Taking Profits on one ... giving up on another

Just a quick note to post some changes in my portfolio -- after watching MEMC Electronic Materials grow into one of my larger holdings on the back of near-300% gains, I decided to give in to some of my misgivings about the company's valuation and take profits on about 40% of my holdings.

I'm still holding the balance of my WFR shares, and I do think that it's certainly possible that they will continue to climb -- but there is significantly more risk in the equation now that we're dealing with a trailing PE of 31.

The polysilicon shortage that helped to fuel WFR's rise, on the back of strong pricing, a huge ramping of demand from solar cell manufacturers, and continued strong demand from semiconductor companies, is now getting quite long in the tooth. It was part of my initial buy thesis in this stock when I bought it a little over two years ago. That means that MEMC and their competitors have had plenty of time to see the demand curve rising and put into place plans for dramatic increases in production -- which nearly all producers have done, with some increased production already online.

I'm not enough of an expert on this industry to know whether or not the "big four" polysilicon suppliers will overplay their hand and oversupply the market as their new supply continues to come online over the next year -- so given the boom and bust history of this sector, I'm hedging my bets, taking enough profit off the table to be comfortable holding the balance and watching the supply/demand dance play out. I sold 40% of my WFR position at $60.02, and will continue to hold the rest pending future developments.

And my other recent move, which was long overdue, was to clear the decks of my holdings in Cryo-Cell (CCEL.OB). I was impressed with this cord-blood banking operation when I first picked up shares back in November of 2005, and thought that they were on the cusp of a few good things: potential relisting on a major exchange, transition to a consistently profitable operation thanks to their ongoing relatively high-margin income from storage fees, and possibly increased public interest in their product as stem cell "miracles" come to light.

Well, how's 0 for 3? I should have listened to Yehuda Fruchter and sold my shares a while back when it began to be clear that management was either "competency challenged" or not aligned with common shareholders.

Instead of transitioning to a high-margin, solid growth company with good steady income from storage fees, Cryo-Cell has gone through a few different high risk product "near launches" that seem to have not gone well, notably for Plureon placental stem cells, an innovation that appears to still be in search of a market. They've also invested heavily in marketing, and in upgrading and/or fixing their facilities, which they had said before were already state of the art, and now appear to be trying to develop yet another higher margin (and higher risk) maternal stem cell product of some kind. Ballooning costs led to a bitter challenge for board seats that's still underway, but I don't see this ending well ... at least not in the near term ... so I'm clearing out my shares at about a 40% loss.

Thankfully this remained a relatively small investment for me (and a shrinking one, of course), but I'll take it as a lesson that what seem to be great business plans from microcap operators can quickly turn if management doesn't think the same way you do. I've had similar results so far from my other "microcap with a promising business plan," MMC Energy, but I'm willing to be a bit more patient with that one.

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Risky moves in 2006 -- my worst decisions

I haven't yet done the math on my whole portfolio, but I expect overall I puttered along somewhere near in line with the S&P in 2006 -- I'll update that here in the coming weeks to continue my full disclosure.

But I do know what some of the smartest and dumbest things I did with my money this year were. Or, to be more charitable, my best and worst decisions.

My worst investment decisions this year all related to the riskiest moves I made -- investing in OTC stocks and buying after hours, both things that I would probably be better off not getting involved with (but sometimes, I just can't resist).

I own three OTC stocks (and a couple pink sheet listings, though those are for big companies that happen to be based overseas and not actively traded here), but only one of them was purchased in 2005. I've owned SpaceDev (SPDV) and Cryo-Cell (CCEL) for well over a year now, and they are two of the worst performers in my portfolio, so they might qualify as big mistakes for 2005, but not 2006.

The worst timing this past year was my purchase of MMC Energy (MMCN) -- shares of which I bought in early December at $1.24, and could now buy for about 80 cents.

