Newsletter

Diomed (AMEX: DIO)- Under or Over Performer?

June 8, 2002
Volume V, Issue 42
Email : info@otcjournal.com
URL : http://www.otcjournal.com

To OTC Journal Members:
 

Healing is a matter of time, but it is sometimes also a matter of opportunity.
Hippocrates, 460 BC

 
Diomed (AMEX: DIO)- Under or Over Performer?

Recently we've gotten lots of inquiries about Diomed, one our of our core featured companies. The stock has been down ticking every day since late April, and investors are starting to wonder if there is an undisclosed problem with the EndoVenous Laser Treatment (EVLT) rollout.

It's puzzling when one considers investors could not get enough of this stock when it first came public in mid February. The stock traded up to the $9 level twice on huge volume in its first two weeks of trading, and now there is little interest with the stock just under $3.

In fact, nearly all markets have been suffering horrendous losses over the past six weeks as the "Crisis of Confidence" deepens in investor psyche. Corporate excesses of the 90's have come back to haunt stocks. Fear levels are at a new all time high, as new reports of corporate malfeasance come to light nearly every day.

The Enron scandal has caused a cascading effect, and the actions of corporate executives and elite brokerage firms over the past decade are now being examined under a microscope. Corporate executives who were once awarded Rock Star status by Wall Street money managers and the media are being indicted, and investors are stunned by the arrogant personal use of company funds and the flagrant abusive accounting practices in order to embellish profits.

All this has led to a climate which is the diametric opposite of Alan Greenspan's famous "Irrational Exuberance" description of the market. We are now in a climate of "Irrational Pessimism", where the market is driven down daily for emotional reasons. Market conditions are heaven sent for contrarian investors with a long term outlook.
 

Diomed (AMEX: DIO) Versus the Biotech Index

The chart we have chosen to illustrate the point of today's newsletter shows the price performance of Diomed in green, and the Biotech Index in blue.

Since mid April, both have fallen off a cliff about the same degree. The Biotech index has eroded 33% since the third week of April, and the value of Diomed has dropped about 36%. Therefore, each have lost about a third of their value in the last six weeks.

Since the first of June the erosion in the Biotech index has accelerated much more rapidly than Diomed, suggesting that less institutional participation in small cap stocks equals less stock for sale. Individual investors are thinking longer term.

The Biotech index has, in fact, been absolutely decimated over the past two months. Technicians are looking for the NASDAQ to retest the September 21st low of 1423. However, the Biotech index already blew through its September 2001 low of 415.55 and closed today at 361.90, a full 13% lower than the post 9/11 sell off.

Biotech stocks generally trade with rich valuations as breakthroughs in drug therapies can yield dramatic profits overnight. This makes the biotech sector vulnerable to steep declines in value during declining markets.

This sector will also rebound more dramatically as valuations improve when buyers return.
 

What's Happening at Diomed (AMEX: DIO) Today

Investors were clambering to buy this stock between $7 and $9 back in February because of the perceived potential of their revolutionary new treatment for varicose veins. EVLT has the potential to grab significant market share from the current favored surgical procedure.

Diomed achieved about $7 million in sales in 2001. We expect the company to achieve $15 to $20 million in sales this year, with numbers accelerating rapidly in the 3rd and 4th quarters. More importantly, if Diomed's EVLT can replace 10% of the stripping procedures done annually for varicose veins, the company could enjoy $50 million in annual sales by 2003.

There has been no substantive news coming out of the company concerning the roll out of their FDA approved revolutionary new treatment for varicose veins, which is no doubt contributing to the sell off in the stock. To learn more about EVLT, please read our May 1st edition, or visit the company's EVLT web site at www.evlt.com.

Diomed is in the process of filing a registration statement with the SEC, and therefore is in a regulatory quiet period. Management has informed us that they will not provide any projections to investors at this time. Instead, they intend to allow June quarterly results to speak for themselves. The June quarter is the first time investors will see any hard numbers associated with the EVLT commercial introduction, as the FDA approval for this product did not come until the end of January, and marketing materials were not approved by the FDA until February. We understand there is a very high level of activity at the company, much stronger than originally anticipated.

This stock is extremely oversold and due to bounce soon. The entire Biotech index is in the toilet right now, and many stocks within the sector will rebound like coiled springs.

For long term investors the current level of the stock is heaven sent. Your returns will reflect the success or failure of EVLT. Short term investors also have a high probability of rewards from the current levels. The market is very over sold and due for a relief rally. Biotech stocks have suffered devastating losses in the past two months, and could rebound rapidly.

In previous editions we told you we would try to identify exciting, low risk entry points for the stocks we cover. Diomed seems to have found a bottom, and now could be the most favorable time to grab up shares. Long term investors could enjoy enormous returns, and the stock is probably ready for a short term bounce for traders. Looking at the facts, the stock is not under or over performing, it's simply traded down to ridiculous levels along with it's entire peer group. 

We still believe the stock could trade to $10 this year. In order for that to happen, the company needs to demonstrate EVLT is rapidly gaining market share, and general market conditions need to improve. The odds are in our favor from today's levels.


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