Friday, April 24, 2009

Companies Faking It

In order to determine whether a company is worthy of an investment, it is important to understand exactly how it makes money. Only then can one understand a firm's business and financial risks. Often, however, the only way to do this is to dig deep into a company's financial statements, as firms are often not very forthcoming on the surface. 

For example, Daxor Corporation (DXR) describes itself as a manufacturer of medical devices and provider of biotech services. Investors may believe they are buying a company with a competitive advantage, as DXR's flagship product, an FDA-approved blood-volume analyzer, appears to save hospitals time and money, and no competing products appear on the horizon. Unfortunately, investors who dig deeper into this company will find that this firm's financial results are barely - if at all - related to its blood-volume analyzer!

Instead, the company appears to be a heavy trader in securities of unrelated companies! And it doesn't just take long positions: last year, the company made $5.3 million alone on its short positions, compared to operating revenue of only $1.7 million! Furthermore, the company both buys and sells call and put options. To put its investment income in perspective, here is the company's investment income compared to its operating revenues over the last five years:

Clearly, this company does not appear to be a medical device manufacturing play! Even if its flagship product were to take off (or die off), the company's financial results would hinge on how its traders have performed! Investors who take the time to determine how companies actually make money are in a better position to gauge its risks.

Disclosure: None


Jeff Allen said...

Could it be that their cryobanking subsidiaries are investing the up-front fees they receive in order to maintain the cash flow for the refrigeration into the future? I agree, it is strange when the product's revenues are dwarfed by the investment gains. But it's also true that long-term businesses like cryobanking have to have long-term strategies for covering their costs...

Anonymous said...


One quick question, and I hope this is not confidential. How do you come up with the companies you talk about in your blog? Do you screen for under-valued companies then select the ones that are worth of discussing?? If so, do you use the free online screener or some proprietary ones? Thanks so much and wish you an early good weekend.. =)


Saj Karsan said...

Hi Jeff,

You are right it could very well be a legitimate strategy, but I'm not arguing whether it's a good or bad strategy. My point is just that investors have to figure out how a company makes money or they could be in for a nasty surprise one day.

Hi 008,

I look at a couple of companies a day based on my discussions with other investors, and if I see something that may be of interest to the blog readers I just write about it...nothing confidential at all!

Manshu said...

Whoa! This is a medicine company with a profitable trading desk? Unbelievable! They should lend out their traders to Citi. That's where they are needed most.