Revealed: How a Massive Government Investment is Going to Pay of Big for One Tiny Company in 2015

Fri, Nov 29, 2013

Smart Massive Investment

massive capital investment$50 Million in Government Grants
Is About to Pay HUGE Dividends For One Tiny Company

Revealed: All the Elements of the BIGGEST Small-Cap Success Story of 2015

 

It has a great chance at being the biggest venture capital story of 2015.

It’s a technology backed by $50 million in government grants.

It’s already used by 13,000 customers with thousands more to come.

It’s in the absolute right sector. It’s targeting one of the biggest, consistent booms in North America.

It’s backed by the right people. A Ph.D. engineer, a top salesman, and executives with proven track records.

It has the optimal mix of safety and capital appreciation potential. Equivalent of risking $1 to make $11.

And it’s all coming together at the right TIME. The company has had a few recent troubles which have kept the share price of a great company with a great product relatively undervalued.

In the next few minutes you are going to see all the details as you learn about a small-cap company that has:

Explosive growth potential
Backed by a management team with a real track record of success
Uniquely positioned to grow in North America’s steadiest growth markets
Has a product that makes its customers a fortune
And much, much more…

But before we go any further, I want to ensure that you read the disclaimer after you’re done reading this.

I do think this is a great story with amazing potential, but you must know I’m also an investor. As they say, I eat my own cooking. So you should correctly assume I am heavily biased.

With that made clear, let’s begin.

Revealed: America’s Stealth Super-Boom

Chances are you’ve seen this boom firsthand. But you probably never realized the kind of growth going on behind the scenes.

Don’t worry, most investors haven’t spotted it either.

After all, the markets are jumping from one hot sector to the next. Ever since the 2008 crash almost every sector has caught the market’s fancy. From gold to biotech to banks. Everything has soared.

In fact, the worse an investment class did in the 2008 meltdown, the greater it has done since then.

But with the S&P 500 up over 150% from its 2009 lows, investors are starting to reward consistent and reliable growth once again.

massive investment

And to find consistent and reliable growth they’ve recently been focusing on America’s stealth boom. It’s something that has been growing alarmingly steadily for years. And due to the ongoing demographic shift to an older population, it’s about to accelerate even faster.

It’s dentistry and dental products.

Sounds boring, I know. But it’s really not that boring for safety-minded investors.

Dental Economics magazine says a part of the dental industry is going from “gradual erosion to extraordinary growth.”

But who outside the dental industry reads Dental Economics?

Heck, probably not many in the dental industry read it.

And that’s exactly what is playing a large part in creating the opportunity here.

Media Loves It, Customers Love it, Investors Will Love It

That’s where a small company like LED Medical Diagnostics (TSXV:LMD or US:LEDIF) comes into all of this.

LED is the developer of the VELscope oral screening device.

The VELscope is an amazing innovation. It’s simple. Easy to use. Effective. Profitable to deploy. And most importantly, it’s already in use. Which is something a lot of medical device companies as small as LED can say.

On the surface, the VELscope is really simple to understand.

Basically, it uses a special LED light to allow a dentist or medical technician to scan someone’s mouth to detect potential oral cancer.

The potentially cancer cells and tissue show up as a different color than healthy cells and tissue.

Of course, the technology behind is a bit more complicated. But for our purposes, and the customers’ purposes, it’s really simple.

Dr. Oz, who averages about 2.9 million daily viewers, featured the VELscope back in 2011 (link to the video here).

The Doctors, another daytime medical show, also featured the VELscope (link to video here).

Again, it’s truly an amazing product. The audiences “oohs” and “aaahs” say it all.

But what’s more important is it’s hitting a market ripe for growth.

Oral cancer is one of the most dangerous types of cancer. In fact, it is one of the top 10 cancers in the country.

There are more than 34,000 cases diagnosed per year in the United States and more than 400,000 worldwide.

Oral cancer normally detected is through visual inspection by a dentist.

This visual inspection is insufficient to properly detect the cancer early enough. As a result, about two thirds of oral cancer are detected in Stage III or IV. This results in a 45% mortality rate within five years.

Dentists are often legally liable for oral cancer screening too. The cost of the settlements for cancer that was missed during their visual inspections averages more than $800,000.

