·Abbreviations:
o My Estimate of Fair Value (MFV)
o Return on Invested Capital (ROIC)
o Liquidation Value = Tangible Book Value (TBV)
o Book Value (BV)
o Operating Income (OI)
o Enterprise Value (EV)
o Price-to-earnings ratio (P/E)
Shockwave Medical Inc (NASD:SWAV) is a medical device company. To me, that’s not particularly relevant. What’s of greatest relevance is the differential between its market value and MFV. But, before those calculations, I measure the stock via a scorecard to highlight indicators that might make the stock more or less likely to be a winner. Correspondingly, pros and cons as I see them.
Pros:
·The % of shares short is <5%
o Shorts take greater risk than (non-margined) longs, so I assume they’ve done some research before betting against a company
·The company’s debt relative to its Market Cap is <25%
·The company appears to have an easy year-over-year OI comparison in the coming quarter
·Operating Profit Margins increased sequentially and year-over-year
Cons:
·Diluted share count is up >80% over 5 years
Those pros and cons and—more importantly—the company’s average ROIC (~-23% over the last 4-years) make it seem unlikely that the company has durable competitive advantages. So, I deem the company not good quantitatively and value it relative to its liquidation value, TBV of $9.89. The not good designation outweighs any positives for the company, including a seemingly excellent balance sheet. Thus, for me, TBV x 1.5 is a reasonably conservative fair value, which equates to MFV of $14.83. At a recent price of $179.21, the differential between market value and MFV is >1000%!, thus I think shares are wildly overpriced.
Conclusion: Admittedly, I’m conservative in valuing companies. I only want to buy in the most extreme cases of undervaluation. I’m sure reasonable arguments can be made for why the company has competitive advantages, why it should garner my good designation, and for a higher valuation than $14.93. But, historical results don’t support those arguments and don’t allow me—within my rules—to own such a relatively expensive company.
When I find a company that overvalued (relative to MFV), I go through a similar, but inverse valuation process where I try to give the company the benefit of the doubt at every turn and come up with the highest valuation I can. When I do that with SWAV, the highest valuation I can come up with is 13 x trailing-twelve-month revenue, or a price of $155.23. Revenue is growing, so that price will increase after the next quarterly earnings announcement.
I do not short stocks, given the unfavorable risk/reward distribution (i.e. I can only make 100%, but can lose infinity), but I will buy put options. Back in September, when SWAV was trading at nearly $300, I wrote about owning put options (https://www.veriteventures.com/post/what-is-investing). I closed the position on Friday. Even though SWAV is still sky-high relative to MFV, I’m only looking for the most extreme cases and it’s now trading close enough to my inverse, ultra-optimistic valuation, that I’ll take my gain and look for something more extreme to bet against.
My positioning: None
For more information about how and why I designate companies not good read here: (https://www.veriteventures.com/post/how-i-value-most-assets-companies)
-V
*Post prepared using data as of 1/20/23
**I’m using the company’s historical Book Value multiple as a proxy for Tangible Book because TB is <=BV and BV multiples are more readily available from data providers.
The information in this post has not been audited and accuracy is not guaranteed. The post is for informational purposes only and is not investment advice. Consult a financial professional before making investment decisions. The author’s opinions and positions may change subsequently, without notice.