MMC Energy shares have been declining because of a big registration for insider selling, which generally wouldn't worry me that much in a brand new company (it doesn't bother me when venture capitalists and insiders want to get paid for their work) ... but in this case, it's a LOT of shares, and a company with a very small float, and those two facts combine to mean that the shares are likely to be under pressure for a while. Add that to the fact that MMC is not yet on the AMEX, an event they predicted to occur by the end of the year, and the steep decline is not that shocking, even in the absence of any bad news about the company's actual operations.

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Regardless, while I still think the rule to avoid penny stocks is generally a good one because of volatility like that experienced by all my OTC shares, I still have hope for all three of these companies -- SPDV and CCEL should be profitable in 2007 if things work moderately well for them, and MMC Energy is in a capital-intensive growth phase that I think has a solid chance of building a good company.

I also know, however, that all the money I put up for these companies is at risk and might all be lost -- that's the price you pay for investing in a tiny company with potential, and I'm willing to be quite patient as these stories play themselves out.

And my second worst investing decision last year was buying shares of a company that reported terrible news in the after hours session. I thought -- and this shows you how smart I am -- that the beating that Imax (IMAX) took following their announcement that they hadn't found a buyer was terribly overdone, so following the news I picked up some shares in the after hours session at about $6. It's never even gotten close to returning to that level since.

So what are the lessons for me?

When investing in OTC stocks that are notoriously hard to value, especially new ones, go in with your eyes wide open and the expectation that you might lose all your money. At this level, you're really investing in business plans and management and potential most of the time, all of which can be a bit ephemeral. I'll continue to wait on these stocks, and to keep them a tiny portion of my diversified portfolio.

And the second lesson, learned after making this mistake several times, is to never ever ever trade in the after hours or pre-open trading. For the few times when an informed investor can make money in these sessions with some lucky timing, you pay with the many times that you had the wrong conviction which, given the time frame allowed for this kind of trading, is almost always going to be based as much on emotion as anything else.

I've learned lots of other things from my mistakes and victories in the past year, but these two risky areas stand out in terms of what they've cost. I'll share some of the better decisions I made, and what I might have learned from those, in the days to come.

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Checking in on Cryo-Cell (CCEL)

After noticing that Cryo-Cell (CCEL) shares were bumped up by about 8% this afternoon, I thought it was high time to take a closer look at recent news from this umbilical cord blood bank.

There isn't anything in particular that would obviously cause the shares to boom today, except for the general interest in stem cells following the recent political debate and the follow-up coverage from Time, CNN and the rest of the mainstream media. It might just be that shares are moving up because of increased awareness of the only really morally unambiguous stem cells now available, those from umbilical cord blood.

I've been on a downward spiral with CCEL for some time -- I looked at it with some enthusiasm in November, made my initial purchase shortly thereafter and filled out my position in February to give me an average cost of about $3.80, but since then I've watched as it dipped and dipped and dipped, most significantly in April when their earnings disappointed thanks to the first salvo in an enlarged and more expensive marketing campaign.

I continue to believe, as I wrote when I first purchased shares, that banking and/or donation of umbilical cord blood will be a significant social trend in the coming decade, as awareness of the value of stem cells rises and the scientific advances made possible with transplantation of u-cord cells become more and more compelling.

But that's not going to happen overnight -- Cryo-Cell does not do its own medical research (though they do have a small investment in a company that does), they primarily focus on marketing their services and processing and cryo-freezing cord blood. They charge both a processing fee and an annual maintenance fee to pay for the continued storage. Their focus has been on building a better service, and building and maintaining better facilities that are certified by all appropriate oversight bodies.

And they've done that, but not without some controversy. They had problems a few years ago with some malfunctioning machines and just last year finished accounting for any liability for that, and they have some unpleasant funding mechanisms in place that, while not illegal or unethical, aren't necessarily appealing for small shareholders. Yehuda Fruchter over at Casino Capitalism was a shareholder, and has written about his distaste for these revenue sharing agreements that essentially provide nice royalty streams to investors in exchange for upfront payments -- payments that he calculates work out to a 24% interest rate for CCEL, which is certainly not pleasant. These revenue sharing agreements cover several geographic areas, but certainly not all of them, and I'd imagine that with a cash position of about $9 million they're unlikely to enter into additional agreements.