Those at risk for oral cancer are nearly the entire population too. There are 85 million Americans over 40 who either drink or smoke. And young people are more at risk than ever with the spread of the HPV virus, which is now known to be closely correlated with oral cancer. So there’s a very big market for the VELscope to be used on.

Clearly, oral cancer is a serious problem and overdue for an innovation. The VELscope is that innovation.

Since VELscope helps dentists discover cancer far earlier than they could with the naked eye. As a result, the survival rate of oral cancer detected with it is 55% to 95% than the traditional visual inspection according to LED’s data.

The VELscope has been under development for nine years. Funding its development has been a number of government, non-government organizations (NGO), and investors.

Combined the British Columbia Cancer Agency, National Institute of Health (NIH), and other public research agencies have put $50 million into its development.

Furthermore, private investors have put up $20 million in capital over the years.

Together that’s more than $70 million to get the VELscope to market. And it’s all starting to pay off big.

Now, the question is what about the customers?

At the risk of being way too excited, that’s where the VELscope really brings the value.

Dentistryiq.com reports the VELscope can be purchased for about $2500.

The purchaser can then use it to do pre-cancer screenings and charge patients a nominal fee of $10 to $15 per visit. A fee that’s small and most customers are happy to pay given the situation with oral cancer, HPV, etc.

That means for $2500 up front, a dentist office could easily add $10,000 to $20,000 to its annual bottom line with the VELscope.

Everybody wins. Dentists, patients, LED…everyone.

That’s the real key to a successful business.  And why you should be surprised to know LED has already sold more than 13,000 VELscopes. And they’re already in use around North America.

But again, all that’s not even the best part.

LED Medical “Crossing the Chasm”

Don’t get me wrong here, that’s all great. The VELscope and everything in the market for it. It’s enough to make a solid winner. Especially for a company with a $30 million market cap like LED. But keep in mind it’s just part of the equation here.

LED has recently brought on a new management team to really unlock the value of the VELscope and build a large business around it. We’ll get more into their biographies in a bit, but for now you must understand is that these are medical and dental equipment industry salespeople with a long track record of success. And they’ve taken over LED as their vehicle because it offers something very few others can, a foot in the door at more than 13,000 dentist practices.

They plan to use the VELscope as the foot in the door to most dental practices. Because once the dentists are satisfied with the VELscope – think of a dentist who has been using it to help patients discover potential cancers extremely early and increase his bottom line – LED’s new management and personnel can sell many more dental products to them.

But I’m getting ahead of myself. Back to the VELscope and the potential market for it.

Consider this.

The key make or break for almost every technology related company (from Internet start up to medical devices) is what’s called “crossing the chasm.”

In his book, Crossing the Chasm: Marketing and Selling High-Tech Products to Mainstream Customers, Geoffrey Moore states:

The point of greatest peril in the development of a high-tech market lies in making the transition from an early market dominated by a few visionary customers to a mainstream market dominated by a large block of customers who are predominantly pragmatists in orientation.

That means most products never make it past the “chasm” between a small market of early adopters and the mainstream market. The latter being where the big money is made.

Here’s the chart of what crossing the chasm means for tech products like the VELscope:

LED and the VELscope is right at the point where it just crossed the chasm.

The early innovators have already bought it and started using it. Early adopters have too.

Now there are 13,000 of them in use. It has it’s “beachhead” in the mainstream dental products industry.

And with the publicity the product has brought on TV, print, and other media, it’s on its way to crossing into the majority very quickly.

From an investor’s perspective, this is also the best time to invest. It’s the time when revenues and earnings are about to take off and share prices quickly follow.

The company has already started making all the moves to make it work.

LED publicly announced a few weeks ago it was preparing to unlock the potential of the VELscope:

As of Nov. 1, 2013, the global distribution agreement for the VELscope Vx product line between DenMat Holdings LLC and LED Medical Diagnostic Inc.’s wholly owned subsidiary, LED Dental Inc., is no longer an exclusive agreement for North America.

This means there is no long one exclusive seller of the VELscope. That opens the doors for the company to achieve what it’s trying to – build a large dental supply network on the back of its beachhead product.

