Hair-Raising Price for Hair Removal Stocks?

An enthusiastic young friend with a lot of hair on his back has been pushing me to buy stock in ThermoLase (TLZ). When he started pushing, the stock was around 22, up from a 1995 low of 3-5/8. He explained that right now the company had just one hair-removal salon in La Jolla, but that it had a patented painless laser process to permanently remove hair quickly. And for only $3,000.

This is not one of those companies where you can go crazy with lines like . . . “and once they saturate the market here, think of the billion Chinese!” . . . because, if I have my racial stereotypes right, the Chinese tend not to be all that hairy. Still, imagine grabbing $3,000 from every hairy-backed guy in America who wishes he weren’t. And from every gal tired of shaving her legs.

So the stock was a buy at 22, my friend said — what did I think? I asked the obvious question, how many shares is this little company divided into, and, as usual, my friend didn’t know. We’ve had this kind of conversation before. (US Surgical was his last pick. Having already tripled, it would nearly triple again. Then drop from 140 to 20.)

I looked it up, and TLZ has about 40 million shares out, so at 22 the company was selling for $880 million. A lot, I thought, for a single hair-removal salon — even perhaps for one with a patented process so promising as this one.

Naturally, the stock went up. At 26 or so, I read an article in Business Week describing another company, Palomar Medical (PMTI) with a similar-sounding technique said to be just a few months from FDA approval, and said to have ties to institutions like Massachusetts General Hospital in Boston. PMTI was $9.50 a share at the time and thus, with 15 million shares out, was being valued in the market at about $145 million.

PMTI, I reckoned, could be competition for TLZ.

So I did two things. I shorted some TLZ — up to 29-1/2 by this time — and bought an almost equal dollar amount of PMTI.

If hair-removal companies ARE worth a billion dollars, I figured, then PMTI would eventually sextuple, while TLZ, already valued by the market at a billion, wouldn’t budge. Or, if they collapsed, TLZ would collapse further. Either way, I’d come out ahead.

(Important caution: I usually lose money shorting stocks. It is VERY risky, ESPECIALLY if you do it with as little knowledge and research as I do. This comment is meant to amuse you, not lead you into making the same mistakes I do.)

Two weeks later, PMTI had climbed to 11-1/4, up 18%, but TLZ had climbed almost as much, to 34-1/2 (where I shorted some more). So my gains being long PMTI more or less canceled my loss being short TLZ.

Why am I skeptical of ThermoLase? I know next to nothing about hair removal, other than that I have a little of my own I wouldn’t mind getting rid of. But even though I can afford the $3,000 I’m told TLZ charges, I haven’t rushed out to La Jolla as of yet. So based on a sample of one, me (a sample size I all too often select in making my investment decisions), the Lase craze may be overdone.

My friend DID rush out to La Jolla and reports that after another couple of visits his hair should be history. (The process, he says, gets all your current hair. But at any time in the hair cycle, you’re gonna have some nascent hairs the laser misses — like seeds in the ground that later sprout — and so return visits are advised.) He also managed to get them to come down a bit on the $3,000 price, which led me to believe the demand for this process may not yet be at a fever pitch, even if demand for the stock is.

Now, it’s certainly possible PMTI will never get approval for its method, and that a million people a year will pay TLZ enough for it to net $1,000 from each one, after taxes. That would be a $1 billion profit to TLZ shareholders — in a league with companies like Sears, Merrill Lynch, 3M and Chevron — and would justify a stock price 10 or 15 times where TLZ is selling today.

But what if PMTI does make it, and competition from the hundreds of health care facilities that have signed up to license its process, once approved, drives the after-tax profit per hairy back down to, say, $300? And what if TLZ manages to corral just 100,000 customers a year instead of a million — still a lot of customers for a start-up business in what could become a competitive industry? That’s a $30 million profit, which at 15 times earnings would justify a $450 million valuation — about $11 a share.

Not that rationality has so much to do with any of this in the short run. TLZ could be 100 or 200 before the bubble bursts, if it is a bubble.

But I’m having a lot of fun with this. If PMTI goes up enough or TLZ drops enough, I just might have enough mad money to justify a trip to La Jolla.

Tomorrow: Evil