It’s been a tough winter for investors in the small cap sector, with the SPDR S&P 600 Small Cap Growth ETF (SLYG) falling 19% in the past three months, undercutting its Q1-21 low. Unsurprisingly, this decimated many small-cap growth names, Joint Corp. (JYNT) being a particularly affected name. Although Joint Corporation is still trading at a slight premium to its historic sell multiple, it feels like a coil spring due to a significant rebound from a more than 50% correction from key support. So if I was looking to start a new position in JYNT, this pullback below $49.60 looks like a buying opportunity.
A little over four months ago I wrote about Joint Corporation [“Joint”], warning that while the stock had strong fundamentals and exceptional growth, its price was close to perfect. Indeed, the stock was trading at more than 200 times fiscal 2021 earnings estimates and was more than 190% above its 85-week moving average. As I noted, this was the most extended stock since its stock market debut, and a pullback below $80.00 at some point in the next three months would not surprise me. As sentiment in the small cap space shifted from greed to panic, the stock found itself down 50% from its highs. Let’s see if this could offer a buying opportunity:
The past few months have been busy for Joint Corporation. The company announced that it had added a Chief Technology Officer [CTO] position, announced partnerships with the Atlanta United Club and the University of Nevada, and opened a clinic at Luke Air Force Base. The latter is part of its agreement with the Army & Air Force Exchange Service to provide chiropractic care to service members and their families. The latter is an opportunity for additional growth on top of the potential the company sees for more than 1,800 long-term clinics in the United States.
Finally, the company has also won several awards, earning the top spot among 100 companies on the Forbes 2022 list of America’s Best Small Businesses. This is an impressive feat, especially given the new challenges of providing personal services during the pandemic. Not only is this a testament to Joint’s competitive offering, but it should help raise awareness for this small, fast-growing medical services company.
From an operational standpoint, Joint has also achieved impressive results, delivering 10.9 million patient visits in 2021, representing more than 31% year-over-year growth. On a pre-COVID-19 basis, and despite headwinds with some less comfortable patients venturing away from home, patient visits increased by 41%, driven by strong unit growth (706 clinics to end of the year against 513 at the end of the year). 2019). Finally, even in a more difficult operating environment where it would have been understandable for the franchisee to falter, the company sold 156 franchise licenses, compared to 126 in 2019.
Consistent with earlier company comments, Joint is not resting on its laurels and plans to accelerate unit growth in 2022, hoping to reach its goal of 1,000 clinics by the end of 2023. would result in an acceleration of the compound annual growth of its clinics. rate. At the end of 2021, Joint increased the total number of clinics at a compound annual growth rate of approximately 14.6% over 2015 levels (706 vs. 312) and reaching the 2023 target would push that growth to around 15.7%, an acceleration of 110 basis points. These results are nothing short of phenomenal and are bolstered by strong comp sales numbers of 29% in 2021.
Between strong unit growth before the arrival of Charles Nelles as CTO, who has experience at American Express (AXP) Global Business Travel and Western Union (WU), Joint is well positioned to continue to gain share of Marlet. Indeed, Joint was already gaining market share with a massive lead over its peers before Nelles was recently hired. The addition of Nelles is expected to accelerate its market share growth, unlocking the potential of all the company’s data in its massive patient database.
The other key point that sets Joint Corporation apart from other growth stories is that only ~5% of total chains make up the US chiropractic care industry, well below the ~12% for dental chains. This provides an opportunity for companies like Joint to gain market share from independents. Meanwhile, posture has become a major issue, with many staring at smartphones all day, especially among children. So, with sitting being called the new smoking, I wouldn’t be surprised if the market for chiropractic care, as well as massage therapy, continues to grow at a healthy pace over the next decade.
This view that the chiropractic care market will continue to grow is supported by recent research, with growth of 2.6% per year between 2017 and 2022, and forecast growth of around 3.2% between 2021 and 2026. , according to 360 research reports. Although this is a more dated report, Grandview Research estimated growth at a CAGR of around 4.3% between 2018 and 2025. I would say it got worse during the pandemic, learning now moving online, socializing moving online for many, leading to unwanted spinal development, neck strain and pain.
This is confirmed by the term “Quarantine 15”, a play on the “Freshman 15”, and weight gain can also affect posture, including hunched shoulders, a bent spine and hips that rotate out of alignment. So, with Joint Corporation continuing to improve its position against freelancers with better technology and a new CRM platform, the company has the ability to take market share and benefit from an industry that continues to grow. grow at the same time, an enviable combination. The fact that franchisee growth is at record highs, even in the midst of a global pandemic, indicates that the company is in an excellent position to grow both franchised and company-owned clinics.
Evaluation and technical image
If we look at Joint’s valuation below, we can see that the stock has historically traded at ~6.7x sales since 2018 and closer to ~8x sales since 2019. Based on the Previous lows in the stock, the best time to buy JYNT has been below 4x sell. Normally, after a 50% correction, a stock trades well below its historical multiple. However, JYNT was trading at ~20x sales prior to this correction, so although this correction has improved the stock’s valuation, it is still trading at ~9x sales, above the historical average.
If we look at fiscal year 2022 revenue estimates of around $105 million, the stock is trading at around 6.9 times sales, which is in line with its historical average, based on its market capitalization. currently around $720 million. However, the goal should be to buy at a steep discount to fair value and maintain a margin of safety. So while Joint seems fairly priced here, it’s hard to argue there’s a significant margin of safety here. Therefore, from a valuation point of view, I remain neutral on the stock. Let’s look at the technical picture:
Looking at the technical chart above, JYNT’s reward/risk ratio has now improved significantly since the time I noted earnings above $105.00 per share. Indeed, the stock is down more than 50% from its highs and approaching a key support level at $48.20. With no strong resistance up to $77.30 and the action just $1.60 above support ($48.00), this left the stock trading at a reward/risk ratio of over 10. .0 for 1.0. This is a very attractive reward/risk ratio, suggesting that a strong rebound is certainly possible from these levels.
Unfortunately, the valuation and technical picture are in slight conflict with the stock trading at a premium to its historical earnings multiple. So while this looks like an attractive swing trading opportunity at $49.60, I think there are more attractive bets elsewhere in the market from an investment perspective. It should also be noted that Joint Corporation is slightly higher risk due to being a small cap company if we head into a cyclical bear market. This is because small capitalization stocks tend to be sold indiscriminately in risky environments. Therefore, I would size positions conservatively if I tried to play this bounce off the support.
Joint Corporation posted a strong end to 2021, with two new partnerships, the hiring of a Chief Technology Officer to unlock the full potential of their data, and strong growth in patient visits despite the headwinds of COVID- 19. The valuation has undoubtedly improved to a revenue multiple of around 7.3, but I still don’t see enough of a safety margin just yet. That said, the stock is deeply oversold in the near term and could generate a strong bounce here on the key support at $48.20. So if I wanted to open a new position in the stock, this violent correction to $49.60 seems like a buying opportunity.