The metrics to watch for every year are the number of current clients they have (the number of customers who pay that annual storage fee), and the number of new clients they bring in. It's a very simple business, but this year it is a little bit more complicated than usual for a few reasons.

First, they are launching a new product, of which they are the sole licensee. They will be the first cord blood bank to offer processing and storage of Plureon placental stem cells, which are somewhat different than U-cord cells and have shown some early potential for treating diabetes and other dreaded illnesses.

And second, partially in conjunction with the launch of this Plureon product (which has been pushed off to the Fall, after being initially planned for March), they're significantly boosting their advertising and marketing budgets to try to take market share and rebrand the company.

With an industry that has a few companies of significant size but is generally quite fragmented, and with very little brand recognition (Cryo-Cell and Viacord are the only names that trip off the tongue, and they're two of the larger players), I think this investment in marketing and building market share is right on target. The Plureon service will allow them to offer the only significantly different product out there and give them some opportunity to grow even with the price increase they initiated in December, since prior to this the only real differentiation between the companies was the reputation and the price (both of which were minor positives for Cryo-Cell in comparison to their major competitors).

This year, they've felt the impact of the price increase at the end of last year in significantly boosting sales, but they've felt the incrase in marketing costs even more and reported a small loss for the last two quarters. They did note in their last earnings release that the new plureon service and the rebranding of the company have made a significant impact on their operations, with huge boosts in inquiries from expectant parents in response to their advertising campaigns to both parents and doctors -- but we'll have to wait a little while to see if that interest translates into sales.

I'm still holding my CCEL shares, even though I don't know why they're rising today. I still believe in my general thesis that expanded awareness of the value of umbilical cord blood will make the retrieval and storage of these stem cells more prevalent, and that this expansion of the market will lift all the companies involved. With Cryo-Cell you get both a downside and an upside that could cause the shares to diverge from what I think will be the generally positive trend of the industry -- the downside is the spate of legacy revenue sharing agreements that are on their books which cut into some of their proft, and the upside is the launch of the first truly differentiated product in the industry and the absence of an overhang for drug discovery and approval risk.

With the company on the verge of becoming consistently profitable, and with the potential for a relisting on a major exchange if the launch works well enough to boost the share price significantly in the fall, this still seems a fairly decent bet for me. I'll be holding on, watching the rollout of the Plureon service, and, hopefully, enjoying the show.

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Ouch Ouch Ouch Ouch Ouch (CCEL)

I'm glad to see the sun begin to set -- this was the worst day my portfolio has seen for a very long time.

I'm a little bitter about the fact that I doubled down on my Exelixis (EXEL) position this afternoon, only to watch it inexplicably fall a few more percentage points -- but given my history I suppose I should expect just such a move, my short term timing stinks.


But the decline was nearly across the board -- Nasdaq fell about 1% today, but my portfolio dropped nearly 2.5% ... not enough to reduce me to wearing a barrel, but hard to watch.

And it was a remarkably broad decline -- as it would have to be to hit my very diversified portfolio this hard. Akamai (AKAM) had a nice recovery day, thanks perhaps to Jim Cramer's incessant promotion of the stock, but nearly everything else was down.

Some of the worst? Cryo-Cell (CCEL), whose earnings were, I thought "not bad" ... the Street disagreed, vehemently, and pushed it down about 15%. I don't want to sink any more into this one, but if their more aggressive marketing does it's job this year they should be able to grow significantly.

I'll have to look into the company in more detail -- Casino Capitalism, another blogger that has held CCEL, has certainly lost faith in management and posted today that he's looking to exit his position. I don't necessarily share his concern about management's plan to upthe online advertising budget, since that's where the customers are doing their research, but he believes they're late to the party and are in danger of overbidding (perhaps being a GOOG shareholder will cushion me there).

