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No. of Recommendations: 8

I can't explain the disdain. I bought my first bunch at over $40 (just a small amount to get in the game), and then more at $32, and then more just this week as my June puts were executed early. I think my average cost is around $28.

The Russell 2000 fell by 14% from May 10th to June 13th, so I think the sell off in small caps has hurt ELOS. Not being able to buy back stock is a problem. Well, not really a problem, but if they could buy back stock it would provide some votes in the near term voting machine. The company has a high short interest (so it gets red flagged on Hewitt's 5 minute drill), and I think the stock can definitely be artificially depressed by shorts. It is volatile and any buying interest seems to send the stock up quickly.

3 of the largest holders dumped the stock this year, which is part of it going down. If you believe in technicals, then there was no support between $25 and $20, so when it broke the $25 level...

And there's always concern over competition. Management turn over didn't help the recent price either. I think the moat is smaller than none if that's possible. They have patents, but there's nothing stopping anyone from coming out with a better or different way of firming skin/wrinkles/veins/hair. And with PMTI suing CUTR, I think that spooked some investors (although ELOS uses different technology [ie, energy and light], my research shows the laser component uses the same wavelength and pulse duration that's covered under PMTI's patents, so they'd have to prove to a court that using energy as well as the laser is not covered under PMTI's patents [of course PMTI's patents only cover hair removal, not wrinkles or cellulite etc].)

And missing 2 quarters in a row of revenue estimates certainly doesn't help. However, the CIBC analyst who reiterated his buy yesterday has a history of good channel checks (he called the Q4 miss before Q4 was over), so I view that as a good sign for the current quarter. And I think if they can prove that their investment in sales will pay off, the stock will be right back to $30. We may not see $40 again for a long time, but I don't think $30 is that far off.

My model shows that the current price, with a 12% discount rate, is estimating 5% sales growth, additional investment in working capital (receivables) of $2M more than the previous year (ie last year was $8m, this year $10M more, next year $12, etc), and expenses as a % of sales higher than the most recent quarter (which was higher than the street was expecting). I think that's just overly pessimistic. I conservatively get about $37 a share in value, I can get over $50 if receivables quit growing so fast and I can get $55 if they gain some leverage from selling expenses. My sales growth rates are, starting from the $115M in 2006 (management guidance, we might have to adjust down after Q2)

20% - 2007
18 - 2008
3% terminal

Using the expectations investing approach, I estimate only 2 years of 20% sales growth before 3% terminal growth justifies the current price (assuming massive working capital needs). It's only 1 year if I assume normal working capital needs.

So yes, I think it's a strong buy right now. It's currently about 10% of my portfolio, or I'd be adding more. I couldn't pull the trigger when it was below $18 earlier in the week, however I expect I'll be selling some more puts along the way.

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