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Posts from the ‘Portfolio’ Category

Week 294: It doesn’t matter how you get there

Portfolio Performance

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Top 10 Holdings

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See the end of the post for my full portfolio breakdown and the last four weeks of trades

Thoughts and Review

It’s a seminal moment for the blog!  For the first time in what seems like forever my largest position is something other than Radcom.  Thanks to more than doubling in price in the last four months (and even after pulling back from $6 to $5), Identiv now holds that honor.

At the beginning of November I wrote the following about Identiv:

I tweeted a couple of times this morning that I don’t think this stock makes sense at a $20 million market cap… The company has a $55 million trailing twelve month revenue run rate, they are showing growth, they are EBITDA positive now and it’s not an insignificant amount of EBITDA.  That feels like it should warrant at least 1x sales.

We are already at a $55 million market capitalization but with momentum at the company’s back I haven’t sold a share.

A second position, RMG Networks, has also ran up the ladder, and now sits as my fourth largest position at a little less than 5%.

I wrote this about RMG Networks when I first took the position in late June:

With the focus on the new verticals and improve productivity of the sale force new opportunities in pipeline are up over 40%.  And here is where we start to see an inkling that the strategic shift is bearing fruit.  In the sales pipeline, Michelsen said that the number of deals $100,000 or greater has increased by 50% in the last year while the number of $1 million deals have tripled…My hope is that these early signs of sales improvements lead to an uptick in revenues in short order.

We are starting to see that pipeline bear fruit.  The entire move has come in the last two weeks.  The stock has moved from 70 cents to a dollar on news that they had secured contracts in the healthcare vertical and converted one of their previously announced trials into revenue in the supply chain vertical.

Finally, a third company, Combimatrix, which I wrote about earlier this week, is beginning to run and take a more significant position in my portfolio after releasing solid fourth quarter results.

So that’s all great, but the reason I mention these three examples is because they illustrate how bad I am at predicting how things will play out.   In the second half of last year had you asked me what my portfolio would move on I would have replied it will rise and fall on the fortunes of Radcom and Radisys.

Flash forward a few months and my portfolio has moved significantly higher and Radcom and Radisys have done nothing.  Radisys has actually went backwards to the tune of 20%.  Whodathunkit.

This is why I carry so many positions.   A. I’m a terrible timer.  The events that I think are imminent take months or years to play out, while the events that I think are distant have a habit of manifesting much faster.

Second, my favorite ideas are often not my best one’s.  I have no idea why this is.  If I did I would change my favorite ideas.  But it’s uncanny.  I’ll sit on a thesis like Radisys, work it into the ground to understand it in depth, and then along will come a Health Insurance Innovations, which I will buy on a bare thesis (in this case that the Affordable Health Act will be repealed and this is going to be good for HIIQ) and when the dust settles I’ll have more gains from the latter than the former.  Its kinda crazy.

I guess as long as you are moving in the right direction it doesn’t really matter how you get there.

Portfolio Changes – Adding Silicom

I added a couple of new positions this month.  The Rubicon Project and Silicom.

Silicom got hit after releasing what I thought was a pretty good fourth quarter.  The company traded down to $35 from $39 pre-earnings.  I’ll try to get a more detailed write up out on Silicom at some point, but the basic points are:

  • This is a $250 million market capitalization company with $36 million of cash and no debt
  • It’s trading at a little over 2x revenue and just guided 15% growth in the first quarter and double digit growth for the year
  • Their past seven year compounded annual growth rate is 26% and growth was 21% in 2016.

Silicom designs a wide range (over 300 SKUs) of networking, cybersecurity, telecom and storage products. These are generally board level and appliance level hardware solutions.

They expect their security vertical will grow double digits, their cloud vertical will “grow significantly” and that a contribution from SDWAN will kick-in in 2017 and is expected to become a “major growth area”.  They said that over the intermediate term they see a larger opportunity in their pipeline than they have have in the past.

Already the stock has rebounded on news of a significant contract for encryption cards that will ramp in 2017 and reach $8 million in sales in 2018.

I’ll talk more about Rubicon Project in an upcoming post.

Apart from these new positions I did a bit of tweaking of my positions, adding a little to Nuvectra and Combimatrix, reducing my position in Bsquare and selling out of DSP Group.  I also have added to my Vicor position in the last couple of days (subsequent to the update end so not reflected in this update).

