It is often said that emotion is one of the main enemies of successful investing and trading. The most frequently cited example of this is the impact of fear and greed; the dastardly duo principally responsible for the “sell at the bottom, buy at the top” behavior that retail investors so often display. This is a huge problem, but it is really one of position management. I have said before and will probably say again that disciplined position management is one of the most notable traits of successful traders, and is the biggest single lesson that Main Street can learn from Wall Street.
Simply having parameters defined before initiating a position can go a long way to avoiding the emotional temptation to run a loss too long or sell at the first sign of a dip. There is, however, another, less recognized problem that our emotions can cause. They can cause us to ignore good ideas.
Zeltiq Aesthetics (ZLTQ) is a case in point. This California-based company sells a product that is used in a cosmetic surgery technique that they call “CoolSculpting.” The process is a non-invasive technique that effectively freezes fat cells off the body. Zeltiq maintain that it is not an alternative to the more invasive liposuction as it is for more focused application, but that may be the easiest way for most people to think of it.
My immediate, emotional reaction when I first started to look at the stock was that cosmetic surgery was all about fads and vanity, and my lack of interest in the subject caused me to underestimate the value of the procedure and product. The flawed “logic” here went something like “I’m not interested in this, nor are most of my friends, so it won’t be successful.”
The numbers, however, which are what really count, indicate that it will. Adoption of the method has been swift and continues to grow. Q4 results released in January were disappointing on the bottom line with a $0.15 loss versus a consensus forecast of $0.13, but revenue was nearly double the same quarter a year ago.
I have no moral or ethical objection to investing in cosmetic surgery which might stop me from buying or recommending ZLTQ; my problem was simply a lack of imagination. If it didn’t appeal to me, it wouldn’t make money. When written out like that, this thought is obviously ridiculous, but I would wager that many investors miss many opportunities for the same reason. Once I got past that, though, ZLTQ looks like a decent investment, even after more than doubling in price in the last six months.
The key here is the company’s launch of a new applicator that makes use of the technique possible in previously unsuitable areas of the body, subject to FDA approval. It is hard to see that not being granted given that cryolipolysis, as the process is properly called, has been used for years with no noticeable side effects. It gained initial FDA approval here in the US in September of 2010, but was used quite extensively in Europe prior to that. Previously, CoolSculpting has been limited to the abdomen, but research shows there is demand for use on thighs, necks, etc.
My hesitation would be that ZLTQ has still to turn the corner into profitability, but this would seem to be about to be addressed. The company made a conscious decision to launch at a relatively low price point and offer rebates while the concept of CoolSculpting became established, but recently announced a price increase and the end of the rebate program. Taken together with the launch of the new product, this could well result in a rapid move to positive cash flow.
I mentioned before the other side to taking emotion out of investing, setting parameters so that decisions about when to take a loss or profit are taken logically before you invest, and that is important in this case too. A stop-loss on a clean break of this month’s low of $15.80, say somewhere just below $15 (I hate setting stops at round numbers) would make sense to me and limit losses to around 20%. To the upside, a break of the previous highs around $25 would clear the way for a move toward $30, at which point some profit taking, or at least a re-think, would be called for.
I am not one to ignore gut feelings when it comes to investing. The interbank forex market in which I was trained moves at such a pace that detailed analysis of technical and fundamental considerations is impossible with most opportunities; your gut is all you have to go on. That doesn’t mean, however, that our first instinct is always right. Sometimes, even a cursory look at the actual evidence indicates otherwise and that was the case with ZLTQ; my initial, emotional reaction was negative, but it was also wrong.