Accuray Incorporated (ARAY – Nasdaq)

Dear Bottarelli Research Member,

I’m always on the quest to find companies that not only have cutting-edge technology but those that also benefit mankind. This week’s pick accomplishes both of these goals. This company is centered around a non-invasive treatment of cancer using unique robotic instruments. As I dug into the company, I have to tell you, I came away very excited and very intrigued. The product they own is called the Cyberknife, and I am including a link to a video clip (below) for all of you to watch. I feel this will tell the story far better than I can. As you’ll see, Cyberknife can pinpoint tumors with uncanny accuracy and deliver larger doses of radiation to tumors without harming the surrounding tissue.

Using computer-controlled robotic mobility, CyberKnife automatically tracks, detects and corrects tumor movements in real-time. This enables the CyberKnife System to deliver high-dose radiation with pinpoint precision, and this minimizes any damage to surrounding healthy tissue and eliminates the need for invasive head or body stabilization frames.

I was originally drawn to the company when I learned about their advancements in the treatment of prostate cancer. After all, we all know that this is a major concern for men across the world. But I quickly learned that prostate cancer treatment is only the beginning. CyberKnife’s Robotic Radiosurgery System can also be used to treat cancer tumors in the spine, lung, liver, and pancreas. Make no mistake; this is a major breakthrough for anyone needing high-end cancer treatments worldwide!

Since Cybeknife is the world’s only robotic radio surgery system designed to treat tumors anywhere in the body non-invasively, I think that this stock has tremendous potential. And based on my research, I believe that now is the ultimate time for us to dip our toe in the water and establish a position. After all, nobody is talking about this stock right now, which tells me that it’s still a Wall Street secret. Plus, since this will be the new wave for cancer treatment (at least until a drug or cure is found) I don’t think that the market turbulence will affect this stock much at all.

Not only that, but there’s also a very real possibility that a company like General Electric (GE – NYSE) could come in and make a buyout. That’s a huge statement that sets the tone for this unique investment. And to top it off, the company just reported earnings that I consider very strong – but nervous investors panicked and aggressively sold the shares off. Bad move. I once again believe that we have a tiger by its tail, and therefore, picking up the stock at these levels is a steal. So on that note, the company is called Acurray (ARAY – NASDAQ) and let’s establish a new position under $10.50.

Here is the link for their amazing video:

http://www.accuray.com/products/cyberknife/redefining-radiosurgery.aspx

UPDATES

E*TRADE Financial (ETFC – NASDAQ): Our investment in ETFC is working out beautifully. Shares traded as high as $ 5.48 this week, good for a 71.79% increase off our January 14^th entry price of $3.19. If you recall, Bryan issued profit-taking instructions in our original alert that read as follows: “Should the stock move up to $4.40, don’t wait for our signal – take your 40% profits and sell!” As a result, you should be locking in profits on this position. Congrats on your gains!

Polymet Mining (PLM – AMEX) & Minera Andes (MNEAF.OB): Over the course of the last week, there has been a lot of talk about miners and juniors starting to outpace the movements of pure gold or silver bullion. This bodes well for PLM and MNEAF. PLM is preparing its very first non-ferrous mine in Minnesota and MNEAF is already producing and is eagerly looking for a JV partner. Folks, please use this sell-off as a strong buying opportunity.

Terra Nostra Resources (TNRO.OB): Shares have pulled back on yet another great quarter, thanks (in part) to weakness across the entire sector. Even the best names like FCX, PCU, and GMO have been beaten up, but I think this move is only temporary. After all, stainless steel and copper are still in high demand in China, and their new JV with Sino Metals is set to debut in a few months. Therefore, it could be a great time to nibble at some TNRO at current levels.

Puda Coal (PUDC.OB): The stock is still on the short leash, but I like the fact that it’s now recovering from its lows. As China’s thirst for electricity explodes, coal is still the cheapest way to fulfill that need (by far). Let’s also not forget that PUDC also produces coal for making steel, so continue to hold.

WorldWater & Solar Technologies (WWAT.OB): It’s been a while since I updated WWAT, but for all of you who wrote me about buying it off the lows, excellent trade! I continue to love this little company, especially since they just completed their merger with Entech of Keller, Texas. This little gem has already given us some juicy profits, and if you have yet to own it, I would definitely establish a position now. I expect 2008 to be another great year for WWAT.

China Finance Online (JRJC – NASDAQ): Like I mentioned, this stock moves fast! Just last week, for example, JRJC was the third-best performer on the entire NASDAQ – with a one-week gain of 42%. This shows you just how quickly this one can move. Now as you know, we entered JRJC on December 21^st for $21.00 per share, and shares currently trade for $17.03. Therefore, continue to hold for more upside.