With CCEL, it's really a question of whether you think it's advisable to market aggressively into what I think will remain a fast-growing and competitive market, or you think they should take advantage of their steady revenue stream and manage their cash flow more conservatively, for more predictable returns. I'll let you know if my thinking changes, but I think they might be doing the right thing -- though it's hard to have conviction on that given the clear evidence that the market disagrees with me.

But the ugliness wasn't confined to micro-caps today -- Vertex (VRTX), Radyne (RADN), Taser (TASR), Myriad Genetics (MYGN), Intuitive Surgical (ISRG) and Click Commerce (CKCM) were all down by well over 3%. I know, 3% isn't much for these volatile tech and biotech stocks, but they don't often all move at the same time.

A lot of the pain in my portfolio over the last week or so has been in biotech -- I wrote last week that it looked like we might be seeing a nice biotech opportunity, but that guess was definitely early. Largely in the absence of news, most of my biotech holdings have fallen precipitously over the past few trading days. I wonder how much of this is attributable to fear over the next week or so, when we're going to see the sector bellwethers Amgen (AMGN) and Genentech (DNA) report their earnings? If that impact is significant, it should be short-lived and perhaps I'll have the courage to put a bit more cash to work if this decline continues -- though after EXEL bit my hand this afternoon, I'm not so eager.

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Company on the CCEL bandwagon

Since there are so few people following Cryo-Cell, I thought it was worth sharing that I just ran across another blog, Casino Capitalism, that has purchased CCEL shares and follows them with some regularity.

According to the latest info he's posted, he bought shares of CCEL at $3.90, which is just about the same as my current cost per share of $3.89, so we must be thinking at least similarly on this one. He expects them to double within the year, which may be a bit ambitious (but I'll happily accept it).

I've written about CCEL several times, I posted an article with my detailed analysis of the company and the stem cell banking trend back in November, then most recently wrote them up about a month ago following their last earnings release.

Casino Capitalism has a few posts on CCEL that I've seen -- this one on his argument for stem cell banking stocks in general last Fall, another on the importance of federal stem cell banking legislation, and another on CCEL's introduction of their Plureon product. Certainly worth checking out for those of you who, like me, have an interest in seeing how the growing popularity of stem cells impacts this solidly run, profitable company.

One thing Casino Capitalism and I certainly agree on is the importance of the possible near-term catalyst of CCEL's relisting on a major exchange -- if they get back on the Nasdaq or onto the AMEX in 2006 as is widely expected I think the company will get a lot more attention and may well be richly rewarded for their very solid and steady ongoing revenue stream as well as their significant growth prospects as stem cell banking enters the mainstream.

Glad to see someone else on the CCEL bandwagon -- I'll be looking forward to seeing how the plureon product sells, and how well CCEL holds up against the swelling ranks of competitors, but I really think the cord blood banking business will be a rising tide that lifts nearly all the boats -- and certainly CCEL, one of the oldest, largest, and best financed companies in the business should grow at least as quickly as the overall industry.

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Cryo-Cell -- investing for the future (CCEL)

I've been a shareholder in Cryo-Cell (CCEL -- click to register for free RT streaming quote) for a relatively brief time -- I first bought shares and posted my argument for doing so back in November. Success has so far not come my way on this one, but that's not very surprising.

CCEL is an over the counter stock, not yet returned to the national markets -- though they hope to apply for relisting this year if possible (their share price has to maintain $4 for a while before they qualify).

But today I'm thinking about them a bit because they just released their earnings, for the oddly timed fiscal year that ended in November. The stock has tumbled slightly, though the news wasn't particularly bad.

Cryo-Cell is an investment in the future -- both for customers and for investors.

If you decide to bank your child's umbilical cord blood privately, you're effectively taking out an insurance policy and hoping that if your child or a family member does get a horrible disease, stem cells from that cord blood might be an effective treatment. So far, a large number of parents are opting to use this service -- though it's still a tiny minority of the total births in the US. But if you can afford it and believe that stem cells will ultimately become much more useful in the treatment of heart disease, cancer or diabetes, it seems a reasonable bet for those who can afford it.

