The Red Flag Alert Spots a Surging Med-Device Company

Welcome to another edition of the Red Flag Alert... Before we get going, I'd say, "read my lips," but since that's not possible, read the words I'm typing: Unless otherwise stated, the Red Flag Alert does not reflect a deep dive. These data-driven ideas are sourced from various screens and lists from my friends at […] Not rendering correctly? View this e-mail as a web page [here](. [Empire Financial Daily] The Red Flag Alert Spots a Surging Med-Device Company By Herb Greenberg --------------------------------------------------------------- [GM's next big release has no engine and no wheels]( In a shocking move, auto giant General Motors is venturing into a whole new space (hint: NOT electric vehicles). While industry analysts see this as a way of catching up with Tesla, the bigger reason could be because this new space is getting the full backing of the current administration and could mean huge tax credits in the future. Or it could just be that this fledgling industry has more scope than the declining auto industry. Whatever it may be, this move could put GM into the same bracket as Apple, Google, Microsoft, and Amazon. [Get the details of this massive trend here](. --------------------------------------------------------------- Welcome to another edition of the Red Flag Alert... Before we get going, I'd say, "read my lips," but since that's not possible, read the words I'm typing: Unless otherwise stated, the Red Flag Alert does not reflect a deep dive. These data-driven ideas are sourced from various screens and lists from my friends at Kailash Concepts ("KCR") based on data that suggests these companies are likely to underperform the market. Put another way, with thousands of public companies, there are better ideas out there... And if those I mention are in your portfolio or shopping list, make sure you are fully aware of what might trip things up. Going forward, I intend to publish the Red Flag Alert when I have ideas I believe are worthy of publishing, rather than publishing for the sake of publishing... sometimes it'll be one idea, other times it'll be more. Sometimes it'll be once a week, other times maybe once a month. Today, it's just one. The Red Flag Alert just spotted Penumbra (PEN), a $12 billion medical-devices maker... The company manufactures catheters to remove blood clots and treat stroke victims. Somebody mentioned this to me the other day in passing. My first reaction was that this had been a big name among activist short sellers a few years ago... and the stock got clobbered. There were safety concerns, and the company wound up recalling one of its products. I hadn't thought much about it since. So imagine my surprise when I took a look and saw that the stock – after ultimately having lost half its value – has clawed back all of those losses, and then some... nearly tripling from its lows of less than a year ago. Serendipitously, I recently took a look at KCR's list of what it regards as possible large-cap earnings manipulators for May, and among the two dozen names was Penumbra... Keep in mind, the KCR list uses quantitative algorithms, and the list I'm pulling from highlights names that score toward the very bottom of its rankings. I confirmed the KCR data by running Penumbra through my KCR-powered QUANT-X System, where it scored nearly off the charts on several known earnings manipulators, with a so-called Manipulator Score of 96% out of 100%. (The higher the number, the worse.) Again, this is a single month, but its "M-Score" has been ticking into the danger zone in January and has consistently been getting worse... as its net income has been growing. Digging just a little deeper, I was struck by four things... The first is competition. The company has plenty of it – from the major device makers, as well as upstarts. The number of competitors, especially from newcomers, is increasing, which is something to pay attention to if earnings quality gets stretched. (For its part, management says more competition results in a "more disjointed [market, which] makes it easier, not harder.") I know what he's trying to say, but in general, more competition is not a positive. And when it comes to the vein-clot device – currently the biggest part of the business – as one insider told me... Tools that don't need capital equipment are typically good winners. There's plenty of room and players in the market. I don't see a finish line, just a big field with lots of activity! The second thing I noticed was the growth of the broader market... Asked on the most recent earnings call if the market is growing, CEO Adam Elsesser said... It's hard to quantify really market growth across the board versus share right now. It's easier to define share. So we're optimistic. Let's wait a few quarters to see. In my opinion, "wait a few quarters" is generally not the correct answer to that question unless the current answer doesn't fit a desired narrative. I'd think every CEO of every company knows the state of their market and where and how they fit. --------------------------------------------------------------- Recommended Link: [Overheard at Apple's Secret Meeting...]( A thousand people attended... NO CAMERAS were allowed! One invitee said every iPhone was wrapped with "tamper-proof stickers" to prevent photographs. At the event, Apple unveiled a device that "could eventually replace mobile phones." Apple codenamed the device "N421"... But Michael Robinson calls it "iPhone Killer." To see how you could potentially profit from iPhone Killer... [Click here before July 26](. --------------------------------------------------------------- The third is the amount the company is spending on research and development ('R&D')... At Penumbra, R&D spending as a percentage of revenue has been both erratic and over the past year, it has been falling. The real story is in the chart below... At last count, Penumbra was around 8.3%. By contrast, its closest competitor, Inari (NARI), is closer to 19%. That's an enormous spread. Edwards Lifesciences (EW), which is a pure play on heart valves – has consistently spent between 17% and 18% for years. It's not encouraging to see R&D as a percentage of sales falling while competition is rising... and especially if its direct competitor is spending roughly double. It smacks of a company that is pulling levers for the sake of making margins and earnings look better. I'm not saying that's what Penumbra is doing... I'm saying it's an obvious tool management of any company has to use as a way to manage earnings. The fourth is patents... Penumbra says it has 16 patents that expire by 2025 and 2026, with 13 related to the company's two top products. What's more, one of those patents covers 19 separate products. I detest discussing anything related to patents because there are so many nuances amid the complexities. And to be fair, Penumbra has plenty more patents where those others came from that expire years from now. But the expirations are laid out in its SEC filings and the number tied to a single patent is right [here]( on its website. The question investors might want to ask is whether any of the impacted products are significant enough that the company would be vulnerable if generic "medtech" companies filed applications to manufacture the same products. In theory, that would put pressure on sales and margins. Or, have they been replaced by newer, better products? For obvious reasons, I recommend avoiding shares of Penumbra. If you have a different opinion, you know where to find me... Are you familiar with the company? Let me know what you think by [clicking here](mailto:feedback@empirefinancialresearch.com?subject=feedback%20for%20herb). Regards, Herb Greenberg June 13, 2023 [Get a 60-day, 100% money-back trial to Empire Real Wealth by clicking here.]( --------------------------------------------------------------- If someone forwarded you this e-mail and you would like to be added to the Empire Financial Daily e-mail list to receive e-mails like this every weekday, simply [sign up here](. © 2023 Empire Financial Research. All rights reserved. Any reproduction, copying, or redistribution, in whole or in part, is prohibited without written permission from Empire Financial Research, 1125 N. Charles Street, Baltimore, Maryland 21201 [www.empirefinancialresearch.com.]( You received this e-mail because you are subscribed to Empire Financial Daily. 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