Taking advantage of Bovie Medical Weakness

I also added significantly to my position in Bovie Medical.  The stock sold off on news that their pilot project with Hologics for selling the J-Plasma device would not be extended.    As I tweeted at the time, I didn’t think this was as big of news as the market did.

To expand on my reasoning, Hologics has a particular business model they follow for their instrumentation and disposable business, of which J-Plasma would have been a part (from 10-Q):

we provide our instrumentation (for example, the ThinPrep Processor, ThinPrep Imaging System, Panther and Tigris) and certain other hardware to customers without requiring them to purchase the equipment or enter into a lease. Instead, we recover the cost of providing the instrumentation and equipment in the amount we charge for our diagnostic tests and assays and other disposables.

So they go “full razor blade”.  Bovie on the other hand, generates significant sales from generators.   The average selling price (ASP) for a generator is much higher than hand piece so Bovie generates a significant slice of their revenue from it.  From the 2015 fourth quarter conference call :

I guess when you think about it, the generator ASP is north of $20,000, the hand piece ASP is $375

So the models aren’t aligned.

Second, Hologic’s Gyn Surgical business segment (consisting of the NovaSure Endometrial Ablation System and our MyoSure Hysteroscopic Tissue Removal System) is a $400 million business so J-Plasma is microscopic for them.  They may not have been inclined to bend their model for Bovie.

Also worth noting is that Hologics wasn’t even mentioned in the Bovie 10-Q whereas the agreement with Arteriocyte that was mentioned favorably.

Finally the language used on the third quarter conference call around Hologics wasn’t exactly definitive:

Well, as you know, the sales channel partnership with Hologic,right now,is in a pilot phase.  So we wouldn’t be in a position, if we were to disclose the economic relationship, until that’s a permanent agreement.  So the pilot portion of our partnership will go until the end of February.  So you could look at some period after that before we can announce a permanent relationship and we’ll decide at that point in time if we’re going to elaborate on the economics of the relationship.

The agreement with Hologics hadn’t generated material revenue so there is no hit to the bottom line.  And in a separate press release (which oddly was released on the same day as the Hologics information but didn’t get on their website for a couple days after), Bovie reiterated guidance for 2017, including “accelerated growth for J-Plasma”.

I think the stock sold off in the following couple of days because its small, illiquid and under followed, not because this agreement was meaningful to the company.  So I bought.

Portfolio Composition

Click here for the last four weeks of trades.

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Week 290: Renewal

Portfolio Performance

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Top 10 Holdings

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See the end of the post for my full portfolio breakdown and the last four weeks of trades

Thoughts and Review

I came into the new year wanting to reduce my exposure.  I had racked up gains last year that I had held onto for tax gain reasons.  It’s also been a good run, and there are at least a few signs that the market is topping out.

I also find too much exposure leads to poor decisions.  The lack of cash causes me to ignore ideas I might otherwise pursue and I start to feel stuck with the positions I have.  I end up “hoping”.

When it comes to investing “hope” is a dreaded word for me.  Hoping that a takeover happens.  Hoping that a news release comes out.  Hoping that this quarter is different.

Moreover, hope is inextricably tied to patience and patience, while not so toxic as hope, has a love/hate relationship with me.  Patience is necessary.  You have to wait to have your ideas play out.  And I do this.  I sat on Willdan for 3 years before it decided to more than triple in 6 months. You can’t cash out on the first gain or jump ship on the first sign of loss.

But too much patience, at least for my style of investing, is counterproductive.  It wastes capital of all kinds.  When I am too patient with my positions it also means I am not looking for new and better ideas.

So every so often, maybe once or twice a year.  I take a hard look at every position and ask myself if I really want to own it?  Do I really believe in this idea?  And I force myself to sell at least some of them.

I have to go through a renewal.  I sell off a bunch of positions, reduce a bunch of others, and, at least in terms of my own mindset, I start over.

I did my last big reset last January and that one was sparked by the market moves.  It was not pleasant.  This reset was more minor.  I shook things up enough that I could refresh my perspective.  It seems to be working so far.

Changes to the Portfolio

I sold a number of energy positions: Jones Energy, Resolute Energy, Gastar, Granite Oil and Key Energy Services.  I didn’t time these sales particularly well, as many of these names have rallied further after I sold.