For investors, we're betting that stem cell research will continue to illuminate new uses for these incredible little cells. The tease that placental stem cells may cure diabetes in mice, or the few examples of stem cells treating leukemia in siblings, or similar stories all have us wondering when this research will become mainstream enough that cord blood banking will be a recommendation of every obstetrician.

Cryo-Cell had a fine year but not a great one, largely because their expenses increased pretty dramatically -- they have rolled out more selling expenses, as well as incurring some significant expenses for their new facilty and accreditations. I'll be watching to see if they can keep their costs in control as they grow customers, because the near 20% revenue growth certainly makes for a solid top line.

But this company is an interesting beast, with three things that stand out for me as important reasons why I've invested in them ... and this also stands as a list of three things I'm trying to watch closely for this company:

• Unlike some of its competitors like Viacord, CCEL doesn't do stem cell research, which helps to keep the volatility down (no clinical trials to worry about) ... if their service continues to grow, the recurring revenue stream from annual storage fees could become a single good enough reason to own this company.
  
• CCEL will be the only private bank in the US to offer harvesting and storage of Plureon placental stem cells when they roll out that service offering sometime this year. This is a bit of a gamble since those cells are even further along than umbilical cord cells in the path to general acceptance ... but overall, I like this because it differentiates their service.
• And CCEL may have a purely stock-related catalyst this year, in that the company's turnaround appears to be well underway and some continued solid financial performance should enable them to be relisted on a major exchange, re-entering the mainstream investing universe.

This is a very risky investment and questions about the long term health of the industry or this specific company weren't likely to be released in this week's earnings report ... but I've invested in this company both as a parent (and CCEL customer) and as an investor. I think it has a good chance of paying off, but I also think it might take many years for that to happen and I intend to be patient.

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Another poorly timed purchase (CCEL)

This is getting to be a habit -- I buy some shares at a price I find reasonable, and they almost immediately dip. Of course, when we're talking about little OTC companies like this that's to be expected to some degree, and it shouldn't matter given my long time horizon on most of my investments, but it's still irritating.

I felt fine about the price I paid a week ago when I actually put this order through, but now that I see how the shares have cratered again ... arg.

But anyway, I bought more Cryo-Cell (CCEL -- click to register for free RT streaming quote), and now have what I consider to be a full position with an average cost of $3.80 a share.

Did I mention that it's down to $3.40 as I type this? That is, by the way, exactly what happened when I made my first purchase of CCEL, too -- I need to get better at predicting the future.

Long-term, I am not worried about differences of a few pennies in the price. CCEL is trading at a very reasonable price right now, even though they face a large number of challenges.

I wrote more about CCEL back before I made my first purchase as well as immediately after I bought, and touched on them again when I did my annual checkup, but here's what's right about Cryo-Cell, an umbilical cord blood bank:

They only process and bank stem cells. They don't have a risky research arm, like Viacell, that puts them in the red with very unpredictable and expensive clinical trials.

They sell at a competitive price and have a very solid competitive position in general -- their advertisements online compare them favorably to the other large banks on price, technical capabilities and certifications, size, and long-term support for families who actually need to withdraw and use the stem cells. As far as I've seen, no other bank makes this kind of comparative marketing pitch, and I think it's effective.

They have a product which no one else will have -- placental stem cell banking. If you're going to make this investment, one would expect that you'd want to go all the way and get the best product. CCEL is the sole licensee of what is, as far as I know, the only placental stem cell handling and storage process in the market. The combination of their lock-in pricing for annual storage fees and this placental cell product provide the only significant product differentiation in the market, to my eye. And P.S. -- those placental stem cells are the ones that appear potentially to be a diabetes cure ... at least for mice.

They're expanding overseas with franchises -- latin america, india and other areas are ripe for this business as their middle classes develop, and CCEL has a low-risk exposure to that through these franchised businesses.

