EDAP Adventure

So, we started stock trading. And not the free-money-after-waiting-10-years kind.

Unfortunately, our first attempt did not go so well.

We discovered Edap Tms SA (ADR) from random google searches for stocks to invest in. Ohhhh.. and please cut us some slack. We had absolutely no clue where to start looking!

With about 1000 CAD in our pockets, we knew there was no upside in investing in +300 dollar stocks, so we narrowed our search to stocks below 20 dollars. At the time, EDAP was at about 2.60 USD and relatively cheap. So, we said “why not?” and began our research.

As a global leader in ultrasound technologies, EDAP created tools for the medical community to treat various conditions. Upon our initial research, we found that the earnings in 2016 have been good and growth was evident. For more recent data, we found that a paper was published in January 2017 about the efficacy of their ultrasound treatments for urinary stones compared to the current medical standard. We also found out that the company had secured an exclusivity contract for a medical company in Japan. We then scrutinized through the financials of the company in 2016, and felt like the stock could do well this year.

In the end, we decided to buy the stock, and see how it preforms after the investors conference during early April.

We each bought 250 stocks of EDAP (approximately 900 CAD) and sat on our optimism. I knew from hearing the conference call, things were turning south.

Some things we had learned:

  • You cannot predict what they will say during the conference; We thought that it would be about the Q4 earnings and it would boost the stock price immediately.
  • Information releases do not necessarily affect the stock price immediately. The stock price did not change immediately after the call.
  • Illiquid assets tend to imply less value for the company

To illustrate, we learned that in a year, EDAP had only sold 4 of their machines, and planned on selling 8 of them this year. Now, these are very low numbers compared to “regular goods”. Say, selling 100,000 pairs of shoes in a year. Obviously these machines must be expensive and quite hard to manufacture, creating large manufacturing overheads and almost zero inventory turnover rate.

This is where the devaluation stems from. When you consider the risk of not being able to sell these machines after they have been manufactures or if it breaks down during its lifetime operation, the losses would be quite significant to the company as the machines have already been made and now turned useless. The inherent risk of the investment goes up and as a result, I can see why the stock was unable to gain momentum, even after a previous year of growth. In fact, due to the way some of the investors questions were being answered, I think some people started to lose faith. Luckily, we both sold quickly after the investor conference and made it out with a loss of 100 CAD.

For next time: Consider the nature of the product and that the paper value != perceived value. Thanks for reading!

CalvinL

Net Change: -100 CAD