You might ask why I sold Key Energy Services so soon after buying them?   Partly it was logistics; in the account I track with the practice portfolio I wanted to raise cash and so I had to look for names to sell.

Second, it had appreciated 20% from my original price and, in light of my first reason, seemed like an easy gain.  Energy services is a tough business and so this isn’t a stock I wanted to hold for a long run.  Nothing has changed with the company though, and in my actual account I still hold my warrants, which give me exposure to upside in the stock.

I also sold Contura Energy.  I did more research on the met and thermal coal market and I concluded it was more likely that coal prices would decline than increase.  In particular, much of the increase seemed to be because of closures in China that could just as easily be reopened and there was evidence that was already happening.  I’ve been in and out of the coal market since 2006, I know how volatile it can be (especially met) and I also have experienced that when the coal price is declining it doesn’t necessarily matter how cheap the company appears, the stocks will follow the price of the commodity.  Maybe that won’t happen in this case, maybe Contura is “cheap enough”.  But I couldn’t ignore the precedents I had seen.

Even with these changes I still don’t have enough cash in the practice portfolio.  I’m running about 20% cash in my regular portfolio and am a little less than flat with the online account.

As for my remaining positions…

I still have reasonably big positions in Radcom and Radisys, but along with many other stocks I reduced these positions as well.  I am balancing my expectation that the first and second quarter results from each of these names will likely be modest with the awareness that positive news in terms of new contracts could happen at any time will send each stock much higher.  However I did decide to add a little Radcom back on Monday, which is not reflected in the update.

I also reduced Willdan.  Its just gone up so much.  I took some off at $27 and $29, which turned out to be a little early as the stock briefly hit $31.  I don’t plan to sell any more; I still really like where the company operates (energy efficiency), they should see some benefit from infrastructure plans, have the ability to pull together cheap accretive acquisitions and will also benefit from changes to the tax code (their tax rate has typically been above 40%).

Finally I reduced my positions in Attunity, Hudson Technologies and Nimble Storage.  I’m not completely confident that the results for these companies in the next quarter are going to be stellar.  I prefer to wait to see the results an add back depending on the reports.

And a few new positions…

I took five new positions in the last month.  I wrote up two of them, Ichor Holdings and Nuvectra.

I tweeted that I took a position in Vaalco Energy (hat tip to @teamonfuego)

And I tweeted that I took a position in Combimatrix:

I have a write-up in the works about Combimatrix and have plans for one on Vaalco after that.

The last position that I took was in Gigamon.  I have written in the past that I been waiting for this stock to correct and continually regretted not buying it when it was lower.   The company announced poor numbers for the fourth quarter and the stock took a massive beating.  I was happy to step in.  The stock could go lower but I am not convinced that their announced portends a trend so I wanted to get at least started with a position here.  If the stock dipped into the $20’s, I would double down.

Last Thought

I’m very edgy about Trump and his economic agenda.   Given the role that Steve Bannon has taken on, its worthwhile to read and listen to what he has said.  I might do a more detailed write-up on this in the future, but for now consider this speech.    Bannon’s ideas remind me of what you hear from gold bugs and all those economic podcasts that portend the financial end of the world.    He talks about the contingent liabilities, the trade deficit with China, its all those things you hear from the newsletter writer/economic podcast cohort.  Some of what he is saying has merit, but if he is going to attack what he sees wrong I don’t know if this plays out well.

Portfolio Composition

Click here for the last four weeks of trades.

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Week 286: On being wrong a lot

Portfolio Performance

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Top 10 Holdings

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See the end of the post for my full portfolio breakdown and the last four weeks of trades

Thoughts and Review

The other day I was considering posting an article on SeekingAlpha.  I couldn’t muster the energy.  I wasn’t sure why, but I felt a strong resistance against it.

So I put it aside and in a couple of days it came to me why.

Take a look at my SeekingAlpha history.  I’ve written a few articles for it.  The list of names is, at best, uninspiring.  Hercules Offshore went bankrupt not long after I wrote about them.

The fact is, I’m wrong a lot.  At least a third of the time I pick a stock it doesn’t even go in the right direction.  In a bad market that number is likely well north of 50%.  And even when I’m right, I often miss by degree.  The last couple of months, while my portfolio has done pretty well, it would have done much better if I was not weighted most heavily in two positions that have done absolutely nothing (Radcom and Radisys).  My biggest winners are often afterthoughts where credit should only be taken with qualification.

