"Pennsylvania-based Emerald Research recently issued a short- and long-term "speculative buy" rating on the company, with a possibly "conservative" 12-month price target of $26 a share. Emerald estimates that the company will see $1.31 a share in earnings for fiscal '97 and $2.00 a share for fiscal '98."
The investment community calls them "story stocks," the kind that promise almost instant riches and send the momentum investors into fits of salivation. The companies are usually small and from the out-of-nowhere regions. But they all offer some can't-miss product with virtually unlimited potential.
For the most part, these companies don't appear on the mainstream investment community's radar until, like a Comparator Systems, they explode: first up, then down. Amidst the Wall Street cognoscenti, story stocks are of interest mainly to that pack of short-sellers keen on finding suckers ripe for some bloodletting. These stocks also interest those well-placed pundits who are always looking for a good excuse to pontificate about the stupidity of individual investors going it on their own.
Of course, there's a reason these "stories" so often end badly: the story is all there is. When a company has lots of news releases but little cash, too much debt, too many shares outstanding, no sales, maybe even no product, the odds are pretty good that when the final curtain falls, the stage will be strewn with corpses. It's relatively rare for the story to end with happy investors trotting down the aisle committed to a blissful long-term relationship with the company.
In a year full of great story stocks, few have been more compelling than QUIGLEY CORPORATION (Nasdaq: QUIG). Based in Doylestown, Pennsylvania, Quigley is a tiny company with an almost too-good-to-be-true product: a simple and inexpensive zinc gluconate lozenge that has been shown in clinical trials to actually reduce the duration of the common cold by about 42%, from 7.6 days on average to just 4.4 days.
Researchers still disagree on how zinc gluconate might work, but leading advocates of the therapy believe it exerts an antiviral effect on the human rhinovirus, the most common cause of colds. That would help explain the anecdotal reports that the lozenges can even stave off a cold if taken at the first sign of symptoms.
No other product ever investigated has shown such remarkable efficacy against this troublesome and ubiquitous illness. Whereas other cold products just treat the symptoms, Quigley's Cold-Eeze is said to speed up the cold process while simultaneously ameliorating many of the symptoms. And Quigley has exclusive rights to two key patents, making Cold-Eeze a seemingly proprietary franchise in what is a multibillion dollar annual market full of products that cost more but accomplish a great deal less. And at just $5.99 for about a three day's supply of lozenges, Cold-Eeze seems to be not just a terrific product, but an unbeatable value.
Just as important for investors, the company has rapidly built a consumer following. For the last year, Quigley has been selling lozenges on the QVC home shopping network. And recent coverage from CNBC's "Steals and Deals," the Boston Globe, the Chicago Tribune, and other media outlets has provided loads of free advertising that's helped jack up demand way beyond the company's capacity to produce the lozenges. Consumers are reportedly scooping up new shipments before retailers can get them on the shelves.
In early December, the company said it was receiving $500,000 a week in new orders and was planning a rapid expansion of its contract manufacturing capacity to meet its $3.5 million order backlog -- about seven times its total sales for 1995. In a phone interview with Rogue two weeks ago, company CEO Guy Quigley said that new manufacturing equipment was now being installed and that the company would soon be able to produce "at least" $1 million worth of lozenges each week
The next day, Quigley announced an additional expansion that will raise production capacity to $3 million per week by early 1997. The same press release indicated that the company had received new orders from Walgreen's and Revco totaling $2.5 million and an unexpected order from Zee Medical, Inc., a division of McKesson Corporation, to supply Cold-Eeze for 300,000 first aid cabinets in office sites throughout the U.S. The Zee Medical purchase was valued at $7.5 million for the first year.
(The 10K annual report released this week indicates that the company's manufacturing capacity will reach $1.5 million per week by the end of January with more capacity coming on-line "shortly thereafter." This SEC filing also notes that as of December 26th, Quigley had a purchase order backlog of $7.5 million.)
Given such exceptional demand, it's no surprise that investors have gone gaga over Quigley. The stock has more than tripled in value over the last two months. Even more astonishing, the shares have actually soared to the recent price of $18 a share from just $0.62 a share in April. A thousand dollars invested in the company just eight months ago would now be worth about $29,000.
Curiously enough, the stock has skyrocketed even as the company has offered additional shares. The company currently has 6.05 million shares outstanding. This figure represents a dramatic increase over the 3.2 million shares outstanding after a 10-for-1 reverse stock split orchestrated last January, as well as a significant boost from the 4.2 million shares outstanding as of June 30th or the 5.6 million outstanding as of September. Quigley also has outstanding warrants allowing holders to purchase up to 2.35 million shares for as little as $1.00 per share.