And they should, in all likelihood, relist on a major exchange sometime this year -- they're just waiting to get their stock price up to the required range. With earnings continuing to increase and solid guidance for 2006, I expect that to happen sooner rather than later.

And here's what's wrong with CCEL, or what could go wrong.

They might have a bad quarter, which would delay their relisting if it kept the stock price down.

There are lots of competitors out there, more every day -- few have the solid foundation of CCEL, but there are several strong competitors. I expect this market to grow fast enough to lift all the strong companies, and I am confident in the product differentiation CCEL is developing, but I could be wrong.

Technology could interfere with their business model -- if researchers eventually come up with a way to develop stem cells from adult cells that have all the flexibility of embryonic stem cells found in the umbilical cord, then CCEL's business model is in danger of collapse.

Stem Cell donation might become so wildly popular that no one feels the need to bank their own cord cells, relying instead on public banks. I think if this happens there's some likelihood that CCEL could do contract work to help manage some of the government supported banks that are starting to crop up, but there's no guarantee of that. I also think that the recent press about a few states building public donor banks should help, not hurt, the private banks by continuing to increase awareness. Preservation of cord cells is still extremely uncommon, whether done privately or for donation -- an increase in the market size could make up for any drop in market share to the public donation system.

In the end, I think of this company as a relatively lower risk bet on the future use of stem cells to cure disease. If research continues on the trend it is on today and cures for diabetes and other dreadful diseases do prove to be viable using stem cells, every parent in the country will want to buy this extra insurance for their family.

If my thesis holds, good news for stem cell treatments means good news for CCEL in the long term -- but with a huge and growing customer base and a very predictable revenue stream, the risk is somewhat lower than for a discovery-based biotech play in this sector.

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Annual Checkup -- CCEL

I opened my initial position in Cryo-Cell International (CCEL -- click to register for free RT streaming quote) back in mid-November at $3.89, so my shares are a bit depressed at the moment. My full rationale for investing in this private cord-blood stem cell bank is in my recent writeups here and here, but I think 2006 could end up being a very big year for this investment. All of CCEL's competitors have seen a very recent boost in price due to the new Stem Cell Therapeutic and Research Act signed by the President earlier this week that appropriates $300 million for research and infrastructure for umbilical cord stem cells, but CCEL didn't see nearly the same appreciation as most of them. CCEL has the most modern banking facility and one of the largest, if not the largest, client base, and should benefit from the higher profile of stem cell banking as well as the increased awareness of the amazing things that stem cells may possibly be able to do (cure diabetes, etc.) -- even if they don't actually receive any direct governmental funding, which is certainly possible as well. CCEL is launching a new service in 2006 that will further differentiate their offerings -- they will begin banking placental stem cells as well, using a patented and exclusively licensed process, which should help them stand out for expectant parents. Finally, 2006 marks the year that CCEL aims to finish its financial turnaround and re-list on one of the major exchanges, which may boost the shares as well. With the price a bit low here, I'll definitely consider filling out my position early in the year.

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Broke the rule again (CCEL and SPDV)

I have a personal rule, borne of bad experiences with companies like Mooney Aerospace, and of reading of the bad experiences of others with penny stocks, OTC Chinese shell companies, and the other scams of the pink sheets and over the counter market.

The rule is: Don't buy companies that aren't on the major exchanges (NYSE, NASDAQ, AMEX).

But sometimes we all break the rules, and I am no exception. I now own two companies that are traded over the counter, SpaceDev (SPDV-full writeup here), and Cryo-Cell (CCEL-full writeup here) . Both have been making waves lately, but I've held SpaceDev for while -- it's Cryo-Cell that's the new rule breaker here.

I bought CCEL yesterday at what turned out to be the closing price, $3.89. It has actually already dropped a hair below that, which is neither unusual for my investment choices nor a problem for my long-term outlook.

Just to quickly update you on SpaceDev, which I still consider to be a great investment for the long term:

They are planning a merger with Starsys, which I already wrote about.