If there is one redeeming feature about my strategy it is that I am fully aware of my own limitations.  I am never certain.  In my blog write-ups I try to phrase every position in terms of what might happen, both the positive and negative, with the expectation that I may have the thesis totally ass-backwards.  If anything, the limitations of the medium (writing) convey more conviction than I generally have.

This doesn’t play well when writing an article that is trying to convince others about what a great idea you’ve just found.  It might be, it might not. Who knows.  What I can say is that as long as I cut my losses quickly, it presents a pretty good risk/reward.  But I have no particular insight into whether its going to pan out or not.

It doesn’t make a compelling narrative.

Nevertheless after another pretty successful year, despite a whole lot of mind-changing and almost constant self-doubt, I can say that it worked pretty well once again.  To summarize:

  1. I freaked out in January when my portfolio lost over 10% in a couple of weeks.
  2. I only tentatively added back as the market bottomed.
  3. I sold out of the years big winner, Clayton Williams, about $100 too soon.
  4. I mostly missed anticipating the Trump rally apart from a position in Health Insurance Innovations and a couple of construction plays I bought in the days immediately following the election.
  5. (As I will describe below) it only donned on me that community banks should be firing on all cylinders in the last few days.

Yet I’m up about 35% since July (my portfolio year end) and about 40% in 2016 (though with the asterisk that it is with far less than $50 million in capital 😉 ).

Most occupations don’t tolerate excessive uncertainty.  I am fortunate to be involved in one of the few that reward it.

The last Month

Last month most stocks in my portfolio stagnated.  The gains I had were fueled by a few oil names (Gastar Oil and Gas, Jones Energy, Resolute Energy) as well as Health Insurance Innovations, Identiv, DSP Group, and a last day move back up by Radisys.

Health Insurance Innovations has been a big winner for me.  If only I had bought more!  The stock has more than doubled since Trump took office.  I sold some of my position in the last days of the year (I mistakenly sold all of it in the practice portfolio so that is why it doesn’t appear in the list below).

The second big winner has been Identiv.  Unlike Health Insurance Innovations, I have not taken anything off the table.  Identiv remains quite cheap, with only a $35 million market capitalization.  There is a rumor that after a presentation given at the Imperial Conference the company suggested some recent business with Amazon, which, if done in mass, could be quite a big contract for the company.  I have no idea if its true though.  The stock has pulled back in the last few days, but I’m not too worried.  As long as business continues along its current trajectory, the stock should do well in the coming year.

Key Energy Services

In mid-December I took a position in an oil services firm, Key Energy Services (KEY).  I was given the idea by someone in the comments section of the blog.  Key Energy operates a number of well services rigs, as well as having businesses in water management, coil tubing, and wireline services.  This is a tough business, and has been a disaster over the last two years.  At least 3 competitors in the space have been through bankruptcy.

At the time I bought the stock it was still trading in bankruptcy.  Similar to Swift, existing shareholders received a piece of the new company and warrants.

Since exiting bankruptcy in late December the stock has traded up quite a bit but I think there is still some value there as oil services demand rises.  What I remember from past cycles is how leveraged these companies are to improving fundamentals.  They gain on both pricing and volume. With both natural gas and oil moving up, this may be the first time since 2012 where Key Energy has had pricing of both commodities as a tailwind.

The company has reduced its G&A, reduced interest expense via the bankruptcy process, and is the first of  its brethren to make it through the restructuring process.

On the negative side, its a low margin business, I don’t get the sense that management was particularly astute heading into the slowdown, and in the current pricing environment even after restructuring they are still EBIDA negative.

Nevertheless I am willing to see if I can ride the cycle here.  Its probably no multi-bagger, but I am looking for a move into the $40’s where I would sell.

Community Banks

The last thing worth mentioning is that after a month and a half of rallying, and the astute comment of Brent Barber asking me why I wasn’t looking at them, I finally spent some time on the community banks.  Its soooo obvious, its painful to think that if I had spent a few hours on November 9th I would have quickly realized the same conclusion and ended up a number of dollars richer as a result.

