TheStreetSweeper issues an investor alert about the quiet furor blowing up around Foundation Medicine (FMI).
The Cambridge, Massachusetts company spun out its initial public offering in September 2013. Since inception eight years ago, the genomic profile testing company has lost money ... totaling ~$345 million.
Investors may find the company website here. Meanwhile, TheStreetSweeper highlights the top issues that we believe will soon crimp this stock.
*1. Stockholders' Earnings Disintegrate, Revenue Drops
Stockholders are suffering a significant decline in earnings from Foundation.
From quarter one to quarter four, losses increased a miserable 79.6%!
1 Q 2016 2 Q 2016 3 Q 2016 4 Q 2016
(Source: CNN Money, TheStreetSweeper)
Along with these big losses, Foundation's revenue is declining, too:
1 Q 2016 2 Q 2016 3 Q 2016 4 Q 2016
(Source: CNN Money, TheStreetSweeper)
*2. Misunderstood “News”
Foundation's stock has recently flown despite the complete lack of meaningful news (here) and its recent release of another disappointing financial report.
Along with lower revenue and higher losses, gross margins have plummeted ... from 57% to 39%.
So why on earth have shares continued to levitate?
Well, Foundation's financial report chirped out old news regarding an August 2016 announcement that the company has applied for a combination Food and Drug Administration/Medicare process for premarket approval. And a website incorporated that old news (here) in a piece about Foundation’s financial report.
It may be that traders misunderstood this line: “advancing its universal, pan-cancer companion diagnostic assay through the FDA and CMS parallel review process to decision and launch in the second half of 2017.”
But Foundation actually said that the parallel review process will end in the second half of 2017, they think. That’s starkly different from a commercial launch … which would come far later after studies and other FDA requirements.
Bottom line: old, misunderstood “news” likely helped levitate the stock price.
*3. Stock Pump
Another factor in Foundation stock's rise may be promotional material spun out by Paul Mampilly's Extreme Fortunes newsletter sporting a $2,999 subscription rate.
Mr. Mampilly's newsletter sent out a recent teaser:
Stockgumshoe figured out the promoted stock is Foundation. The author wrote a rather cautionary piece last month, adding "so in these kinds of situations it’s always important to be a bit wary."
The San Diego Consumer's Action Network issued a scam alert in October 2016 focused on Mr. Mampilly. The consumer network says Mr. Mampilly has worked on various advisory newsletters, and is associated with notorious Bill Bonner's investment newsletters that promote expensive and risky investment propositions.
So the stock apparently popped on both Foundation's old, misunderstood news and Mr. Mampilly's hype. Meanwhile, real news of a political nature may chop the stock ....
*4. Trump Trample
President Donald Trump warned in a tweet Tuesday morning that his new healthcare system will increase competition in the medical sector:
That means Foundation may be a little less risky as long as it is not making money. But the risk gets whipped up if the company begins to make money. Because then it would likely need to lower prices to keep up with the competition in this new environment.
And here comes the new deal ...
*5. Released: New Anti-Obamacare Plan
Now President Trump's campaign promises to get rid of Obamacare are becoming reality. On Tuesday, March 7, Republicans released their healthcare proposal to replace Obamacare.
One co-author stated that the new plan will "repair damage" to the state insurance markets caused by Obamacare.
So how does that plan increase investors' risks?
To Foundation's misfortune, the plan likely will halt what some have observed as the Obamacare-fueled assault on insurance companies. Under the new plan, insurance can be expected to pick up less of the cost of drugs and tests ... ultimately a threat to Foundation's already weak financial condition.
*6. Can't Match The Competition
Meanwhile, Foundation falls miserably short of competitors such as Myriad Genetics (MYRD) and NeoGenomics (NEO).
Though Myriad stock is little more than half of Foundation's stock price, Myriad is positive in operating cash and earnings. And Myriad revenue is 6 times greater.
Also, rival NeoGenomics stock is about one-fourth the price of Foundation. Neo's losses are 1,448% less than Foundation's losses. And considering NEO's most recent 9-month financial report, Neo's revenue for nine months outdistanced Foundation's yearly revenue by $67 million.
*7. Price Forecast: Dreary
In this exuberant market, ever-optimistic analysts are predicting something surprising. They predict Foundation's stock will plummet.
They believe the stock price will plunge as little as 20% to as much as 52%.
(Source: CNN Money)
*8. Analysts Dish: Downside Looms
Foundation has gotten plenty of negative notes from analysts. On Tuesday, the stock received a rare upgrade from "Sell" to "Neutral."
Here's a breakdown of recent analyst actions:
- 3/7/2017-Janney Montgomery Scott Upgrade from a “Sell ” rating to a ” Neutral” rating.
- 11/3/2016-Benchmark Co. was Downgraded by analysts at Benchmark Co. from a “Buy ” rating to a ” Hold” rating.
- 8/4/2016-BTIG Research Reiterated Rating of Hold.
- 8/3/2016-JPMorgan Chase & Co. Reiterated Rating of Hold.
- 5/4/2016-Leerink Swann Reiterated Rating of Hold. (Source: Market Exclusive)
In fact, Foundation is rated "Hold" overall. The average target price is just $20 .... that points to a potential downside of around 40%.
*9. RSI: Pristine Positioning
Finally, Foundation's relative strength index or RSI is a steamy 85-plus. That's much higher than the 70 mark, a technical touch point widely considered an indication that a stock may have risen too much and could quickly reverse and drop.
(Source: Yahoo Finance)
While this company is better than most TheStreetSweeper covers, we believe significant downside looms ahead.
First, Foundation's fundamentals have a lot going against them, ranging from rising losses to tough analyst ratings to lagging behind the competition.
Second, even if Foundation ever became profitable, the stock still couldn't justify such a high price. The price would have to be more comparable to competitors.
Third, even if the company does get the FDA/CMS approval, the new anti-Obamacare package poses a major risk. Under Obamacare, doctors ordered tests and those costs were fairly easily passed on to insurance companies.
The new healthcare plan is expected to allow insurance companies to back off on paying some costs ...that's why insurance company stocks have jumped since election day. Companies such as Foundation will likely lower prices as everyone grabs at the same shrinking dollars. A profit may be more difficult to make and sustain.
Foundation's just not a billion-dollar company...certainly not until it becomes profitable.
Foundation's biggest fans, analysts, have even devalued the stock. We see this stock pulling back 30% near-term.
* Important Disclosure: The owners of TheStreetSweeper hold a short position in FMI and stand to profit on any future declines in the stock price.
* Editor's Note: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies that they cover. To contact Sonya Colberg, the author of this story, please send an email to [email protected]