Buy, Sell, or Hold: MELA Sciences

When considering any stock for your portfolio, don't be swayed by the positives alone. Examine its pros and cons and decide whether its potential upside outweighs its risks. Let's take a look at MELA Sciences (NAS: MELA) today and see why you might want to buy, sell, or hold it.

MELA is a small biotech company with a market cap near $77 million. Its melanoma detection device recently received FDA approval. Over the past year, its stock has dipped more than 10%.

Buy
The main thing MELA has going for it right now is its MelaFind melanoma-detecting machine, which uses light as its takes images of suspicious skin growths and analyzes how likely they are to be problematic, helping dermatologists decide whether they should be examined further or removed.

MELA sponsored a study to reflect how valuable the technology is, and the study showed that MelaFind suggested biopsies on 125 out of 127 melanomas that dermatologists removed. When it comes to correctly identifying noncancerous growths, physicians were correct only 4% of the time, and MelaFind improved on that with 10% accuracy. In other words, the product seems rather useful.

When the company reported its recent quarterly results, it offered more reasons to be bullish: MELA has begun "commercializing" MelaFind, focusing its early efforts in the Northeast U.S. and several German cities. At a recent dermatologist annual meeting, it collected more than 200 leads. It inked a three-year expanded manufacturing agreement with the supplier that produces MelaFind. And it signed on Quintiles to support commercialization of the product in Germany.

If you like to see Wall Street analysts supporting your moves, you'll like that Cowen & Co. recently initiated coverage on MELA with an "outperform" rating.

Sell
Why might one sell such a promising stock? Well, there are risks. For one thing, MelaFind is not yet a blockbuster generating gobs of money. The company's recent earnings report showed positive revenue in its first quarter, compared to no revenue at all in the year-ago quarter. But that revenue was -- wait for it -- $11,250. Yes, possibly less than your car is worth, and quite possibly less money than you took in last quarter.

That's not a damning figure, though. MELA is a small company with an exciting new product; it's just very early in its history. If all goes well, the company could ramp up quickly. Intuitive Surgical (NAS: ISRG) went from $72 million in sales in 2002 to $1.8 billion in 2011, enjoying rapid adoption by surgeons and hospitals. MAKO Surgical (NAS: MAKO) , also offering machines for surgeries, went from $1.2 million in 2002 to $85 million in 2011. Of course, some small companies never quite make the cut.

Then there's the company's industry. MELA will likely need to be developing and bringing to market new products over time, so it will have to deal with FDA regulations and successfully pass through the approval process -- easier said than done. MelaFind was initially not approved, and many other companies have hit FDA-approval obstacles on their way to market.

Meanwhile, the FDA restricted the use of MelaFind to only dermatologists, who as a group may be reluctant to spend money and time learning a new technology when they feel they have been doing a satisfactory job without it.

Hold
Given the reasons to buy or sell MELA Sciences, it's not unreasonable to decide to just hold off. You might wait for a revenue increase or a net gain -- or a bunch of these in a row. It would be reasonable to sit this play out until it's clear that MelaFind is being accepted and purchased by lots of dermatologists.

The verdict
I think I'll be holding off on MELA Sciences, at least for now. After all, there are plenty of compelling stocks out there with more certain futures.

If you're looking for a blockbuster stock, our analysts think they've found a very promising company. Check out our special free report, "Discover the Next Rule-Breaking Multibagger," to learn more about it.

At the time thisarticle was published LongtimeFool contributorSelena Maranjian,whom you canfollow on Twitter,holds owns shares of Intuitive Surgical and MAKO Surgical, but she holds no other position in any company mentioned.Click hereto see her holdings and a short bio.The Motley Fool owns shares of Intuitive Surgical and MAKO Surgical.Motley Fool newsletter serviceshave recommended buying shares of Intuitive Surgical and MAKO Surgical. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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