Newsletter

Don't Buy DexCom; Yet

January 28, 2006
Volume VII, Issue 10
Home Page : www.otcjournal.com
Email Questions or Comments To: editor@otcjournal.com

To OTC Journal Members:
 

Comments in the BLOG

No new BLOG postings since last week's on KAL and TLPE. I believe both are still in excellent ranges for accumulation. I'm working on more detailed information on KAL's new cancer drug.  I'm also working on some comments on the massive one day swoon in UPSN last week. That stock is schizophrenic. It dropped from $2.75 to about $2 in one day, and is now slowly climbing back up. This is the second time it has happened. Apparently, the only way to buy this one is when it gets clobbered. As it climbs back into the $2.50 range you might want to sell and wait for another free fall opportunity.

To use the BLOG, simply go to the home page at www.otcjournal.com - the BLOG will scroll down automatically on the right side of your screen. The most current journal entries appear in the middle of your screen. Check back frequently for updates particularly when stocks are moving to overbought or oversold levels or in volatile markets. Your questions and postings do not automatically appear, so don't bother posting the same question multiple times. I personally go through to moderate and respond to every reasonable question.
 

DexCom, Inc (NASDAQ: DXCM): Don't Buy This Stock; Yet

A bubble in the stock market happens one one group becomes the market's obsession, and all stocks within that group swell to absurd valuations. The internet bubble was the biggest of all time. Two years ago it was defense/homeland security. Last year it was energy. 

There's a stock market bubble coming sometime in the future, and it will center around treating diabetes. There will be huge and swelling demand for new diabetes technologies as the current epidemic mushrooms. Thomas Gunderson of Piper Jaffrey states "We believe the diabetes market is on the cusp of what may be sweeping changes in alternatives for management and treatment of diabetes."

Gunderson also goes on to state "We believe DexCom is positioned to provide the market with a long-awaited technology- a more effective and more user-friendly tool to improve management of the disease and decrease the longer-term risk of severe complications."

You are looking at the components of a revolutionary new blood sugar monitoring device. This is a continuous blood glucose sensor that can be implanted in the human body for up to one year. The version you see here is very close to being approved by the FDA for three day use.

The tube is used guide the insertion of a tiny monitor under the skin. The patch fits over it, and the wireless handheld LCD screen delivers second by second blood glucose levels. I have seen a demonstration, and it is amazing. You can watch the levels change in real time as the subject eats and takes medication.

In February of '05 DexCom completed its clinical trials for the three day version of their product, and submitted a request to the FDA for approval. Since then, the company has launched clinical trials for a one year version.

Recent reports I have read by analysts at Piper Jaffrey and Montgomery indicate FDA approval is expected to come sometime in April. The stock has recently been surging to new all time highs, and I believe it will continue on its current uptrend right up to the FDA granting the approval.

I could write 20 pages on why this product could prove so valuable to diabetics, but in the interest of brevity let me sum it up this way: Type II Diabetes, which is currently reaching epidemic proportions in the US, is a disease which gets progressively worse. The more effective your blood glucose monitoring, the more effective and less costly the treatment.

DexCom will not be first to market with a product of this kind. Behemoth Medtronic (NYSE: MDT) ($10 billion in annual sales) got a device approved in 2005. It is similar to the DexCom device, but not as accurate in certain ranges of blood glucose monitoring. In addition, the device represents only a tiny percentage of MDT's sales. For DXCM it is the holy grail and certain to have a major effect on the stock price.

DXCM debuted for trading on April 14th, 2005. Piper Jaffrey was the lead underwriter in the IPO, and 4.7 million shares were issued at a price of $12. DXCM received $52.5 million in the IPO.

I have been patiently waiting for a pullback in the stock to present it to OTC Journal subscribers, but the stock has not cooperated. On Friday, shares of DXCM closed at $16.24, just $.50 below the stock's all time high.

It is a San Diego based company, and I have been following their progress since they began trading publicly. Here's how I believe the script will play out: Assuming the market remains in reasonable shape, I believe DXCM will continue working its way higher right up until the FDA Approval is announced. The day it is announced, the stock will spike up, and that will be your selling opportunity.

When the FDA announces its conclusion, if they are not favorable to DXCM, shareholders will lose a lot of money. Most who follow the situation believe the approval is a slam dunk, but there are no guarantees.

By way of full disclosure, I started accumulating this stock for my personal account last year. Currently, I am holding 4,000 shares at an average cost of $13.18. I intend to make a very substantial bet on this stock, and might accumulate up to 10,000 shares. I might buy it or sell it anytime without notification, but will try to keep everyone up to date. One word of caution- just because I have bought it for my own account doesn't mean it isn't risky. I make plenty of mistakes with my own money.

This idea should be viewed as a special situation for an event driven trade. You might want to review a previous edition entitled Event Driven Trading, published August 27th, 2005. Just click on the title.

As far as the upside goes- here are my thoughts: Piper Jaffrey has a price target of $18- Montgomery pegs it at $20. I believe the stock will surge higher than those levels when the FDA Approval is granted- perhaps in the $22 to $25 range. I also believe $20 plus pricing will be short lived, and the stock will come back rather quickly. 

I have been trying to accumulate this stock on pullbacks for some time, but the pullbacks are shallow and short lived. A 38.2% retracement is about the best you can hope for, which would be $14.20. If you want to own this stock, a good strategy might be a partial position now, adding to it on the shallow pullbacks. It is a tough stock to buy because there is so little supply. Nevertheless, as implied by the title of today's edition, waiting for even a slight pullback might prove prudent.

This one is out of the realm of our normal microcap ideas, but it does fall into the theme of a company you might not have found out about on your own. If you participate, I hope we all ring the bell on this one. I will try to post a BLOG early next week for questions and comments.


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