BioReference Laboratories (BRLI) has been capturing the attention of a number of Rule One investors here. Its an interesting case study. BRLI has been a successful company for a long time, growing in excess of 20% a year for 17 years. Here are the Moat and Management numbers from my Toolbox (to be available this month). With the notable exception of Operating Cash Flow growth per share, the numbers look very consistent and, therefore, more predictable.
Here is a view of their value. The average of the analysts estimates is 18.5%. The bigger you get the harder it is to double sales and earnings every 4 years (which is what 18.5% requires). While the larger industry may not be growing that fast, BRLI's pieces of the industry seem to have at least 10% growth built in. If that is the case, reaching my long term growth number of 15% isn't so unreasonable. Here's the Valuation chart:
The key numbers are on the bottom right - Valuation Result: The Sticker is $37, MOS is $18 with an 8 year Payback Time and a Red Zone (Sell) Price of $44. If they can handle 15% growth, this is a steal.
But that's the question, isn't it? Can they sustain their growth or are they going to slow down? Here's the negative thesis in yesterday's Street Sweeper article on SeekingAlpha.com.
If we can't resolve the questins about management Mafia connections, systematic over-charging, systematic over-testing and missing cash flow but we still like the company anyway, one way to go is to trade it. Here's the chart from Interactive Brokers:
The three Red Arrows running vertically on the right side of the chart show when each Tool said to get out. All three were 'red' on Nov 1 when BRLI lost over 10% of its market cap. Note that two days earlier the price bumped the Fibonacci Ceiling at $21 and ended the day down That triggered the Stochastic to go 'red'. The next day opened down and went down to the Fibonacci Floor and triggered the MACD to go 'red'. If you were paying attention to these signals you would not have exited the trade but you would have prepared for an exit by putting in a stop loss below the Fib Floor at about a $1 below the close - about $19.25. (The stock was trading in a dollar range regularly.) You would have been stopped out at $19.25 as the third Tool, the Moving Average, was triggered. (See my book, Rule #1, for how to set up these Tools properly.) Note that the price drop tore right through two Fibonacci Floors, one at $20 and one at $19 and finally hung up at the $17.75 Fibonacci Floor where it opened and closed on Nov 2 and then opened and dropped today. The next Floor down is at $16 and I note that the stock finished trading today at $16.86. Also note that the last trip down to this price level the price stopped at $16.65. That can be taken to mean BRLI is at or near the end of its plummet. However, with Volume running at 3X normal, this might not be over. Supporting that view is today's full candlestick with no wick at the bottom.
The advantage to trading a company you like that is under attack is that you can follow the money in and out with lower risk than if you take a position but its only relatively less risky. The disadvantage is that a stock this volatile can run up faster than the signals can react. You can get whipsawed - buying just after the run up and holding through the drop, then selling just as it runs up again. Still, using the Tools the way I indicated here would have saved some pain in this case.
Now go play.