Look Up Bio-Reference

 | Jun 14, 2012 | 3:30 PM EDT
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I normally don't pay too much attention to stocks with market caps under $1 billion, but Bio-Reference Laboratories (BRLI, market cap of $651 million) continues to recover nicely from an erratic trading day on June 7, the day it released earnings.

Bio-Reference provides laboratory testing services used by health care providers to diagnose and treat diseases. The company markets its products and services directly to physicians, geneticists, hospitals, clinics, correctional and other health facilities.

Growth in recent years has been driven by expansion in esoteric markets, including endocrinology, genetics, immunology, microbiology, molecular diagnostics, oncology, serology and toxicology.

Bio-Reference has a lot going for it from a fundamental and technical perspective. Earlier this month, the company reported profit of $0.33 a share, up 27% from a year ago. Sales growth decelerated slightly from the first quarter but still rose 19%, to $163.4 million, the highest quarterly sales in the company's history. Valuation-wise, the stock is compelling at 18x trailing earnings and 14x forward earnings, relatively cheap considering that annual earnings should be up 26% this year (compared to 2011) and 18% in 2013.

Bio-Reference continues to outperform in an overall weak tape. Shares closed Wednesday at $23.54, up 2.3%, for the seventh gain in the past eight sessions after hitting a low of $18.29 on June 1. Six of those gains came on above-average volume. It's only 3.8% from its 52-week high of $24.48.

Bio-Reference Laboratories (BRLI)
Source: StockCharts.com

One aspect of the chart does give me pause -- it's a bit lopsided. It took Bio-Reference eight weeks to form the left side of its base (point 1). Notice that the stock appears intent on testing its recent high of $24.48, but the right side of its base is only one and a half weeks old. V-shaped recoveries such as Bio-Reference's are suspect, but it's not out of the question that the stock could see a breakout soon, especially if its accumulation trends continue.

Note that short interest in Bio-Reference is relatively high -- not surprising since health care reform remains in flux. Higher health care costs could crimp spending by the company's customer base.

Bio-reference has one of the highest days-to-cover ratios I've ever seen at 25.1. That means, based on its average daily volume of 227,000, it would take just over 25 trading days to cover its current short position of 5.7 million shares. I've said it before and I'll say it again. High short interest in a stock isn't a big deal to me, especially when it comes to a high-quality name with strong fundamentals showing relative price strength such as Bio-Reference.

In the earnings press release, I was impressed by CEO Dr. Marc Grodman's thoughtful comments about market headwinds and how the company plans to attack them:

We are fully aware of the headwinds in the market that have gotten significant attention. There is pressure on the payer side to cut expenses and deal with burgeoning health care costs. I would rather face these pressures with a company based on innovation and growth. We have chosen not to commoditize ourselves but rather to leverage our expertise in technology to develop innovative and cost-effective solutions that provide more clinical information for less cost to the payer, the provider and the patient. Our goal has always been to utilize technology and service to increase market share, not to use individual tests to exploit profits.

Smart strategy if you ask me. In the end, it's the truly innovative companies that have the best chance of succeeding on Wall Street. Despite its small-cap status, Bio-Reference Laboratories is one of those companies. When new institutional money starts to come in from the sidelines again and major averages start new uptrends, Bio-Reference' s track record of innovation and execution make it a small-cap name to watch going forward, especially if it eventually breaks out over $24.48 with conviction.

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