Sunday Research Pipeline Session #5 - Two Diagnostic Test Turnarounds
Watching for early growth inflections and a reduction in risk factors
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Some of the best stocks I’ve owned throughout my investing career have been medical device/diagnostic test companies. They can tend to trade at a premium price or enterprise value to sales valuations as long as they’re at least around breakeven.
If you can find them at a point where accelerating sales growth intersects with a time where they are no longer burning loads of cash, you can see a significant upward revision in valuation multiples because of the recurring revenue nature of these kinds of businesses.
I don’t know if I’ll ever own another KRMD in my lifetime, rising from around 10 cents to around $11.00 while I owned it, but I’m sure going to try.
So, this Sunday Journal entry includes two diagnostic test stocks. Both of these stocks delivered big returns in 2020/21, as many diagnostic test companies did during the COVID hype. However, also like many other “Covid beneficiary” stocks, they came crashing down to earth once the hype subsided.
While these two stocks don’t quite yet qualify to be added to our MS Microcap Quality Index (MSMqi), their turnarounds are worth watching very closely. However, we will like be adding the second stock mentioned below to the Index.
Medical device turnaround #1 - PRPO (NASDAQ; $14.51)
Precipio is a cancer diagnostics company developing two proprietary technologies, HemeScreen, a rapid and cost-effective genetic test for blood cancers, and IV-Cell, an advanced cell culture medium that improves diagnostic accuracy by growing multiple blood cell types simultaneously. The company operates through two segments: a Services Division that performs tests in its CLIA-certified lab, generating the majority of revenue with moderate margins, and a Products Division selling diagnostic panels and consumables to external labs, which may be poised to drive future growth due to its recurring revenue model and higher margins. Strategic partnerships with major healthcare distributors support broad market access.
Financially, Precipio has doubled its revenue from $8.8 million in 2021 to $18.5 million in 2024 and improved gross margins from 27% to 40.8%, while significantly narrowing net losses.
Recent regulatory wins, including overturning a restrictive FDA rule and gaining Medicare billing approval for next-generation sequencing, are expected to drive steady growth and positive operating cash flow by mid-2025.
Currently trading at a low 1.15× EV/TTM revenue, well below diagnostics peers such as Illumina (3x), Guardant Health, and Natera (6-11x), Precipio offers substantial upside potential if it can continue scaling and move closer to profitability.
Key risks include regulatory changes, funding dilution, and execution challenges in growing the products segment. It’s also worth noting that the company has had a history of over-promising and under-delivering in the recent past, something we need to dig into further. It’s also worth noting that some really smart investor colleagues of mine seem to like the company.
The next stock is a beaten up stock that appears to have put things in place to orchestrate a nice turnaround. It’s also a potential perfect stock for a January effect tax-loss selling bounce candidate.