The company is currently trying to raise additional cash through a private placement "in an amount undetermined at this moment," according to CEO Quigley. (The recent 10K says the offering would be in the $6 to $8 million range.)
Given the company's apparent growth prospects, however, none of this dilution seems to have bothered investors. Since Quigley's officers and patent holders own a significant chunk of shares, there are only about 2 million shares in the float, according to Quigley. And even assuming some further dilution over the next year, Pennsylvania-based Emerald Research recently issued a short- and long-term "speculative buy" rating on the company, with a possibly "conservative" 12-month price target of $26 a share. Emerald estimates that the company will see $1.31 a share in earnings for fiscal '97 and $2.00 a share for fiscal '98.
On the other hand, Quigley has been and still is a very small company. Recent filings with the Securities and Exchange Commission show a firm that has been barely scraping by. Because Quigley has suffered net losses since its inception in 1989, its accountant has been forced to raise the question of whether the company can continue as a going concern.
And the latest 10Q filing for the quarter ended June 30th showed sales declining by 20% for the first nine months of fiscal 1996, to a meager $323,726, even though Cold-Eeze lozenges were already being sold via Walgreen's and QVC. Working capital stood at about a quarter million dollars, with just $85,000 of cash on hand at the quarter's end.
Year-end numbers released this week do show rocketing sales in the fiscal fourth quarter (after the latest trial results were made public). But sales totaled just $1.05 million for the year. Moreover, the company still reported a loss of nearly $700,000. On the other hand, the increased sales and new private placements have raised working capital to about one million dollars, with cash on hand of $370,000 as of September 30th.
And the business does seem to be growing at a fantastic rate. On January 2nd, the company announced that it was expecting $3.9 million in revenues and $1.8 million in earnings (or $0.30 per share) for the first quarter just ended. Curiously, this press release indicated that back orders stood at $11 million as of December 31st (an enormous $3.5 million increase over the figure given in the 10K).
Still, the company was only recently so small that a loan for a single company car represented a significant balance sheet item in its third quarter filing. The company has even offered stock to pay for basic operating expenses such as advertising costs. It's hard not to agree with the poster in The Motley Fool's Quigley folder who found this 10Q to be an amusing read. One's tempted to ask: Is this really a *public* company?
The point is that the Quigley story should make even the most naive investors apprehensive enough to ask some basic questions. Is it really possible that the company's zinc lozenges can work such wonders? If they can, how is it that a small company in Pennsylvania created to market a sumptuous but unprofitable health food bar came to hold patents on the lozenges?
Indeed, the first clinical trial showing remarkable efficacy for the zinc lozenges was published in 1984. What in the world has taken so long to get this amazing product to market? And why wasn't it scooped up by some pharmaceutical titan with loads of muscle in the over-the-counter market for cold therapies? Moreover, if the product is really so great, will the patents actually hold up against the inevitable competition?
Finally, even if the Cold-Eeze story stands up to a thorough inquisition, can the Quigley Corporation? The company has only 10 employees, not including its contract manufacturers. Even Emerald Research has expressed the desire to see some more seasoned managers brought in to guide the company through what investors hope will be quite dynamic growth. Then, of course, there are the repeated warnings from short-sellers that Quigley is a stock rig, one of a long line of companies listed on the OTC bulletin board that have fleeced small investors out of their life savings and lined the pockets of stock promoters.
As is so often the case, Rogue has uncovered a story of intrigue behind this story stock. But perhaps what is most intriguing is how convincingly the story of Quigley's zinc gluconate-glycine lozenge, at least, pans out.
It is true, for example, that Dr. Jack Gwaltney, Jr., a world-renowned expert on the common cold, completely rejects the efficacy claims being made for Quigley's zinc gluconate lozenges. It is also true that George Eby, the primary patent holder on the use of zinc salts in the oral treatment of common colds, has licensed two zinc acetate products that are just hitting the market and should compete with the Cold-Eeze lozenges. Finally, it is also true that some of the largest pharmaceutical companies, including Bristol Myers and SmithKline Beecham, considered marketing a zinc gluconate lozenge only to decide against it.
A number of questions remain to be answered. But Rogue's study of the published research combined with interviews with the principal investigators suggest that Quigley may indeed be on to something genuine.
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