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Ontrak (OTRK) Crashed 44%. Is this Dip a Buying Opportunity?

8/19/2021

 

KEY POINTS

  • The market ended the day mixed as investors stalled over a positive jobless claims report and bleak economic forecasts.
  • Macy’s (M) proves it is hitting reopening hard with a great earnings report.
  • Ontrak (OTRK) stock drops 44% in a day after losing a big contract. Should you buy the dip?

OVERALL MARKET

The market ended the day mixed as investors stalled over a positive jobless claims report and bleak economic forecasts.
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Two contrary news forced the market indices into a mixed day.

On the one hand, we have the new jobless claims report hitting the lowest since the pandemic. As unemployment numbers sink lower, confidence in the strength of the economy increases. The drop to 348,000 helped boost investors' sentiment.

On the other hand, Goldman Sachs’s lowered its GDP estimate for this year. Blaming the rise in COVID cases and the uncertainty that it brings, the firm lowered its forecast from a growth of 9% to 5.5%. This certainly added to investors' pessimism.

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WHAT'S UP?

Macy’s (M) proves it is hitting reopening hard with a great earnings report.
Macy’s (M) is one company that is leading reopening efforts in the retail industry. I found the stock sitting pretty high up the winner’s list on Stock Card today. It looks like the company released its earnings report for this past quarter, and the results were received quite well by its investors.

The earnings report had a few highlights:
  • Macy’s saw a 61% increase over last year’s quarter, but even more impressive is that the growth translated into a 5.8% growth over 2019, pre-pandemic. While many corporations are still trying to catch up to their numbers from 2019, Macy’s is already on its way to greater heights. 
  • The company raised its forecast for this year to match the confidence management has in the company's direction.

Taking a quick look at Macy's Stock Card, the fundamentals are kind of hit-or-miss. There are some glaring debt problems and uneven revenue in the last three years. It's also an undervalued stock. At 0.3 times price to sales ratio, it seems investors expect the company's sales to be at ⅓ of its current revenue, which explains the drastic price jump today after revenue was up even compared to 2019. 

I like to invest in companies that shape the future, and Macy's doesn't excite me. But, I can see why some investors want to hold the stock to benefit from the reopening, while I don't think Macy's can repeat such growth rates next year or anytime soon. 

WHAT'S DOWN?

Ontrak (OTRK) stock drops 44% in a day after losing a big contract. Should you buy the dip?
Folks, what caught my eye today was the drastic Ontrak's (OTRK) price drop. It was third on the loser list on Stock Card with a whopping 44% drop! I own the stock, and I was surprised to see the decline. Let's see what happened and what we should do if we are shareholders. 

Ontrak helps patients deal with behavioral health issues. For example, it uses its program to help patients with substance abuse challenges to stick to their treatment better and have less hospitalization, which means lower costs for the patient and the insurance provider. 

Today, according to an SEC filing by the company, one of its clients asked to terminate a 3-year contract at the end of the year, 2 years into the contract. This was undoubtedly a significant customer for Ontrak. From the calculations I’ve done, it seems like the remaining contract value is about $30 million, which represents about 30% of the $108M annual revenue Ontrack generated last year. 

Can the company survive this challenge?
  • The company has about $97 million of cash reserves, which is less than a year’s revenue. So, even if management took time to find replacement clients, the company can stay afloat just fine.
  • It also has a robust sales pipeline that could be used to replace and grow its client base. 

It seems Ontrack should be okay, this is a short-term challenge that can be rectified. The concern I have is the reason for the contract cancellation. The management attributed this to a change of strategy by the unnamed client. But that's left to be proven. If the cancellation is a sign of operational or product challenges, then Ontrack is in trouble. 

What's happening with Ontrak reminds me of Stamps.com’s (STMP) stock price, where there were two large crashes in price after it terminated its contract with USPS in 2019. The company had cash reserves and an effective strategy to diversify its partnership away from USPS and other postal carriers. Investors who bought the dip at around $30 per share were rewarded when it wasacquired in July and reached an all-time high of nearly $330 per share, a 10X return! 

I wonder if this could be a similar situation. I'd wait to see the actual reasons behind the contract termination and may jump in with a few more shares, in addition to what I own now. Stay tuned. 

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