A Mixed Bag

A Mixed Bag

Given the way things have been unfolding it’s difficult to judge how much of the recent selloff is related to concerns over the coronavirus and its impact on the global economy and how much is company results related. The results released by Insulet this afternoon and the initial reaction of the street is an example of this. While revenues were strong, gross margins a key metric declined 60 basis points for the full year, down 290 basis points for the fourth quarter.

Frankly we aren’t surprised that shares have been selling off in after-hours trading given the miss on this key metric combined with the general negative sentiment of the overall market. Add in the fact shares of Insulet have been surging it’s really no surprise that investors are taking profits. Let’s be very clear here other than the miss on gross margins the business remains strong and the future looks very bright.

During the call the company did note this miss on gross margins was related to their continued investment in additional capacity. In an ironic twist the company is well positioned should the coronavirus continue to adversely impact the global supply chain. No longer dependent on offshore pod production the company is well positioned to handle any possible supply chain disruptions. Put simply, the company is willing to make short term sacrifices to ensure long term growth even if that means taking a short term hit to gross margins.

The other issue the company could run into is order delays as patients put off ordering the OmniPod until the Horizon gets here. This is the same issue Tandem had to deal with while patients waited for the Control IQ to be approved by the FDA. Given the continued conversion from ‘smart” insulin pumps to hybrid closed loop sensor augmented system there really isn’t much Insulet can do to encourage patients. Like Tandem they will likely offer some sort of conversion program for patients who order the OmniPod so that they get the Horizon once it becomes available.

The third issue that could impact the company is the law of large numbers, tougher revenue comparisons due to how well sales grew in previous quarters. Now to us this is the right problem to have however the street is not as enlightened as we are.

The fact the company remains committed to their long-term strategy is a sign of maturity which eluded the company in years past. Management should not be chastised for this commitment quite the contrary they should be commended. Like Tandem they understand the dynamics of the market, they see Medtronic wounded therefore there is no reason to vary from a strategy that is clearly working. Yes, there will be dips along the way, but these are short term blips that come with continued long-term growth.

To be quite honest we had anticipated a selloff in the three amigo’s – Dexcom, Insulet and Tandem – as valuations were getting overly wacky. We didn’t know when this would happen or what event would trigger the selloff but our 20 plus years in this wacky world told us it was coming. Just to be very clear here there is nothing fundamentally wrong with the three amigo’s, they continue to perform well and have very bright futures. This is more a reflection on what’s going on externally in the market. We would also add that we see any sell off as an excellent opportunity for new investors to jump in or for existing long-term investors to add to their positions.

As Momma Kliff used to say stocks are the only asset that when they go on sale no one wants to buy. It’s also the reason smart long-term investors make money as they know that money isn’t made when you sell it’s made by buying smart.