And there couldn’t be better people in position to lead the explosive growth which comes after this critical juncture.

                                                   Can Lighting Strikes Twice?          

Leading the way is a new management team.

Peter Whitehead, the scientist who spearheaded the development of the VELscope over its decade of development, used to lead the company. Now he has been put back in the lab and focus on research, development, and special projects.

Taking over the reins as president and CEO is Dr. David Gane.

Gane has been in the dental supply industry for a very long time. He has been at all levels of corporate management include CEO, President, and VP.

He was formerly the head of dental imaging for Carestream Dental. Carestream is a part of Carestream Health which was recently offered to be sold for a reported $3.5 billion.

The third member is Lamar Roberts. He is the one charged with exclusively with getting the VELscope in as many dentist offices as possible and building additional sales streams alongside that one.

In short, these guys are deep into the dental supply industry and have been for a long time.

That is crucially important to tap into a sector that has years and years of steady growth ahead of it.

Consistency Counts

The final thing about LED, the company, is the sector it’s in.

The dental sector is one of the most consistent, lucrative, and growing industries in the world.

The Industry Growth Group estimates the global dental equipment and consumable industry to be a $26 billion per year.

The group also estimates annual growth of 6.8% each year. That would mean the industry will double again in the next 10 years.

That’s massive growth for a relatively mature industry like dentistry. And the big catalyst for it will be product innovations.

The VELscope is a great example of one of the products which can drive the industry’s strong growth.

More importantly, the dentistry industry, including dental equipment, is remarkably consistent.

If you look at some of the largest dental products companies including Dentsply (XRAY), Patterson Companies (PDCO) and Henry Schein (HSIC), you’ll see companies with consistent revenue and earnings growth and that have rewarded their investors with consistent returns.

The chart below shows these companies have been some huge winners over the last decade:

Note the chart begins in March 2002, while the tech bubble was still bursting

These three stocks have since returned 110%, 180%, and 450%.

Meanwhile, the S&P 500 is up only 50% over the same time period.

Even during the height of the market meltdown, the dental industry stocks held up extremely well relative to the rest of the market.

The reason – consistency.

We believe the consistency of the dental industry combined with the growth of a product innovation and company formed the way LED Medical is perfectly suited for the current market.

That’s especially important right now.

Because some very “smart money” is betting big on LED. And it doesn’t take long to see why.

The “Bear Market Test”

LED Medical Diagnostics shares trade on both the TSX Venture Exchange and the OTCQX market.

Both of these markets are exclusively for small, developing companies.

Most of the companies never develop into anything at all. And with the markets at nose-bleed highs, there isn’t much interest in the small companies which dominate these exchanges.

That’s why LED is really starting to set itself apart. And it’s a tremendous advantage to potential investors looking into LED right now.

Just look at the bear market for the TSX Venture Exchange has been through.

The chart below tracks the entire market value of the TSX Venture:

As you can see, the slide has been alarmingly steady since peaking in early 2011.

The reasons for this are many. The TSX Venture is largely a commodities-driven exchange.

The main reason for the slide, however, is investors’ risk tolerance. Right now investors don’t want more risk. The S&P 500 are up more than 150% since 2009. When something goes up that fast, most investors see nothing but a major fall. It’s natural.

It may be right, it may be wrong. We tend to believe it’s the latter (When was the last market crash everyone saw coming? Right, never.).

But it doesn’t matter, investors want less risk.

LED, given its growth position and the consistency of the industry it’s in, offers the potential for risk-conscious investors who also want the chance to earn much higher returns than normal.

But that’s not all. LED was also able to attract some large financing for its aggressive growth.

In the past six months it has completed two private placements to top off its capital reserves.

Last June LED completed a $2.55 million private placement. Its shares went on to triple from there. Then LED completed a $5.25 million private placement.

Altogether, that puts about $7 million (after associated fees, etc.) in the treasury for LED.

More importantly, it’s a major indicator of the market is starting to realize the true potential of LED.

The chart below shows how much financing opportunities have evaporated from the TSX Venture Exchange since it turned in 2011:

The average monthly financing activity was $832 million in 2010. It rose to $913 million in 2011.

Then it all turned. In 2012 the average monthly financing deals total $494 million.

