The allure of penny stocks lies in their potential to deliver massive gains in a short period. However, in exchange for that opportunity, most penny stocks carry tremendous risk. They can be extremely volatile and are susceptible to “pump and dump” schemes and fraud.
Unlike regular stocks, the financial condition of most penny stock companies can be extremely difficult to analyze, as the majority of such stocks are traded on over-the-counter (OTC) exchanges, which are typically less transparent and less regulated than the major exchanges. In fact, in the penny stock space, it’s often easier to spot warning signs and red flags than it is to identify a sound investment.
Although the potential reward may make it worthwhile, choosing the right penny stock is a daunting task. Nevertheless, we’ll do our best to identify short-term trade opportunities in this exciting space.
With this in mind, we’re starting a new series called “Penny Stock of the Day”. These ideas are geared for traders with a high risk appetite.
Our Penny Stock of the Day is chosen by screening for stocks under $5 and then applying technical analysis on the shortlisted set of penny stocks showing unusual volume. When making these trades, please make sure to pay vigilant attention to pricing moves and have a strict stop loss in place to avoid significant losses.
Penny Stock of the Day: ConforMIS Inc. (NASDAQ: CFMS)
Today’s penny stock pick is the medical devices company, ConforMIS Inc. (NASDAQ: CFMS).
ConforMIS Inc. develops, manufactures, and sells joint replacement implants.
The company offers personalized knee replacement products, including iTotal CR, a cruciate-retaining product; iTotal PS, a posterior cruciate ligament substituting product; iDuo, a personalized bicompartmental knee replacement system; iUni, a personalized unicompartmental knee replacement product to treat the medial or lateral compartment of the knee; and iTotal Identity, a knee system.
It also provides Conformis Hip System and Cordera hip replacement, which are hip replacement products; and iJigs, a personalized single-use patient-specific instrumentation.
Website: www.conformis.com
Latest 10-k report: https://sec.report/Document/0001305773-21-000017/
Analyst Consensus: CFMS has an average analyst recommendation of Buy. The company has an average price target of $2.50, with a high forecast of $3.00 and a low forecast of $2.00. This is based on 2 Wall Street analysts offering 12-month price targets for ConforMIS in the last 3 months.
Potential Catalysts / Reasons for the Hype:
- The news of ARK Investment Management LLC buying 13 million shares of CFMS. The PRINT ARK fund currently has more than 3% of its total investment in CFMS.
- The execution of an agreement to enter the Asia-Pacific market through an exclusive distribution relationship with XR Medical Group (Hong Kong) Limited.
- Settlement of patent litigation with Wright Medical Technology Inc.
- Upcoming second-quarter financial results on August 4
- The company announcing clearance for iTotal® PS in Australia.
- Recent 510(k) Clearance by FDA for the company’s Identity Imprint Knee Replacement System.
- The company achieving a faster turnaround time to fabricate a custom knee. It now takes three weeks instead of six weeks.
- The general hype around biotech penny stocks on Reddit.
On analyzing the company’s stock charts, there seem to be multiple bullish indications…
Bullish Indications
#1 Symmetrical Triangle Pattern Breakout: The daily chart shows that the stock has currently broken out of a Symmetrical Triangle pattern. This is a continuation pattern and is characterized by two converging trend lines connecting a series of sequential peaks and troughs. This pattern is marked on the daily chart as pink color lines. A breakout from a symmetrical triangle pattern usually signifies the start of a bullish move.
CFMS – Daily Chart#2 Bullish MACD: As seen from the daily chart, the MACD line (blue color) is currently above the signal line (orange color). This indicates a possible bullish bias.
#3 Bullish ADX and DI: The ADX indicator shows bullishness because the (+DI) line is greater than the (-DI) line, the ADX and (+DI) lines are above the (-DI) line, and the ADX line has currently started to move up from below the (-DI) and (+DI) lines.
#4 Price above MAs: The price is currently above the short-term moving average of 50-day SMA as well as the longer-term moving average of 200-day SMA. This usually implies a possible bullish bias for the stock.
#5 Consolidation Area: The weekly chart shows that the stock was consolidating within a price range for the past several months. This area is marked as a purple color rectangle. The stock is now near the upper range of the consolidation area and looks poised for a breakout. Once the stock breaks out of the consolidation area, it would move higher.
