre-earnings close for a short time, but fought its way back to flat by the end of the day.

I don’t know what has held the stock back for the last two days but I don’t think I’m wrong about where its going.  Maybe there are shorts making a last ditch attempt to push it down, maybe there is a big holder who has already made the decision to reduce their position into strength and doesn’t care about the results.  I don’t know.

The bottom line is the results are good, the company continues to increase revenues, show increases in test volumes for their core tests, and show excellent cost control (G&A, Sales and Marketing and R&D costs are all at levels at or below what they were at the beginning of 2015).

I added to my position.  I had already been adding prior to earnings but I added some more.  It’s getting to be a big position, especially considering the entire company is only worth about $7 million net of cash.  I’m okay with that.  I think this is a disconnect in an under-followed, mostly hated, perennially disappointing micro-cap and few are willing to give them the benefit of the doubt.  So I will.

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8 Comments Post a comment
  1. You rightly highlight the progress they are making in developing the business.

    For me to speculate on the common stock though, I need a more definite picture of the ultimate upside. I see “potentially dilutive securities” at 3.26 million shares in the last 10-Q, mostly from the warrants issued with their latest preferred offering. The stock rises to $6 over the next couple years, warrant holders like the business growth, send in their $5.17 per share. So now management has $14 million more cash and goes looking for a suitable acquisition. They now have 5.7 million shares out, $14 million in cash, and a $34 million market cap. What do they buy, and at what price?

    Today’s common stock buyer effectively gets less than 50% of any per share growth above $5.17. It’s probably a lock to get there in the next year though given the business growth, which isn’t an unreasonable gain from today’s $4.4 per share. Thoughts?

    February 26, 2017
    • Jon #

      I don’t quite get what you’re saying…the stock won’t go up because they will have $14M and wont know what to do with it?

      February 27, 2017
    • If they meet the cash flow target I don’t think the stock is going to rise to $6 over the next couple of years. I think it happens in the next few months, as they give one or two more datapoints showing that this is indeed going to happen. My argument is that this currently isn’t priced in and that it will happen shortly.

      The warrants dilute the share count, the company gets more cash, I don’t have any special insight into what happens but if management makes prudent decisions with that cash (maybe increasing salesforce, maybe adding adjacent tests) I don’t see those shares as dilutive. They making positive strides so I am willing to bet they make continue to do so.

      February 27, 2017
  2. Anonymous #

    The idiots on stock twits are responsible for the inability to make progress. That is why volume gets so as they buy and sell constantly
    Most have no idea what they are doing

    February 26, 2017
  3. Luis #

    Revenues grow 30% but volumes 10%. They have price increases. So growth could slow down soon. I would like your opinion about this.

    February 27, 2017
    • Jon #

      Last year included sqnm

      February 27, 2017
    • I don’t think price increases are the driving factor. They term their price increases as ‘modest’. The bigger factor has been reimbursement rates. Off the top of my head I can’t remember the exact number but I think its around 24 payors that have changed their coverage on miscarriage. In the 10-Q that is the factor outlined around the volume per test increases. They also are seeing more embyros per test on PGS which has some impact as well.

      February 27, 2017

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