This year the average monthly financing total has fallen to $308.

That’s a drop of more than 66% in average financing activity. And it shows perfectly what a company that can raise $7 million in capital has the potential to do. Bust most companies simply can’t attract any capital at all.

The other thing to notice is what I would call the “bear market test.”

You see, the $2.55 million financing was priced at 15 cents per share. It included a full warrant (the right to buy an additional share) with an exercise price of 20 cents per share. The minimum required holding period for those shares is four months.

As a write, LED shares are trading for 45 cents per share.

So of the 17 million shares issued (and 17 million deep in-the-money warrants), they are sitting on a gain of 367%.

That’s a huge gain in a bear market. And it normally would have shareholders running for the exits. It’s a bear market after all.

But LED shares have actually gone up when the hold period expired for the shares.

There are very few TSX Venture stocks that this has happened to.

It’s a very encouraging sign too. Because it says the shareholders know what they got with LED. They’re not looking for a 367% gain. They want something that absolutely massive.

But it doesn’t stop there. The timing couldn’t be better to be picking up a few LED shares.

When Bad News is Good News

As mentioned above, the VELscope has been an astounding success. Having 13,000 devices sold and in use is quite an achievement.

LED as a company, however, is not nearly as successful.

In the last two quarters LED has shown up very poorly.

For the second quarter of 2013 the company posted a loss of $2.2 million.

The third quarter wasn’t much better. LED posted a loss of $1.95 million for the quarter.

Again, this type of news has weighed heavily on LED shares. It has kept a lid on them. But that lid won’t be there much longer.

So this is all bad news.

But if you see the future path LED is headed down, it’s good news.

For us, that’s very good news.

A Speculator’s Dream: Risking $1 to Make $11

The way it looks LED looks fundamentally undervalued based on its VELscope sales.

If we add in the expected growth, management’s proven ability to use the company’s asset base to expand rapidly, the consistent industry growth, and the potential for a significant revaluation of LED as a company by the market, we have some massive potential here.

That’s where we get to valuation.

The potential for LED to grow sales using the VELscope as its beachhead is nearly unlimited.

We’re talking $50 million, $100 million, or more in the next year or two.

At $50 million in sales, using comparable industry ratios, we can estimate a $50 to $100 million market cap for LED. That would put a price (assuming 100 million shares outstanding after exercise of warrants) between 50 cents and $1.00 per share.

At $100 million in sales, it all doubles. That would put LED shares between $1.00 and $2.00.

At $150 million in sales, the numbers get ridiculous. We’d be looking at a reasonable valuation between $1.50 and $3.00 for LED shares.

So taking the middle estimate, leaving the best-case scenario on the table, and assume $100 million gross sales, we’ve got a fair valuation between $1.00 and $2.00 per share.

Assuming the low-end of that range, again being conservative, we have a 122% winner on our hands.

But as the company grows and if it’s able to achieve its growth goals, we could be looking at a gain as high as 567% ($3.00 per share/45 cents per share current price).

On the downside, because we always consider the risks, everything could just not work out.

It could be the management team’s worst failure to date.

And with the VELscope and a struggling dental supplies business, we could see shares cut in half from here.

So the worst case scenario is a 50% loss from here.

That’s a tremendous mix of risk and reward.

You’re basically risking 50% to make an expected 166% with the realistic potential of making as much as 700%.

That’s risking $1 to probably make $3 and possibly make as much as $11.

In other words, LED is a truly excellent opportunity.

Action Review

It will likely take a year or two to play out completely. Real companies like these are not built overnight.

However, for an investor looking for a big win with a high probability of success, LED has amazing potential.

Recommended action: Buy LED, plan to hold for 12 months, and look for gains of between 166% and 700%. Set your stop loss at 50%.  

Good investing,

 

Editor
Contrarian Insights

 

Disclaimer: I have received NO compensation for the preparation of this research. It is 100% independent.

However, it is imperative to understand that I do eat my own cooking. So you must assume I am heavily biased in my opinion of LED Medical Diagnostics because I own shares in the company. 

And you should keep in mind any time investing in a penny stock or small-cap stock (LED happens to be both), you must assume maximum risk and any investment may be lost completely.

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