Mercadolibre (MELI – NASDAQ): Call it timing (or call it luck), but we happened to issue last week’s buy alert on MELI just as the stock took a dramatic move to the downside. This allowed us to enter the stock as it was shooting lower, and I believe buying on this dip will pay off handsomely. The down-move came after MELI announced plans to issue $292 million in new stock. Since MELI has a strong balance sheet and a history of free cash flow, Wall Street questioned the stock’s need for additional capital. As a result, shares fell hard. In addition, they gave a cryptic statement about their Q4 revenues, saying that operating income margins for the three months ended December 31^st 2007 will decrease compared to operating income margin for the three months ended September 30^th 2007. Since there was no further explanation, Wall Street (of course) assumed the worst and dramatically over-sold the stock. To me, this is a wonderful opportunity to enter the stock, so let’s certainly use this dip as a buying opportunity.

Have a good week!

Sincerely,

For Under $10.50, You Can Own the World’s Only Robotic Radio Surgery System Designed to Treat Tumors Anywhere in the Body Non-Invasively

“CyberKnife gave me my life back. I was in charge of the cancer – the cancer wasn’t in charge of me. That freedom is priceless.”

- Danny Davis, CyberKnife Lung Tumor Patient

Let’s begin today by looking at the 2-year chart of Intuitive Surgical (ISRG – NASDAQ).As you can see below, this chart is a thing of beauty, moving from $80 in February of 2006 up to $360 in December of 2007. Going back even further, shares of ISRG are up almost 2,000% over the last five years – and it’s easy to see why.

ISRG is the leader in minimally invasive surgery technology. Intuitive’s “da Vinci” surgical systems consist of a surgeon’s console, a patient-side cart, a vision system, and wrist instruments which translate a surgeon’s natural hand movements at the console into corresponding micro-movements of instruments positioned inside the patient. It truly is an amazing piece of technology with a wide range of applications, including urologic, cardiothoracic, gynecologic, and general surgeries. This has allowed ISRG to carve out a strong and undisputed market niche. And now, ARAY is using this same successful business model to carve out a unique medical niche of its own.

As Mark mentioned above, Accuray’s CyberKnife system is an image-guided robotic radio surgery system for the treatment of solid tumors. This does not put Accuray in direct competition with ISRG, but rather extends upon this powerful surgical technology to create their own sector for cancer tumor treatment.

As you saw if you watched the video, the CyberKnife system delivers high doses of radiation to a tumor from different directions – which is a process called “radiosurgery.” By targeting the direct tumor, radiosurgery can apply a high dose of radiation directly to the tumor, thus sparing the surrounding tissue areas. Think of it like this: The patient gets a laser shot right at the targeted area versus a buck-shot blast that scatters pellets everywhere around a targeted area with the hopes that one shot will result in a direct hit.

By directly zeroing in on the tarteted tumor, CyberKnife can adjust even if a tumor moves around. This is important because these movements happen more often than you think. For example, if a patient sneezes and the tumor moves, CyberKnife adjusts to these movements. And thinking specifically about prostate and lung cancer tumors, your lungs are in constant movement as you breath. And the prostate is certainly located in a precarious place on your body – making slight movements very difficult to avoid.

In addition to the treatment process, CyberKnife also produces diagnostic quality 3D and 4D patient imaging prior to treatment, which allows physicians to easily collaborate and review potential treatment plans.

So as you can see, this technology is certainly a new and innovative treatment concept. And with our population aging, it’s easy to see that a major demand for high-tech medical products will only grow larger and larger. When it comes time to evaluating a company like ARAY, the process should go something like this:

• First, look for revenues that are projected to increase at a healthy rate. According to industry estimates, ARAY is projected to enjoy annual earnings growth of at least 20% over the next five years. So we’re covered there.
• Second, it’s important to isolate markets in niche sectors with limited (or zero) competition with patents that can maintain their competitive advantage. To date, ARAY’s proprietary CyberKnife System has been used to treat more than 40,000 patients needing radiosurgery treatment in leading hospitals across the Americas, Europe, and Asia, so we’re covered there as well.
• And lastly, it’s important to consider the market’s size and growth rate. And to be honest, this one’s the easiest part. Just consider the current statistics of cancer (provided by the WHO and the ACS) and the market size and penetration becomes crystal clear.

According to the World Health Organization, 7.6 million people died of cancer in 2005, accounting for 13% of all deaths worldwide. After heart disease, cancer is the second-leading cause of death in the United States.

The WHO estimates that there are 24.6 million people living with cancer worldwide, with approximately 10.9 million new cases being diagnosed every year. The American Cancer Society (ACS) estimates that 560,000 Americans will die as a result of cancer in 2007. The ACS also estimates that approximately 1.4 million new cases of cancer will be diagnosed in the United States in 2007, with continued increases forecasted as the U.S. population continues to age.

Furthermore, the National Institutes of Health estimates that the treatment of cancer accounted for more than $74.0 billion in direct medical costs in 2005. The ACS also estimates that solid tumor cancers will account for approximately 1.34 million (or 92%) of new cancer cases diagnosed. This sets the stage for powerful growth in ARAY’s treatment technology for years to come.

