| 3. Merge Healthcare Inc. (NASDAQ:MRGE) |
 A friend of mine is a speech pathologist at a well-regarded New York City hospital, and she’s had a stressful summer. Virtually every staff member at her hospital has had to pause from their work to brush up on a looming health care mandate, known as ICD-10. It’s an online coding system that will enable better portability of a patient’s medical records.But the transition is already causing industry headaches. Leading hospitals have frozen any new purchasing decisions so they can focus on ICD-10 implementation, leading to a weak second quarter at this digital imaging vendor. Merge delivered what it called “very disappointing results,” citing “a continued reluctance amongst large health systems to move forward with enterprise purchases.”
A new management team was brought in at the time, and a few weeks later, on Aug. 26, Chairman Michael Ferro resigned. But Ferro has an ulterior motive. He’s not abandoning a sinking ship — he wants to avoid any conflicts of interest as he finds ways to boost shareholder value. “I do not believe that the current trading price of Merge common stock reflects the company’s inherent strengths, market position or long-term prospects,” Ferro noted at the time, adding that “I intend to explore a variety of ways to increase shareholder value, including, possibly, a going-private transaction.” Since then, shares have been steadily rising, thought they remain well below the $4.50 level seen earlier this summer.
Despite the near-term revenue pressures, Merge is actually very well-positioned for the move to digital health care. The company’s software modules capture a range of images such as X-rays, and store them in interoperable formats that can be used at both major hospitals and local doctor’s offices. It’s not often you find a software provider trading at 1 times sales, and a return to growth or a company buyout would lead that multiple to expand higher. |
Risks to Consider: Small-cap and micro-cap stocks would be among the hardest hit in any market slump.
Action to Take–> These stocks are starting to trend higher but have ample upside if they can deliver on the business plans in front of them.
P.S. Health care stocks like MRGE and NVAX certainly look promising — but did you know there’s a tiny Israeli company that’s set to revolutionize a key surgery market next year? That’s one of the “shocking” predictions in our latest report, “The Hottest Investment Opportunities For 2014.” Our previous predictions have returned up to 310% gains in a year; to read our latest, click here.
– David Sterman
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