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Our digital Institutional Small & Mid-Cap Bulletin for professional subscribers offers powerful content featuring a pair of companies not often covered by sell-side analysts. Two stock highlights, one geared toward near-term investors and the other for risk-seeking, long-term investors, offer readers current, unbiased recommendations with in-depth analysis. These monthly featured stocks are among the approximately 1,800 that appear in The Value Line Investment Survey® — Small & Mid-Cap. Tap into Value Line's equity coverage, where you'll have access to complete content, and the ability to create watchlists and alerts based on the featured companies offered in this exclusive bulletin.

 

September 2017

 

 Near-Term Investment

Care.com (CRCM)

By Jeremy Butler, Editorial Analyst

Care.com (CRCM) operates an online market for finding and managing family care. It helps families find child, senior, special needs, and pet care, as well as tutors and housekeepers. Care.com also provides employment opportunities for caregivers and helps them with their taxes and finances (these individuals  are not Care.com employees). In addition, the company finds caregivers for daycare centers, nanny agencies, pet sitting companies, and homecare agencies. Launched in the United States in 2007 by founder and CEO Sheila Lirio Marcelo, Care.com is now the world’s largest online marketplace for finding and managing family care. It has 25.2 million members (clients who sign contracts with Care.com) in 20 countries. In 2012, it launched its services in Canada and the United Kingdom, and in 2013 it acquired Berlin-based Besser Betreut, the largest online care portal in Europe. In January, 2014, the company went public with 30 million shares priced at $22.50 a share. It is based in Waltham, Massachusetts, and has about 415 employees (mostly marketers and online administrators). The typical Care.com client is a dual-income working couple with children and/or an aging parent in the household. Their median family income is $65,000. According to the U.S. Census Bureau, in 2016, there were 46 million such households in the United States.

How It Works
Signing up for Care.com is free for those looking for a caregiver. (After creating an account, consumers create a job posting that caregivers respond to. Then, the consumer can review profiles, hire, and pay the caregiver through the Web Site, which contains the online payment portal HomePay.) Those seeking a higher level of service can pay a monthly subscription fee to gain access to features like a messaging service to talk directly with caregivers and tools such as third-party background checks. Likewise, paying caregivers are given priority notification of jobs, as well as other perks. In addition to these subscription revenues, CRCM makes money by taking a brokerage fee out of the payment for services that clients arrange through Care.com, though management works to convert all members into premium subscribers.

The company also has contractual arrangements with employers to provide care services to their employees. Such employers include many Fortune 500 companies. These services are an additional benefit that the employer can give to its workers to engender greater loyalty and productivity. It helps employees cope with unexpected family disruptions by enabling them to continue working while a Care.com caregiver helps their family member.

How Care.com Has Grown
The market for care is large, fragmented, and growing. More couples require two incomes, and, as a result, the need for child care has increased. In addition, an aging baby boomer population means that more seniors are requiring care, and many prefer to remain in an extended family home, rather than going into a nursing or retirement center. Too, more families are going away for shorter (long weekend) vacations (rather than an annual two-week trip) as a result of a perceived  need to stay in touch with work. This impromptu type of mini-vacation can result in a scramble to find pet care at home. Care.com specializes in providing pet sitters who can care for the pet at the client’s home, rather than having the pet placed in a boarding shelter. The ease, convenience, and breadth of its services has increased the demand for Care.com’s offerings.

After going public in 2014, CRCM started to achieve critical mass, as it garnered the financial wherewithal to acquire a range of small  “mom & pop” caregiving businesses at home and abroad. These factors, combined with increased online marketing and promotional spending, enabled the company to garner greater name recognition. This was critical in such a fragmented industry. Moreover, unlike other caregiving companies that simply act as brokers between clients and caregivers, Care.com has been able to retain its clients and caregivers by providing a wide array of services and premium offerings. Indeed, CRCM’s retention rates (72%) are high compared to other caregiving entities, which average around 64%.

The Financials
Sales have climbed from $8.5 million in 2012 to $162 million in 2016. Meanwhile, annual bottom-line deficits have been diminishing from $1.96 in 2014 (the first year CRCM posted a bottom-line figure as a public entity), to a deficit of $0.12 in 2016. For 2017, the company should be profitable, and we look for sales and share earnings of $185 million and $0.20, respectively.
Cash flow per share (net income plus depreciation and amortization) turned positive in 2016 at $0.12 a share, and we expect the figure to climb to $0.25 in 2017. As of July 1st, the company had $86.8 million of cash on the balance sheet, and current liabilities were only $36.8 million. CRCM has no debt, but as of July 1st, it did have $49 million in convertible preferred shares outstanding.   It should be noted that the preferred is close to being converted, and would (if converted) dilute share earnings by about nine cents a share.

Conclusion
Demand for CRCM’s services is increasing. Membership is climbing at a 4.7% average annual clip, as consumers with increasingly busy lives need access to caretaking services for their loved ones and pets that are reliable, efficient, affordable, easy to order online or via a mobile device, and can be called upon at a moment’s notice. Care.com fulfills all these requirements. The fact that membership is rising faster abroad suggests that the potential for CRCM’s foreign caretaking services is vast. Consequently, we envision Care.com expanding quickly over the next few years. At the recent quotation, we see limited downside risk in these shares.