They have now launched a genuine microsat product, available for sale to anyone who needs to get a little dishwasher-sized presence in space. Could be communications companies, or researchers in Universities ... anyone. Microsats are now for sale on the open market, and I'm sure the price is negotiable.

And perhaps more importantly, they have firmed up their plans to develop what is in effect a private space shuttle replacement in the SpaceDev Dream Chaser that's based on an old NASA design (recycling -- another way to be the low cost provider!). They have been awarded a pretty big contract from the Air Force to work at upsizing their hybrid rockets, and they are aggressively pursuing work under NASA's new plan to develop viable commercial projects that can run supply flights to the International Space Station. There's no guarantee that the Streaker will get those contracts, but I think there's a good chance given SpaceDev and Starsys' track record and great pricing.

This is all big money stuff if they can get it working, and it's all on top of what is currently their biggest project, the Missile Defense Agency microsatellite array which is in the middle stages of development. SpaceDev's plan to use government contracts to research and develop commercial space products and services that they can then sell more widely is working, and what's more, the government wants it to work -- still lots of possible bumps in the road, but I'll be enjoying watching these folks reach for the stars.

And if this growth continues apace, I think we can expect SpaceDev to list on one of the major markets in the next year or two.

But the new news is that I did indeed decide to buy Cryo-Cell, despite the fact that they're not only on the OTC market but have already been delisted from the big exchange once. That was quite a while ago, and they really seem to have their act together now and are fully planning to apply for relisting with the big boys next year.

Like SpaceDev, CCEL is profitable -- the current PE is high at around 40 or so, but with the growth potential they have I think that's pretty fair. I wrote such a long bit about them the other day that I can't imagine anyone actually read the whole thing, but suffice to say that they have the largest customer base in what might be a really huge market. Right now they are the largest cord blood bank in the US with about 100,000 customers (almost twice as big as their biggest competitor), but they believe that their addressable market is 25% of US births -- that would be one million possible customers every year. To my ears that's a pie in the sky ambition, but I'm happy to see them aiming high and who knows, maybe they'll reach it.

I listened to several CCEL presentations and executive interviews yesterday as I was making my final decision to purchase -- links are here, here and here if you'd like to hear them, management sounds aggressive, sober and capable, which can always be an act but is still nice to hear.

The company has ambitious goals, a great balance sheet and growing and predictable recurring revenue stream, and is the low cost provider as well as being the largest and the provider of the (arguably) highest quality service. Add that to a new placental stem cell preservation service that they're launching in 2006 to distinguish them further from their competitors, and I really like what I see.

If you think stem cells will be important and that medical discoveries will make people start to realize their value (they've already shown that placental stem cells may cure diabetes in mice, which is huge), then you'd have to believe that parents will begin to think it's irresponsible not to preserve the stem cells that might help their family. Add that to increased marketing, and I think we have a winner in CCEL for the decade to come.

Of course, I didn't get the price I would have gotten had I jumped aboard CCEL at my first impulse, or even as I finished my earlier writeup -- but that's OK, I think a few cents here or there will be immaterial by the time I want to sell, which hopefully will not be for a very long time.

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Stop me before I buy OTC! (CCEL)

I've been thinking about opening a position in Cryo-Cell (CCEL), which is primarily engaged in processing and cryogenically storing umbilical cord blood and the stem cells therein -- and which has recently started expanding it's offerings to include a similar service for placental stem cells. The company, unlike most others that are in any way related to stem cells, is profitable but not cheap, and while it has a good track record of steady growth it has not yet shown the really significant growth of which I think it's capable.

Now, if you've read many of my postings you'll know that I'm not crazy about buying "penny stocks" or OTC companies. I have made exceptions, and SpaceDev, for one, is a company that I'm happy to own and that I think has great prospects, including the potential for listing on one of the major exchanges in the next year or so. CCEL, by my initial judgement, falls in this same camp. They do file with the SEC and their filings are quite complete, and they are profitable and growing -- and are right now roughly the same size as SpaceDev, fighting to make it up to that magical $50 million market cap that makes the exchanges start to take you seriously. Truth be told, their growth and income are much more predictable and stable than SPDV -- and certainly worlds better than many of the fly-by-night operations and shell companies you see lurking around the OTC and pink sheets markets. But still, buying these less liquid OTC companies is a risk that I'm definitely aware of.

