While fundamental analysis can be done on a spread sheet, trading is more art than science. Understanding of both, and how they interact, can be very helpful to generating large returns.
For example, I am quite confident that Catasys will be inking contracts with two major clients in the coming weeks and that their 4th quarter revenues should show big growth, demonstrating the Company has reached an inflection point in their business. Yet, the stock has been down lately, showing that my fundamental analysis is currently being overwhelmed by selling.
In other words, if you had bought Catasys at any time since the last earnings report, it’s likely the right move from a fundamental analysis’ point of view. However, you’d have been buying into a ton of selling, showing that traders are ruling the day in CATS.
Understanding the fundamentals is truly the key to finding long-term, multi-baggers. But, knowing when when the near-term trends are favorable, is helpful to deciding when you should back up the truck.
If you listen closely now, you might hear an annoying beeping noise; that’s me backing up the truck in CATS. Today. At $3.48 per share.
Fundamentally speaking, CATS is poised…
Catasys is at an inflection point in terms of the growth in their business. I have covered this closely in the past few months, so won’t bore you with details but feel free to read my prior posts. However, let me summarize.
- They are outreaching to 5x more potential enrollees since July 1.
- October billings showed a dramatic increase over September.
- Guidance for 2018 is for strong growth from their existing pool.
The bottom line here is that CATS is likely going to show growth in Q4 in excess of 30% over Q3. And, this trend of ramping billings should carry on throughout 2018, even without more contracts. Based on their current business alone, CATS is reasonably priced at less than 3X base-case billings.
However, the exciting part of Catasys is not the value play based on next year’s billings from existing business. Rather, it’s the massive potential upside, which comes from a combination of new customers and expanded relationships with their current customers.
This upside should start to come into clearer view in the not too distant. As the Company said on their last earnings call…
We are seeing as the three main drivers to our future revenue growth; number one, new contracts and subsequent launches; number two, initial launches of existing contracts; and number three, expansions within existing contracts…we have such strong momentum in all three phases and none of it is reflected in our guidance.
When you combine the ramp in business with the new business that is expected to come on line soon, the fundamental story behind Catasys becomes evident. This stock is poised for a big 2018.
Time for the traders to get on board…
Looking at the chart of CATS since their last earnings call, one would wonder what’s going on here. There is certainly a disconnect between the fundamental strength laid out by management, reinforced with October’s tremendous growth, and a weak share price, right?
Well, sometimes the fundamentals get trumped in the near term by trading. In this case, CATS is down for reasons related to financing, overall market strength, and new tax policies. Allow me to explain.
Earlier in 2017, CATS raised money at $4.80 per share. Investors in this deal are under water. Meanwhile, with the strength in the market, they have probably booked capital gains elsewhere. Combine this with wanting to minimize taxes this year, since next year will see lower taxes overall, and you have a prime candidate for tax-loss selling.
Catasys is under pressure for the simple reason of tax-loss selling, which is unrelated to the fundamental story. Meanwhile, they are on the brink of closing several large contracts which could cause a sharp acceleration in billings in 2018. This is a trader’s dream stock…great story, down for the wrong reasons.
I believe CATS could be a big winner starting Tuesday…
I grew up as a trader, starting at age 18 as an intern on the Boston Stock Exchange. The trading instinct has always been in my genes; frankly it took a long time to develop fundamental skills to pair with my trading mentality.
Catasys is a stock that has all my trading antennae going “bing” at the same time. The stock is down from tax loss selling, while fundamentals appear to be accelerating. As such, it is a prime candidate for a year-end bounce. And, if I’m right about contracts and current business, that bounce could be sustained for a very long time. I think it’s time to back up the truck.
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