Like so many tiny pharmaceutical companies, Zomedica Corp. (NYSEAMERICAN:ZOM) will inevitably dominate or stagnate based on some breakthrough drug or deal in the pipeline. As for now, ZOM stock trades in decidedly modest territory, just a fraction above $2 per share.
Yeah, but as my mafioso great-grandfather, whom I only know as Don Peppino, once said, “Modest is in the eye of the beholder.” (Okay, maybe he never said that. But at least that factoid about my life is cool, eh?) In other words, $2 ain’t chopped liver when it marks an in-the-black leap of more than 1,000% this year as of Feb. 11.
Since then, ZOM stock has cooled off, shedding just about a quarter of its value. But given all that’s happened to it in 2021, two questions come to mind. First: What’s going on at tiny Zomedica to inspire these big gains? And second: Is this dip the start of a return to reality or a buying opportunity?
ZOM Stock Surge Explained
Let’s begin with the basics. Zomedica, based in Ann Arbor, Michigan, has been public since 2016. The company works in animal health and veterinary science, specializing in diagnostics products for dogs, cats and horses. And in this case, neither felines nor canines are fighting over this baby. After all, ZOM stock has been propelled of late by … by …
Well what, exactly?
In this case, Zomedica might be riding on news that’s only tangential to its financial infrastructure. The novel coronavirus pandemic resulted in an explosion of consumer activity related to pets. Perhaps you’ve experienced this: You couldn’t hug your friends and family, so you bought a pooch and snuggled with them instead.
Indeed, data from the American Pet Products Association shed some light on this, revealing that in 2020, U.S. pet industry expenditures climbed by roughly 5%. Then you look at the performance of stocks such as Chewy (NYSE:CHWY), the online pet supply vendor’s shares rose by more than 200% in 2020.
Reeks of Pump-and-Dump
This scenario, however, reeks of confirmation bias to me. For hard as those numbers may be, their correlation to ZOM stock is soft at best. In fact, Zomedica recorded a net loss and comprehensive loss for 2020 that equaled 5 cents per share. That neither sounds like the stuff of a rally nor rational investing.
That brings to mind a dubious possibility. Make that a probability. That is, a pump-and-dump. You could call it pup-and-dump but that would be offensive to the dog. Whether you’re an investment veteran or invested veterinarian, you likely know how it works in situations like these.
Investors start with those strained connections between one pet-care sector phenomenon and another. Then, rather than explore a company’s numbers up close, they use those weak links as justification to take an investment beyond where it deserves to be. Unfortunately, ZOM seemingly fits that description to a T. Or a kitty, you could say. But that would be an insult to the cat.
Modest Slice of Small Market
While it’s highly unlikely Zomedica is trying to put one over on anyone, its 2020 Form 10-K filing with the U.S. Securities and Exchange Commission reveals that it lacks any patents to its name. It does quote figures, though, from Packaged Facts Pet Medications 2017 report: “The size of the U.S. pet medication market, the largest companion animal market worldwide, was $8.6 billion in 2017, up from $7 billion in 2015.” Updated stats show that figure rose again to $9.8 billion in 2019.
So the numbers check out. But the number of investors who’ve called this kind of stuff an excuse for the ZOM stock bull stampede doesn’t. It may be they’re wagering on the company’s four pending patent applications. Or that the positive attention will make Zomedica a dominant force in its market.
Ah, yes but: What market? Matt McCall and the InvestorPlace Research Staff have done some commendable digging on this front. Last month they wrote that the entire diagnostic market for pets and companion animals “should reach about $2.8 billion globally by 2024, according to Zomedica itself. The company is targeting only a tiny slice of that market.”
Zomedica Can’t Stay in the Zone
Here’s what I make of all this. In the end, there’s nothing reprehensible about trading on enthusiasm. If you’re enjoying some fun and profit riding the ZOM stock wave, then more power to you. Yet there’s no avoiding the salient question that follows: How do we know that this wave can and will last?
At some point, fundamentals will catch up with Zomedica. Companies losing money, as they are, must eventually show something concrete that makes shares worthy of a label such as “growth stock.” An obvious example here comes from the electric vehicle sector. Barely any companies there make a profit. But as sales increase month over month, year over year, investor enthusiasm is balanced by empirical evidence.
Here, the prevailing logic as many see it is that the rising tide of the pet industry is going to float all boats, including ZOM stock. But the facts simply don’t bear this out over the long term. Even if the rally extends itself into the middle of the year, some patent or other piece of tangible progress needs to manifest for the stock to avoid a very rude burst of the bubble.
Yes, Zomedica treats dogs, cats and horses. But that doesn’t mean it knows what to do with bears.
On the date of publication, Lou Carlozo held a long position in CHWY.