KEVIN KENNEDY
PUBLISHER
THE COOLCAT REPORT

STOCK: Spectranetics (Nasdaq: SPNC)
PRICE: $10.72 (as of 4 p.m. yesterday)
52-WEEK RANGE: $4.50-$13.38
MARKET CAPITALIZATION: $280.62 million

Spectranetics is a small-cap medical device company based in Colorado. Kevin Kennedy is the publisher of the Coolcat Explosive Small Cap Growth Stock Report. Mr. Kennedy explained to David Dalley of The New York Sun what he looks for in a small-cap investment and why, as a technical trader, he believes Spectranectics is a strong buy.

Why are small-cap stocks interesting?

Small caps are fun because they have the potential to greatly outperform larger investments. They’re also a bit more volatile, which makes some people scared of them. In our report we’re looking for profitable investments – a combination of good fundamentals and good technical characteristics. We’re primarily technical traders, and our focus for small caps is on stocks that have reached new 52-week highs over the last few months. We want stocks that show strength then pull back, to give us a decent entry point.

What makes SPNC a strong investment?

Well, it hit new 52-week highs recently, so it has high relative price strength. It bottomed at $4.19 in November 2004, and $4.50 in April – and it’s tripled since then. We look for that kind of initial strength. In general, you want the ratio between the 52-week high and low to be at about 2:1 for small caps [i.e. stocks with a market cap of between $250 million and $2 billion]. I also try to look for hot industry groups. I like technology and medical stocks when they’re doing well because they tend to go to extremes.

At these price levels, this stock is a very compelling buy. It’s still close to what we paid, and it still meets all of our technical hurdles. Another thing I like is its trading volume. SPNC has had some huge volume on the way up. They appeared at some conference back in December – the stock traded 4.5 million shares that day. That’s big.

How important are the fundamentals to you?

Like I said, we focus on the technical side, but fundamentals do play a role. To start with, I know they’re profitable, that their sales and earnings are growing, and that they’ve got good products. So aside from meeting our technical criteria, they’ve got things that other big investors – for example the mutual funds – look for, too. That’s important because it creates demand.

This company is a turnaround story. They’re just starting out on the positive earnings treadmill. The products that they have coming on line are showing good growth. In the third quarter of last year, they had record revenue growth. They haven’t really established themselves as an earnings powerhouse yet, but that’s part of the reason why there’s a high upside potential.

This is a small, highly volatile stock. What are its biggest risks?

Well, to some people this won’t look like a cheap stock at current prices. It has a high P/E – over 100 – and price to sales is over 7, but it is a growth stock, and those numbers are common among companies just starting to flex their muscles. It’s a bet on future potential rather than past performance.