This column is for investors willing to take more risk and potentially receive more reward.  The stocks mentioned in this column are not recommended to buy or sell.  They're brought to your attention so you can investigate them further to determine if they fit your risk profile.  Most of the stocks will have less than $1 billion of market capitalization, have more volatility than other stocks, and oftentimes no earnings.  And some will have tremendous stories.

March 6, 2009 - Obagi Medical Products, Inc. (OMPI-NASDAQ) a specialty pharmaceutical company, develops and markets skin care products in the United States and internationally. It develops and commercializes prescription-based, topical skin health systems, which enable physicians to treat a range of skin conditions, including pre-mature aging, photo-damage, hyper-pigmentation, and acne, as well as soft tissue deficits, such as fine lines and wrinkles.

It also offers Obagi Condition and Enhance System for use in conjunction with commonly performed cosmetic procedures, including Botox injections; ELASTIderm product line, an eye cream for improving the elasticity and skin tone around the eyes; CLENZIderm product line for addressing acne and skin elasticity; and tretinoin, used for the topical treatment of acne in the United States, and Obagi Blue Peel products, used to aid the physician in the application of skin peeling actives.

The company markets its products through a domestic sales force and foreign distribution partners to plastic surgeons, dermatologists, and other physicians that are focused on aesthetic and therapeutic skin care. Obagi Medical Products, Inc.was founded in 1988 and is headquartered in Long Beach, California.

Sales and profits did very well through the third quarter of 2008. In 2006, the first year the company was public, sales were $78 million and earnings were 34 cents a share. The next year, sales hit $102.6 million and earning doubled to 69 cents a share. The first part of 2008 started out fine with first quarter sales $25.4 million, above the $23 million for the first quarter of 2007. Then in the second quarter, sales went to $27.8 million, still ahead of the $26 million in the second quarter of the previous year. But by the third quarter, sales slowed to the same level as the comparable quarter of 2007. The company just announced its fourth quarter results and revenues fell by 6.7% to $25.4 million, down from $27.3 million. For the full year, sales were up 2% to $104.6 million.

Profits were 10 cents a share in the fourth quarter, well below the 20 cents recorded in the fourth of last year. Analysts thought the bottom line would be 13 cents. For the full year, the company reported 56 cents a share, down 17% from the 69 cents in 2007. The economy caught another company in its dragnet.

Here's what the CEO, Steve Carlson, had to say: "The economic conditions that made 2008 a challenging year for all aesthetic businesses had an even greater impact on the fourth quarter."

The stock reflects, actually more than reflects, the lower earnings. It's at an all-time low, trading at $4. In 2007, it hit $25.60. With 56 cents a share in earnings and a $4 price, it would seem investors are expecting more bad news. That's a P/E of less than 8. Analysts predict this year's earnings will show 63 cents, but that may be revised down after the recent earnings release of the fourth quarter and full year's results. Just 90 days ago, analysts had the company making 75 cents for the year.

This is a company that grew earnings an average 48.13% per year over the last 5 years. Analysts think it will continue to show increases, only at 12.7%, over the next 5.

While some may argue that much of this business is "vanity", for people who need to look younger, that spending on these products is highly discretionary, they may underestimate the core cosmetic customer, the one who needs to have skin care because of discoloration or skin disorders. Not every one is using Obagi's systems only to look better. Many are, but there are also many who require treatment after surgery or have skin diseases.

More numbers: Price to Sales is .95. Price to Book is 1.64. Operating margin is 23.62% while Profit margin is 14%. Return on Equity for the last 12 months was 32.43%. Cash per share is $1.08. Total debt is $71,000. There's $25 million in cash. Current ratio is 5.27. Book Value per share is $2.73. Beta is a high 1.58. Total shares outstanding are 22.7 million with insiders owning 31%. There is no dividend.

Here's a small company that had a great run from the day it went public in late 2006 to late 2007. Then the price came down quickly, until now, where it's trading at all-time lows. There's no reason to believe the stock will turn around any time soon, especially with the economy in such dire straits. But when there is a feeling of better times ahead, this stock should once again have a stellar performance as the aging population spends money on looking and feeling better.

Company Web site: www.obagi.com

- Ted Allrich