Short compression candidate with a low PEG ratio: Zynex (NASDAQ: ZYXI)

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A stock with a decent chance of above-average operating growth in 2023 leading to substantial price gain is Zynex, Inc. (NASDAQ:ZYXI). The company is launching several new medical product inventions this year and next, while stable sales benefits from its main product, NexWave, enable strong revenue generation. Its operational focus in 2022 has been the manufacturing and marketing of medical devices to treat chronic/acute pain and to exercise muscles for the purpose of electrical stimulation rehabilitation.

https://www.zynex.com/

Company Website – NexWave Product

Seeking Alpha Contributor David Ravera wrote a solid article in August here, describing new Zynex products in development and their potential impact,

The 2022 guidance does not include revenue from the sale of the CM-1600, the blood fluid monitor submitted to the FDA in late 2021. Pending FDA clearance for the CM-1600, Zynex is preparing commercial launch of the product in the second half of the year. Specialized sales representatives will be hired for this product, which the company says can sell for around $30,000 a piece. Prototype prototypes of the laser-based pulse oximeter are also expected to launch in the second half of this year, with an FDA submission expected mid-next year. These are NiCO CO-Oximeter and HemeOX, whose technology was integrated by Zynex when it acquired Kestrel Lab last year. The Zynex Patient Monitoring division’s total addressable market is valued at approximately $3.7 billion.

Profit and sales growth

Profit margins on sales and returns on invested capital are already excellent. Seeking Alpha’s IT grading system gives the company an “A” grade on current revenue levels.

In Search of Alpha - Zynex, Quantitative Evaluation of Profitability

Seeking Alpha – Zynex, Quantitative Profitability Rating, October 4, 2022

Wall Street analysts are also getting quite optimistic about adding more monitoring devices to its healthcare product lineup. Below is a table of expected sales and EPS growth rates in the range of 20% to 50% per year for 2023-24. The large share buybacks of its cash and new cash flow arriving every day should also help push shareholder value in the bullish direction.

Seeking Alpha - Zynex, analyst estimates 2022-24

Seeking Alpha – Zynex, 2022-24 analyst estimates, October 4, 2022

Evaluation history

Not only is growth occurring at a higher than normal pace relative to US companies entering recession, Zynex’s stock valuation is quite low, selling for a P/E below 22x forward estimates. Simply from P/E to earnings growth [PEG] valuation analysis, revenue less than 1.0x projected results alone is worth further research.

Yet the company’s shares are selling today at low earnings, sales and book value ratios, near 5-year lows.

YCharts - Zynex, price to final EPS, sales and book value, 5 years

YCharts – Zynex, Price vs. EPS/Sales/Book Value, 5 Years

Compared to the basic picture of fundamental ratio analysis, enterprise value statistics are even cheaper. On earnings before interest, taxes, depreciation and amortization [EBITDA] or revenue, the company’s conservative and liquid balance sheet may have opened up a superb buying opportunity in spring/summer 2022.

YCharts - Zynex, EV/EBITDA ratios, 5 years

YCharts – Zynex, EV/EBITDA ratios, 5 years

Additionally, compared to other medical equipment vendors with larger scale, above average growth potential and high margins/returns, Zynex has plenty of room to increase its price/value in the future. . Forward EV to EBITDA and revenue multiples are incredibly cheap today compared to blue chip peers, group management is working hard to get in.

YCharts - Zynex vs Peer Medical Equipment Companies, EV to Forward Estimated EBITDA, 20 Months

YCharts – Zynex vs Peer Medical Equipment Companies, EV to Forward Estimated EBITDA, 20 Months

YCharts - Zynex vs.  Peer Medical Equipment Companies, EV to transfer estimated revenue, 20 months

YCharts – Zynex vs. Peer Medical Equipment Companies, EV to transfer estimated revenue, 20 months

Short interest excuses

Why is Zynex so cheap? The reason for this is that short sellers are weighing heavily on the price (based on further selling with borrowed shares) because they don’t believe in the growth story. Early 2022, UnitedHealth Group Incorporated (UNH) removed the company’s primary product from prescription network coverage. The bears immediately proclaimed that profits would disappear and sales would decline, as this indirect profit customer setup was one of the biggest earners of dollars for Zynex.