 

At the time of the above article’s writing, the author did not have positions in any of the companies mentioned.

 

Long-Term Investment

PolarityTE (COOL)

By Kevin Downing, Editorial Analyst

PolarityTE (COOL) is an early-stage biotechnology company with a potentially groundbreaking system for the treatment of burns and wounds. The proprietary process (which is not yet commercially available) uses a patient’s healthy tissue to regrow his/her own skin and can theoretically be extended to other human tissues , such as bone, muscle, cartilage, blood vessels, peripheral nerves, and more.

The company, in its current state, was formed on December 31, 2016 through a reverse merger (this is when a private company acquires a public entity so that the private company can avoid the lengthy and expensive IPO process). A struggling video game developer, Majesco Entertainment, was purchased and used as a public shell company to provide immediate listing on the NASDAQ and access to relatively inexpensive public capital. The lead on the deal was famed pharmaceutical industry investor and billionaire Philip Frost. His involvement adds credibility to the operation, in our view.

The out-of-the ordinary structure was employed to give the founders more control of the company than they would have if the technology were sold to a venture capital firm. Too, the structure has left the founders with more capital, which they have used to entice highly qualified doctors to join the company. Finally, the reverse merger has allowed PolarityTE to launch trials and pursue commercialization much faster than a traditional IPO structure would have allowed since it can circumvent the time-consuming venture capital due diligence process.

Given that PolarityTE has pending patent applications for its SkinTE technology, specifics about how it works are somewhat lacking. Simply put, a small piece of healthy skin is taken from a patient with severe burns. The sample is shipped to COOL’s lab in Salt Lake City, Utah and processed into a paste containing stem cells and what is known as Minimally Polarized Functional Units. The  paste is sent back to the patient for application on the wound within 24-48 hours, which is generally before scar tissue has a chance to develop.

SkinTE has several advantages over the standard way of treating burn wounds, a skin graft. This long, painful, and arguably outdated treatment often results in scars and permanently disfigured skin. Too, the skin from one part of the body may not match other parts (e.g. arm skin applied to a face), leaving it unable to function as it should. PolarityTE’s process lets living skin essentially provide instructions to the new skin on how to function and what characteristics it should have and allows naturally occurring processes to develop the tissue. Since a patient’s own tissue is used, this approach reduces the risk that the body will reject it. Finally, the company describes the treatment as affordable and readily available, so it seems unlikely that obstacles related to inflated treatment prices will be relevant going forward.

On June 8th, the company released some promising data regarding the effectiveness of its treatment. A trial was conducted on 80 pigs, since their skin is the most like humans’ and is known to be predictive of human trial outcomes. In fact, it is believed that swine skin may be more difficult to regenerate than human skin, which is encouraging for the potential success of upcoming human trials. The study showed the first known cultivation of fully-functional regenerated skin. The wounds healed fully, did not leave scars, and the new full-thickness skin had hair follicles. The latter point is important because it illustrates the technology’s potential to reverse baldness. The company hopes to start human trials throughout burn centers across the United States by the end of September.

After that, the company should have a relatively easy path to commercialization. Since its treatments use naturally occurring organic materials, no regulatory approvals are required, just a registration with the U.S. Food and Drug Administration. The FDA doesn’t even necessitate human trials, but COOL will conduct them to ensure safety and reliability. At present, PolarityTE is aiming for initial commercial deployment in the first half of 2018.

When asked if a dedicated sales team would be used to sell on the open market, management explained that it will initially use its own network of doctors to communicate the technology’s benefits to decision makers, mostly found in large burn treatment centers. The company recruited half a dozen key doctors from Johns Hopkins and other top medical institutions , the most notable being Dr. Stephen Milner, the former superior of CEO Denver Lough at Johns Hopkins. Dr. Milner was also the former director of that renowned institutions’ burn center. He has assumed the new Chief Clinical Officer role at PolarityTE. His participation, along with the fact that Dr. Lough himself left behind a Johns Hopkins residency program and several job offers after investing 17 years in higher education schooling, demonstrates management’s commitment to, and confidence in, this endeavor.
Outside of burn centers, Polarity sees ample opportunity in the military space, owing to the “ever-present dangers of improvised explosive devices, suicide bombers, and artillery blasts.” It wants to develop a system where each soldier provides a skin biopsy before being deployed. Further down the line, COOL wants to use its technology to create other tissues in the body, including bone, muscle, blood vessels, cartilage, etc. This would allow the company to target a variety of markets, including wound care, regenerative medicine, organ transplantation, and cancer research.

Conclusion

Even though this young company is not generating material revenue and is operating with significant losses, its shares have surged in value since the beginning of 2017. Still, its market capitalization is only around $150 million, and that number could rise sharply if the treatment is found to be effective on humans and a clear path to commercialization is outlined. The backing of notable investors and doctors is encouraging and adds significant credibility to the operation. The short interest on these shares was recently below 10%, a relatively low figure for the biotech space, and another indicator of mostly positive market sentiment. This stock is certainly not for the faint of heart, but we suggest risk-seeking, long-term investors consider this equity for its outsized growth potential in the coming years.

 

At the time of the above article’s writing, the author did not have positions in any of the companies mentioned.

 

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