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Subject:  I'll be out on Monday Date:  5/13/2006  11:55 AM
Author:  DatabaseBob Number:  7 of 24

This is mostly a cross-post from the Falling Knives Board. Given the dearth of posting on this board, maybe I shouldn't bother... But hopefully someone interested in the stock will find this bit of history useful.

This quarter's numbers were a bit of an eye-opener. Unfortunately, when they were released, I was 13 time zones away from home and 11 from Wall Street. It is only today, after much carnage, that I am getting a chance to review the latest quarter's results and get them into my spreadsheet model.

My position in FOXH isn't large, fortunately, but I figure that my vacation just got more expensive by roughly the amount between the close one day after the quarter's results were announced, and the price I'll be getting out at on Monday morning.

My prediction for the quarter was a gain of roughly seven and a half cents before stock-based compensation expense. I knew the FAS 123 numbers would be significant, but I wasn't sure how bad it would be. My best guess was they'd postpone profitability, at most, by one quarter. I had nailed the prior quarter's prediction - within a penny - so I felt really comfortable with my model.

FOXH had been growing revenues at astounding rates since it became publically-traded. Of course, costs were growing too, but their growth was slower. If trends continued, by a year to a year-and-a-half out, profits would have grown so large as to make the current PE based on those earnings ridiculously low. That was my investment thesis. Plus, after all, the stock had been as high as 55. Based on Technical Analysis I thought it would find support around 30 (a tad below my entry point). I was right, for a while.

The Motley Fool seems to value transparency when management reports results. They appreciate management that "mea culpa"s when expectations are not met. So I'm not sure that they would buy into the following headine to the FOXH press release: "FoxHollow Technologies Reports First Quarter Revenues More than Double to $46.6 Million".

From 9/04 to 9/05, they more than tripled their revenue. From 12/04 to 12/05, the growth was ever so slightly under tripling their revenue. From 3/05 to 3/06, it was barely double. This is a HUGE slowing in revenue. Most of my thesis for owning the stock just got blown out of the water.

There are new items in the income statement for research collaboration with Merck. Revenue exceeds costs, so they should get some credit for this. However, I'm not sure how far it is reasonable to extrapolate this kind of collaboration out into the future, so I don't apply it to future quarters at all. Perhaps I'm being miserly tonight.

Growth in Product costs slows, which is good, but other expenses (SG&A and R&D, primarily) don't slow nearly as much as the slowdown in revenue. And then there's FAS 123. The stock-based compensation is more than I bargained for. True, it contains some one-time numbers due to a change in leadership last year. But the ongoing numbers aren't tiny either.

On top of this - and I should have seen this before I invested - I am a minority shareholder. The Motley Fool - at least Tom G. with his Hidden Gems recommendations - likes to see high insider ownership. I agree, but to a point. I feel uncomfortable when insiders own more than 50% of outstanding shares (at least one HG rec has insider ownership over 50%, but I don't own it). Within some limits, 50%+ owners can vote for whatever they damn well please, and courts are loath to overturn business decisions. Here, management owns over 50%, but I hadn't noticed when I bought in. On top of that, there was 3% share dilution last quarter, and I'm pretty sure the extra shares went to management.

Today, instead of a company growing revenues faster that costs, I'm left with the opposite. My investment thesis is shot to hell and I'm going to run with my tail between my legs - my model just shows losses widening. The Fool (note the capitalization - and I mean it with respect) who brought FOXH to TMF's attention has been referring to the company as "FoxHole" instead of "FoxHollow" for a while now. It is unfortunate that I thought myself smart enough to know better.

I don't feel completely stupid. I've made some decent calls too on these boards and in my (and my sweetheart's) personal portfolios, and I recognize that this was just a several-hundred-dollar learning experience for me - I've paid more for other worthwhile classes. But I'm also not feeling too smart right now either.

Hopefully I've "bared all" enough so when you're about to pull the kind of stunt I just did, you'll remember this post and "not be that guy".

Best wishes,
DB Bob (long FOXH, but not for that many more hours - after I sell, of course, it'll go up for a while)

P.S. I intend to cross-post this, in tailored form, on the Rule Breakers: Biotechnology board (someone asked about the quarterly results there, and I promised to get back to them).
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