However, most physicians and patients continue to use the NexWave product and bill it as out-of-network for insurance coverage. The company explained it in February here. Overall, results for the second quarter ending June exceeded analysts’ expectations, and management maintained or raised its guidance for the second half of the year, depending on the data point you’re looking at.

A second reason for short seller positioning is that many are not convinced that new product offerings will be successful or add significant value. Personally, I don’t follow this company closely, so I don’t have an opinion either way. I hope the analysts covering Zynex are more competent and correct in their bullish projections.

The latest short position report of 9.5% to outstanding shares is quite a far cry from the vast majority of individual stocks which average 5% or less in September-October 2022.

YCharts - Zynex, Short to Issued Outstanding Shares, 3 Years

YCharts – Zynex, Short to Issued Outstanding Shares, 3 Years

But the short position becomes very unbalanced from there. The current rate of 16.7% on the free float of stocks not tightly controlled by insiders and management is actually quite high. Less than 2% of US companies have a similar level of pessimism embedded in the stock price. Indeed, on good new developments, a massive pool of potentially anxious buyers is now present (through orders covering short positions) that does not exist in your typical stock investment.

YCharts - Zynex, short vs. free float, 3 years

YCharts – Zynex, short vs. free float, 3 years

Finally, the rationale for a “short squeeze” leading to higher prices quickly evolved from the disappearance of sellers over the summer. Daily trading volume has been exceptionally low compared to the 2021-22 stock prior, meaning the number of days of regular trading volume (last two months) required to cover the entire short position has inflated to 24x. Far less than 1% of all US stocks have a higher number, or similar powder keg ready to fuel price gains, just waiting for the fuse to go off.

YCharts - Zynex, Price vs. Trading Days to Cover Short Position, 3 Years

YCharts – Zynex, Price vs. Trading Days to Cover Short Position, 3 Years

Improvement graph

To repeat, price drifted higher this summer on very low volume, in the face of some nasty bearish movement from Wall Street in general. To me, this indicates that there are now very few sellers on its stock, and the short (buy) hedge combined with new investor interest in rising growth rates could push the supply/demand balance into a serious shortage. The only way to find shares in such an outcome would be through significantly higher prices. Hence the logic of the “short squeeze” to own Zynex.

Below is a chart of the incredibly bullish low volume price rise over the past two months. I have circled in green the curious weak increase in volume prices (on an 18-month chart). Rebound in relative price strength vs. S&P 500 changes since March, alongside more positive results Negative volume index and On balance volume the readings are also notable reversals. Where else can you find a growth stock that is trading above its 50 and 200 day moving averages at a bear market low for indices? There are not a lot.

StockCharts.com - Zynex 18 Months of Daily Changes with Author's Benchmark

StockCharts.com – Zynex 18 Months of Daily Changes with Author’s Benchmark

Final Thoughts

Zynex appears to have all the ingredients for a significant price gain of 50-100% over the next 12-18 months. A very profitable and growing underlying business is part of the equation. A valuation that seems unduly low is another. The technical strength in prices for months may be a sign that a reversal of fortune for shareholders is underway. And, a monstrous short position could provide months of additional buying pressure, assuming the company can generate earnings and sales above current analyst projections.

I note the stock one To buy, with potential upside to the 2020 all-time high of $29 in a best-case scenario by 2024. The downside is likely limited to this year’s low price of around $5, which would be a drop in wheels, a deep recession, doctors/patients avoiding its product development. Already, the share price is up 450% over the past five years. Maybe management can deliver again. If track record is important to you as an investor, Zynex should remain a smart idea to buy and hold for the long term. You can look back a year from now and thank your lucky stars that the big short interest position by that name was wrong, sending their trade losses to your brokerage account as an exaggerated gainer on the upside.

Thanks for reading. Please consider this article as a first step in your due diligence process. It is recommended to consult a registered and experienced investment adviser before carrying out any transaction.

Sallie R. Loera