BOSTON (TheStreet) -- Value-focused Morningstar bestows its top five-star rating on just 23 stocks, almost all of which are out-of-favor with investors.

A recent internal performance measurement indicates that Morningstar's five-star stock basket has returned 19% a year, on average, over a five-year span. Given the stock market's breakneck pace over the past few months, commentators are expecting a rotation out of growth stocks and into value shares in 2011, as often occurs in a maturing economic expansion. Thus, it's time to consider value investments.

One such stock, which Morningstar just upgraded to five stars, is TomoTherapy ( TOMO), a high-tech medical company that sells radiation systems. TomoTherapy's shares have fallen 20% in the past 12 months and have delivered annualized losses of 39% since 2008. The market value of the company is just $190 million, qualifying as a micro-cap. Tomo has been consistently unprofitable since fiscal 2008. In the third quarter, Tomo delivered an adjusted loss of 21 cents a share, a 14% year-over-year improvement, beating analysts' consensus target by 16%.

Its revenue rose 27%, outperforming the consensus by 15%. Still, the company is suffering. It remains unprofitable on an operating and net basis, and book value is on a downswing. So why does Morningstar like Tomo? Tomo has a unique and premium-priced technology. Tomotherapy is a type of radiation treatment used on cancerous tumors, particularly head and neck tumors, breast cancer and prostate cancer. Unlike conventional radiation, tomotherapy delivers doses of varying intensity, with precision. 3D imaging allows for more accurate radiation delivery while also reducing unnecessary exposure of healthy tissue.

Tomo's treatment method, known as intensity-modulated radiation therapy, is relatively new, but has numerous advocates in the scientific community. TomoTherapy's HiArt and TomoDirect systems are among the most sophisticated utilizing this technique. Since 2003, the company has installed more than 275 systems, a growing number, signaling the relevance of its offerings. Tomotherapy is in solid shape, financially. Its balance sheet held $140 million of cash, equal to an ample quick ratio of two, and no debt at third quarter's end, though the float rose 4% to 56 million shares. A clean balance sheet should console loss-wary investors.

Tomo has competition in radiation-therapy, namely Varian Medical Systems ( VAR - Get Report) and Germany's Siemens ( SI). Morningstar believes Tomo has no "economic moat", or sustainable competitive advantages, and must "climb a steep innovation curve."

Nevertheless, it sees the risk/reward proposition as compelling, valuing Tomo's stock at $6, on the basis of discounted cash flow, and predicting a rise of 76%. Tomo unveiled its latest system in 2009. TomoHD, designed to treat a broader patient population, can attack simple and complex cancers. Product introduction came at the "perfect time."

Morningstar believes the replacement cycle for radiation therapy is about to "kick into high gear" and Tomo's offerings are attractive and poised to steal market share from competitors' systems, though Varian's latest TrueBeam system "has upped the stakes in terms of treatment times and dose accuracy." Furthermore, radiation machines represent exorbitant costs to hospitals, so the sales-cycle is lengthy and, given ongoing operational difficulties at medical facilities, sales volatility is a major risk. A favorable reimbursement cycle has strengthened the case for investments in radiation systems. If reimbursement rates change, demand will suffer.

Based on the current cash-burn rate, Morningstar doesn't believe that Tomo will require further external financing any time soon. While so-called image-guided radiation therapy is now the norm in the U.S., the technology has tremendous growth prospects overseas, offering an international expansion venue for Tomo. An aging baby-boomer population and rising global cancer rates are demographic catalysts which support an investment in the company. Still, Morningstar assigns Tomo "high uncertainty."

-- Written by Jake Lynch in Boston.


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