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Undiscovered Gem: VNUS Medical Technologies

Examining VNUS Medical Technologies (VNUS) as a potential bullish stock pick

by Beth Gaston Moon (bgmoon@sir-inc.com) 1/24/2008 9:30 AM

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What a wild week! And we're only two trading days in. Things were packed into an ominous hand basket on Monday; the U.S. markets were closed to honor Dr. Martin Luther King, Jr., and a global sell-off ensued. Things looked equally rough on Tuesday, with the market closing lower even after an emergency 75-basis-point rate cut. Yesterday, the Dow Jones Industrial Average (DJIA) managed an intraday swing of about 600 points to close solidly higher.

But don't be afraid of the investing waters. Well, you can be afraid, but don't bail out of them entirely. Even with the market at its most volatile, there are always profitable opportunities for bulls and bears - you may just need to look a bit longer to find them. For this week's undiscovered gem, I again sought out the help of our "Schaeffer's Stock Screener," available on the front page of SchaeffersResearch.com.

Every trader may have his or her own favorite ways to seek out potential stock plays. My strategy changes slightly each week, but I generally look for 3 core elements for a "Gem" stock: low analysts' ratings, low market cap, and good price action. Using the "Stock Screener," I plugged in the following variables:

Step 1: Analysts' least liked
- Step 2: Minimum stock price of 10
- Average daily volume of 100,000
- Trading above 50-day moving average
- Total analysts of 5 or fewer
- Stocks trading new annual high
- Stocks that are oversold
- Small Market Cap

Providing the above factors yielded the following list of stocks:

Lo and behold, like a goddess on a mountain-top (groan), was VNUS. VNUS Medical Technologies, to be specific. The company's flagship product is the Closure system, which treats venous reflux disease, a condition sometimes responsible for varicose veins, skin ulcers, and other vein-related problems. The system is minimally invasive and is typically used on an outpatient basis. VNUS peddles its wares to general and vascular surgeons, and phlebologists in the U.S. and a few nations in Western Europe. The company's shares are lightly traded and market cap is slight, at $230 million.

Another factor I like to see in an Undiscovered Gem is outperformance against the broader market. VNUS shares have easily outperformed the S&P 500 Index (SPX) on a 20-day, 40-day, and 60-day basis, according to internally tracked indicators. Checking back 52 weeks, VNUS has gained 56% while the SPX has lost 7%.

One of the qualifying technical factors for the Gem results is a perch above the 50-day moving average. Although VNUS is trading above this trendline, I'm more interested in the 50-week trendline, which holds more historical significance. The last time VNUS had a view from below this moving average was in November 2006. For the past several weeks, the stock has been consolidating sideways into its 50-week, and the aggressive trader could wager that this will act as a launching pad for the shares.

Weekly chart of VNUS Medical Technologies since July 2006 with 50-week moving average

Another important variable is scant analyst coverage. Lack of attention on Wall Street suggests that the stock could proceed to benefit from brokerage initiations or upgrades. If a broker adds VNUS to its radar, buyers could follow. Currently, just 3 brokerages follow the stock, awarding 1 "strong buy" and 2 "holds." Not only could new coverage bring positive attention to the shares, but there is also the possibility for upgrades from the pair of analysts currently awarding "hold" ratings .

It's a nerve-wracking market out there, but there is still money to be made with the right bullish opportunities. The trend can still be your friend with carefully selected stocks. As always, remember to employ smart money management skills, and don't let your trading be compromised by the emotions of fear and greed.

Please continue to email me with comments, questions, or any "undiscovered gems" of your own. It's a new year, and I hope the gem selections of 2008 are better than last year's, and you can help achieve this goal, even in this rocky market environment! Thanks for reading, and good luck with your trading!

For additional timely commentary on today's market-moving news from me and my colleagues Andrea, Elizabeth, Jocelynn, Joseph, and Mark, please visit our Schaeffer's Daily Market Blog section throughout the trading day.

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