Make no mistake: ARAY is engaged in a market niche that will not go away anytime soon. And their revolutionary treatment technology will only continue to grow more and more popular among cancer treatment patients.

To exhibit their growth, consider the recent attendance of their annual “CyberKnife User Meetings.” Over the past seven years, Accuray has been hosting a meeting where CyberKnife users, physicians, and potential users all gather to discuss the applications of this technology. Their first meeting was held in 2001 and 27 people showed up. Fast forward to their seventh annual meeting, which was just held in January, and over 500 registered users showed up in Scottsdale, Arizona to share their experiences and success stories. This was a record number of registrants, proving that the strong demand and interest in this technology will grow for years to come.

As a further illustration of the potential of their growth, consider that their footprint on a global scale still remains a spec of sand on the beach. For example, on January 8^th 2008, Healthcare Global Enterprise announced that they purchased a CyberKnife Robotic Radiosurgery System for their new oncology center in Bangalore, India. Once this system gets installed in June of this year, it’ll represent the first ever CyberKnife System in India. Just imagine the massive expansion that ARAY will enjoy if these systems prove to be just as successful in India as they are here in the U.S. The expansion prospects in burgeoning markets (like those in Asia) could be huge.

Not only that, but it’s easy to understand that any company that can help in the fight against cancer will enjoy incredible tailwinds over the next 25 to 35 years. And even CyberKnife’s devices cost millions of dollars ($4.2 million to be exact) this technology acts as a showpiece for hospitals. In other words, by installing a Cyberknife system, a hospital will immediately own a competitive advantage over any other hospital in the surrounding area – and as a result they’ll draw oncologists and cancer patients from hundreds of miles away. Some hospitals have even structured their marketing around ISRG’s da Vinci technology, and Cyberknife won’t be far behind.

From a growth standpoint, Cyberknife is attractive because their machines are not found in many hospitals around the country, setting the stage for powerful growth ahead. In other words, ARAY has a much lighter market penetration than ISRG, for example, but I think this will soon change. As of June 30^th 2007, ARAY had 109 units installed at customer sites: 71 in the Americas, 26 in Asia, and 12 in Europe. These numbers could easily double over the next 24 to 48 months, especially if China and India come calling. Furthermore, since the CyberKnife system has already been cleared by the FDA for tumor treatment anywhere in the body where radiation is indicated, there is no implementation risk.

From a valuation standpoint, ARAY’s current P/E ratio of 17.50 looks very attractive compared to ISRG’s P/E ratio of 60. Perhaps this discounted valuation is because ARAY is a new stock. Since its IPO was in the summer of last year, the stock still remains outside the eye of Wall Street. So with all of this positive talk, why has the stock taken a beating this week? Well, as odd as it may sounds, the current credit crunch is actually hurting ARAY.

You see, for the quarter which ended on December 29^th 2007, ARAY earned $2.3 million ($0.04 cents per share) compared with a loss of $7.3 million ($0.45 cents per share) one year ago. This is a very strong year-over-year turnaround. Not only that, but their revenues nearly doubled to $52 million from $26.3 million in the fiscal 2007 quarter.

So once again, why did the stock fall? For one, these numbers (while strong) missed the consensus estimate of analysts surveyed by Thomson Financial. They expected earnings of $0.09 cents per share on revenue of $58.2 million. OK, so that means that earnings were great, but not as spectacular as many expected. But that’s not what really caused shares to fall.

The real reason for this week’s drop was due to financing issues. You see, the current list price for the CyberKnife system is approximately $4.2 million (which includes initial training, installation and a one-year warranty). With a price tag like that, our current credit situation is effecting the purchase of these systems. According to Euan Thomson, ARAY’s President and CEO, “While this was a positive quarter with respect to revenue and backlog growth, we believe that broader credit market issues are having a short-term impact on some of our U.S. customers’ purchase and installation timelines, as obtaining financing has become more difficult. We remain confident in the clinical demand for the CyberKnife and our ability to further build the market for extracranial radiosurgery.”

To account for the tightening of U.S. credit markets, Accuray did the smart thing and lowered their 2008 sales guidance to a range of $210 million to $230 million. Since Wall Street had been expecting sales of $264.8 million, the stock is getting punished. Now remember, this doesn’t mean that ARAY cannot achieve these sales. It just means they’re taking a more conservative approach and projecting sales based on economic conditions that they see today. But now that the Fed, the President, and the Treasure Secretary are doing everything possible to correct our credit troubles, I agree with ARAY’s CEO Mr. Thomson. The credit market issues will only have a short-term impact on ARAY’s business.As a result, I think it’s opportunistic for us to use the stock’s recent downside move as a prime-time buying opportunity.

When you consider that the stock has seen 90% sales growth over the last 12 months combined with a tremendous order backlog of $642 million, I think that taking advantage of this week’s dip and establishing a position is well worth the risk.

PLAY: Take advantage of this week’s stock price dip and buy shares of Accuray Incorporated (ARAY – NASDAQ) at or under $10.50, good for the week.

Sincerely,