Hi-Tech Pharmacal Set to Drop 60%

Hi-tech Pharmacal (HITK) is a $450 million market cap manufacturer of prescription and OTC drugs. The company came public in 1992. It was founded by Bernard Seltzer, and is now currently run by his sons, David Seltzer and the very colorful and entrepreneurial Reuben Seltzer. The two now fill the roles of CEO, Chairman of the Board, President, Vice Chairman and Director.

On the surface, Hi-tech has many of the hallmarks of a very safe investment, including:

  • a strong cash balance with nearly $6 per share vs. $33.32 share price
  • an apparently low PE ratio of 11x (trailing 12 mos)
  • a presence in a stable, counter cyclical industry
  • a high level of management ownership
  • over 50 different drug products currently in the portfolio

However, a closer look reveals that Hi-tech Pharmacal is a company beset by significant near term problems from all directions. A notable lack of sell side analyst coverage has meant that the significance of these problems has not been widely disseminated or understood by investors.Only one major sell side brokerage covers the stock (Bank of America), which reiterated an “underperform” rating when the stock was at $31.00, however their coverage has been infrequent.

As soon as next week (when earnings are announced before market open on Thursday), Hi-Tech shares are likely to begin a rapid descent of at least 20-30% and could subsequently stabilize at a level that is as much as 50-60% below the current share price of $33.32.

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