Cryo-Cell operates what is at it's heart a pretty simple business that comprises two core services -- they provide the materials and instructions to families for collecting and shipping their infants' cord blood (the messy work is done by the doctors and nurses in the delivery room) and they process it for an up-front fee, then they store it in appropriate cryogenic fashion according to FDA standards and charge an annual storage fee. The key things to keep an eye on are the number of new customers added to their "installed base" and a steady percentage of those customers who continue paying their annual bills.

My wife and I are Cryo Cell customers, which is why I know about this company, and I think the next generations of relatively well-off parents will continue to want to make the small investment to preserve their cord cell blood and, hopefully, placental stem cells in ever greater numbers. And once that investment is made, it seems silly not to keep paying the $100 or so a year for storage -- who knows if you might need it someday?

Although CCEL is quite a small company, they are by far the dominant company in this particular niche of the blood bank/stem cell business. They have a chart on their website that compares the services and costs of its competitors, and as of a couple years ago when I registered for this service and researched all the providers, I can vouch for the accuracy of their representations of their competitors. Cryo-Cell really does offer the most advanced storage facility (they're the only ones with a facility that fully meets FDA's new standards), the feeling of stability that comes with having the largest bank, and somewhat better pricing than their competitors. That's why we chose them as customers.

So I'm fairly certain that as this trend of cord-blood storage and stem cell awareness moves forward, Cryo-Cell should benefit significantly more than it's competitors if they're able to maintain their competitive position.

What will move this trend along are a few things:

1. News spreading about successful use of cord blood stem cells. Cryo Cell has only had about a dozen people withdraw their cells for use so far and I don't think they have reported any overall results, but they do have some success stories that they share -- example here. It's important that that continues, whether it's evidence of those cord cells curing a child or helping a family member. Their investment in Saneron is a clear demonstration of interest in moving this science along to show efficacy. Once efficacy is shown, it will only be a matter of time before storage becomes commonplace.
   
2. Stem cell advancements in general. Cryo Cell thinks they may be up for some big government grants for setting up a national stem cell registry -- that's still very unclear, but certainly possible. Many people already believe that stem cells will be the answer to many chronic diseases, but the more science and successful trials are released, the more stem cells will seem like a viable treatment option for all kinds of diseases, from diabetes to cancer. Scientists working with animals have already shown great results in treating diabetes and heart attack patients. When that happens, it really enters the public consciousness and the stem cells that are normally discarded upon birth will begin to seem more and more like a valuable commodity that families will want to protect.
   
3. Marketing and physician acceptance. This is already changing in my experience -- when we brought the kit in from Cryo-Cell to the delivery room the nurses were not at all surprised. They said that not many people do this, but it is happening more and more lately. This was almost two years ago, and at a pretty ritzy hospital that is well known as a great maternity center in the wealthiest part of Washington, D.C., and it's with these folks who can afford a one-time $1000 fee that Cryo Cell is making an impact at first. Cryo-Cell has been spending more on marketing of late, and they do primarily web, print, and referral marketing -- anyone who has children has probably seen their flyers at the hospital or doctor's office and ads in pregancy and parenthood publications, and they give incentives to current customers to refer their friends and family.
   
   We had mixed impressions of doctors and their experience with the service -- they all knew what it was and were perfectly willing to charge a small extra fee to process the cord blood, but some thought it was a more valuable enterprise than others. That's probably inevitable for a service that is by it's nature at this point forward-looking -- unless you have someone in your family who might immediately benefit, you're thinking about how this might help with a disease or condition in the years to come. Physician education and marketing will continue to be critical as well, and evidence of the effica