CFMS – Weekly Chart
#6 Bullish Stoch: The weekly chart also shows that the stochastic has currently moved higher from oversold levels. The %K line is also above the %D line. All these indicate possible bullishness.
Recommended Trade (based on the charts)
Buy Levels: If you want to get in on this trade, the ideal buy level for CFMS is above the near-term resistance area, which translates to a price of $1.50. This is marked as a green color dotted line in the chart.
Target Prices: Our target prices are $3.00 and $5.00.
Stop Loss: To limit risk, place a stop loss at $0.85. Note that the stop loss is on a closing basis.
Our target potential upside is 100% to 233%.
For a risk of $0.85, our first target reward is $1.50, and the second target reward is $3.50. This is a nearly 1:2 and 1:5 risk-reward trade.
In other words, this trade offers 2x to 5x more potential upside than downside.
Potential Risks / Red Flags:
- The company has incurred significant net operating losses every year since its inception and is expected to continue to incur net operating losses for the next several years. The company had reported a net loss of $24 million for the year ended December 31, 2020, and $28 million for the year ended December 31, 2019. CFMS had an accumulated deficit of $528 million as of December 31, 2020.
CFMS – Annual Report
- Heavyweight companies like Medtronic, Zimmer, and Stryker are direct competitors of CFMS. Stryker technology has already proven itself to be reliable and has a history of more than two decades. Being a smaller company with less history, and the lack of any double blind independent studies that prove their products as superior would make it difficult to convince hospitals that the products from CFMS are viable alternatives.
- One of the main selling points of ConforMIS is its proprietary iFit technology that can replace existing implants with personalized, new ones. However, it is yet to be proved that custom devices make patients better than Off-The-Shelf (OTS) products. Even if they were to be proved so, existing competitors like Stryker may be able to make custom devices much cheaper than CFMS ever could.
- Several key CFMS patents were declared invalid by the Patent Trial and Appeals Board in IPR proceedings.
- The company had to grant Zimmer Biomet a royalty-free, non-exclusive, worldwide license to some of the company’s patents for Zimmer Biomet’s patient-specific instrumentation used with off-the-shelf knee, hip, and shoulder implants.
- There are multiple patents expiring in the near term.
- With respect to the patents of personalized joint replacement implants, the first nonprovisional application is expected to expire in 2022 and the other patents are expected to expire between 2022 and 2036.
- With respect to the patents of patient-specific instrumentation, the first nonprovisional application is expected to expire in 2022 and the other patents are expected to expire between 2022 and 2036.
- With respect to the patents of iFit technology platform, the first nonprovisional application is expected to expire in 2022 and the other patents are expected to expire between 2022 and 2032.
- The company has been subject to securities class actions in the past related to its voluntary recall of specific serial numbers of patient-specific instrumentation for the company’s iUni, iDuo, iTotal CR, and iTotal PS knee replacement product systems.
- CFMS has an ongoing lawsuit with Osteoplastics LLC. The lawsuit alleges that CFMS’s proprietary software, including its iFit software platform, infringes seven patents owned by Osteoplastics.
- The company has declining revenue. Product revenue was $58.5 million for the year ended December 31, 2020 compared to $76.6 million for the year ended December 31, 2019, a decrease of $18.1 million or 24%.
- The company had a net loss of $11.5 million for the quarter ending March 31, 2021.
CFMS – Quarterly Report
- Conformis utilizes a mixture of just-in-time (JIT) manufacturing which is a great thing to reduce inventory fees. However, this also poses a delay risk if there is ever a shortage of materials or product delivery delays from 3rd party suppliers.
- Despite being a loss-making company, the executives are being paid hefty compensation every year.
CFMS – Executive Compensation
- The bottomline is that the company’s price uptick would be based on wider adoption of their latest designs and people opening back up to elective surgery. The stock could head even higher if there is greater adoption amongst the surgical and medical insurance communities. However, heavy competition, increasing losses, and multiple ongoing litigations pose a significant risk for the stock.
As you can see, today’s featured penny stock offers big upside potential… but it also comes with a number of risks and red flags. As always, when dealing with penny stocks, we advise caution before entering into such high-risk ventures. Remember to think before you trade… understand the risks… and if you decide to trade, stick to your stop-losses!
Happy Trading!
Trades of the Day Research Team