Buy, Sell or Hold: Why Now is the Time to Buy Bacterin International Holdings Inc. (AMEX: BONE)

Games

Posted on March 29, 2012 at 06:00 AM EDT

Getting old isn't all it's cracked up to be.

When I was young, dumb, and all too daring, I took chances that in hindsight were pretty boneheaded, and I'm still paying for them.

Once I even jumped off the roof of my grandmother's house, thinking I was going to catch the storm drain as I dropped by. Why I believed that I'm not sure.

Instead, I ended up in the hospital needing five reconstructive surgeries that included bone grafts donated from my own hip.

In fact, today I still suffer from a dull ache in the same hip, which is a decent trade off because I can still use my arm.

Fortunately, medicine has come a long way since the day I stood on that roof eyeing up that gutter.

Today someone in the same situation would turn to a biotech company to provide the material needed for that surgery, not a human donor.

This is one of the reasons I like Bacterin International Holdings Inc. (AMEX: BONE)

Breaking Down Bacterin Bacterin designs, manufactures and markets revolutionary dermal and skeletal health products, bone graft material, biological scaffolds and related medical devices.

They also design and produce bioactive, anti-microbial coatings for implantable devices that act as barriers to infection.

Their total potential markets in the United States alone are estimated at over $8.5 billion. Of that, Bacterin has gained a small but growing percentage.

But here's what more impressive:

Bacterin consistently generates gross margins of more than 40% and maintains about an 80% surgeon retention rate.

Put simply, they make a product that surgeons like.

In fact, the number of hospitals that now use their products is climbing nicely. Bacterin seems ready for a breakout year.

That's true even though the market has hammered the stock price since Bacterin released its quarterly results.

Personally, I love to find stocks with expectations of real organic growth where the market has just sold them off. I find "sell the news" type of events to be good places to go shopping.

What I see in Bacterin is a company that is growing at a fast pace, hitting their revenue targets while shrinking their losses, and taking write-offs due to one-time events.

In cases like this, when the market has sold shares off hard, I like to use the discount to open my position.

Biotech stocks are historically volatile, so fundamental points are important.

Bacterin is a company that is growing its customer base, its revenue, and its footprint in hospitals, with new products in the pipeline. It's not a single product or drug company.

The anti-microbial business, while just getting started, could give a much larger company a serious entry into this space with minimal investment.

Bacterin is seeing much higher volumes and analyst coverage as well, and that is a great tell for a potential buyout by a larger company or competitor.

Key Points on Bacterin International (AMEX: BONE)

Earnings Highlight
Bacterin Has New Analyst Coverage
High Growth Rates Expected
Possible M&A Target

Bacterin increased it revenue by 72% between fourth quarter 2010 versus fourth quarter 2011.

"We increased our revenue on a quarterly basis by 21% sequentially, 72% year-over-year, and 96% for the full year 2011 over the full year 2010, showing accelerating progress," said Guy Cook, Bacterin's chairman and CEO.

They also increased the number of hospital accounts from 484 in Q4 2010 to 616 in Q4 2011.

When I am following a small growth stock, I am looking for increases in clients, and an increase in revenue from those new clients.

I also realize that high margins will get compressed during windows of organic growth.

One of the aspects I like about Bacterin is that in just the last two months they have garnered coverage from three analysts, with two giving an outperform rating. There are four analysts currently covering the stock with an average price target of $5.88.

Currently trading at $2.15 a share that means BONE has the potential for a 173% gain if it reaches the consensus targets.

The company has doubled revenue every year the past few, with expectations of it doubling yet again. This is what I think of as the fat point in the growth curve for small companies.

In the biotech industry, critical mass is the key aspect in earning long-term rewards.

A company may have only one product, and will need to invest the majority of its funding in research and development to bring the next blockbuster product to market.

Bacterin has reached the point in the growth curve where they can focus on bringing new products to market. Their growth shouldn't be stunted in the near term.

Background on Bacterin Bacterin International Holdings Inc. is headquartered in Belgrade, MT. The company had over 110 employees at last count.

Action to Take: Buy Bacterin International Holdings Inc. (AMEX: BONE) (**)
The company is growing and expanding in the current economy. I like that the sell side of the market is starting to take notice.
The company is in that window where revenue is ramping up as they bring new products to market. Their number of clients is growing significantly, giving them expectations of additional growth, as their products are put to work.
The market has hammered this stock, since the earnings were released. I like this type of sell-the-news report. It gives us a great chance to buy into a growth story without paying the same equity prices everyone one else was a week ago.
Let's look to be patient and build up a position in this stock slowly with out scaring it. The company has nice volume for a patient investor.
Let's pick up 50% of our position now, near current market prices using a limit order. We don't want to jam the stock with aggressive market orders as the market flushes out the last of the ready sellers. We can put in two more limit orders at 5% and 15% below current prices.
This will give us a great chance to add more shares at lower prices over time, while building at least half a position now before risking that the price runs away from us.

(**) Special Note of Disclosure: Jack Barnes has no interest in Bacterin International Holdings Inc. (AMEX: BONE).

About the Writer: Columnist Jack Barnes started his career at Franklin Templeton in 1997. He started out in the company's fund-information department - just as the Asian contagion infected the Asian tiger countries.

Barnes launched his own shop, RIA, in 2003, just as the second Gulf War was breaking out. In early 2006, after logging a one-year return of nearly 83%, Forbes named Barnes the top stock picker in its "Armchair Investors Who Beat the Pros" competition. His two audited hedge funds generated double-digit returns in 2008.

Barnes retired to the beach in the summer of 2009, and continues to write from there. He's now the author of the popular blog, "Confessions of a Macro Contrarian," and his "Buy, Sell or Hold" column appears in Money Morning on Mondays. In his BSH column last week, Barnes analyzed Hecla Mining Co. (NYSE: HL).

News and Related Story Links:

Money Morning News Archive:
Previous "Buy, Sell or Hold" Features
JackBarnes.com:
Confessions of a Macro Contrarian

Tags: (AMEX: BONE), bacterin, bacterin international

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