Nevertheless, a good idea is a good idea.  Though the names I bought are up between 10-20% in the last month and a half, I still think they have much further to run.  I added positions in SB Financial (SBFG – former Rurban Financial, which I’ve talked about in the past and owned a small piece of of for some time), Sound Financial (SFBL – another bank I’ve owned for years), Atlantic Coast Financial (ACFC – which I have owned and written about in the past), Home Federal Bancorp of Louisiana (HFBL), Parke Bancorp (PKBK), and Eagle Bancorp of Montana (EBMT).  I took a basket approach because all of these namess are illiquid and difficult to accumulate in too much size.  I will write these up in more detail shortly.

Portfolio Composition

Click here for the last four weeks of trades.

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Week 282: Two Big Events

Portfolio Performance

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Top 10 Holdings

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See the end of the post for my full portfolio breakdown and the last four weeks of trades

Thoughts and Review

My portfolio bounced back this month.  This was somewhat remarkable given that my two largest positions, Radisys (RSYS) and Radcom (RDCM), continued to perform poorly.  I don’t expect much from either of these stocks until they are able to secure additional contracts with service providers.  With year end coming up, I am hopeful (but not counting on) some news on that front.

The rest of my portfolio did extremely well, benefiting from the rotation to small caps that occurred after the election of Donald Trump.  I didn’t anticipate the market move or the small cap revival.   But I wasn’t the only one, in fact I didn’t hear that prediction from anything I read.  I would be interested if anyone else knows of an expert, newsletter writer or manager that predicted the move?  They would be worth following.

In retrospect it makes sense; expectations of significantly lower taxes and a relaxation of regulations would lead to a market rally with a bias on small caps with domestic exposure and few tax loop holes.  The stocks that have performed the best for me have had that characteristic.

Willdan Group (WLDN) is a text book example.  Willdan has always paid a high tax rate, sometimes over 40%.  If the companies tax is cut in half, which is not impossible under a Republican government, earnings go up by 30%.  They are also essentially an infrastructure play, another positive.  The stock has moved from $16 to $24 in the month since the election.

Adding Healthcare, Infrastructure, Biotech

While I wasn’t positioned for a rally leading into November 8th, I adapted as the market moved higher.  As I’ve written about here, I added Health Insurance Innovations shortly after the election on the expectation that changes to the Affordable Care Act (Obamacare) would open up competition, which would be positive for their business.

I also added an infrastructure play, Smith-Midland (SMID), as it seems that this will be the focus of spending under the Trump administration.  Smith-Midland makes make pre-cast concrete products like barriers, sound walls, small buildings, and manholes.  They have a market capitalization of $25 million and even after having run up to $5 are not expensive.  There is a good article on the company here.  I also added to my existing position in Limbach Holdings, another infrastructure play.

My last move in response to the election result was to add to a few biotech names.  This worked out initially but interest has waned in the last couple of weeks.  I added to my position in Supernus (SUPN), to Bovie Medical (BVX) and added back some TG Therapeutics (TGTX).  I may jettison the latter position soon.

Responding to OPEC

The Trump move was followed by the OPEC move, which I again don’t profess to have predicted.  I was agnostic going into the OPEC meetings; I held my usual weighting of energy positions, but did not pile into them as a bet that a deal would be reached.

Instead, as is my typical strategy, I chased the news, adding to energy names on the heels of the announcement.  By waiting I missed out on the first 10% move, but once the deal was announced it was a far lower-risk entry into stocks on my watchlist.

It can be argued that OPEC’s cut will only lead to high US production, or that it will be diluted by cheating by OPEC members, but nevertheless its difficult to argue that this doesn’t put a floor on prices.  And if there is a floor, stocks that previously had to discount the possibility of another move into the $30’s do not have to anymore.  Therefore stock prices needed to move higher.  I think they still do.

Many of the names I am interested in are small enough that they do not move immediately with the market.  Thus I have been able to add to Journey Energy (JOY) and Zargon Oil and Gas (ZAR) at prices not too different to what they were leading up to the announcement.  There is a good SeekingAlpha article (and comments, in particular note those on the interim CFO hire) on Zargon here.  I haven’t seen any analysis on Journey, and I will try to write up a summary on the stock in the next couple of weeks.

A second energy name that I added to and am in the process of writing up is Swift Energy.  As I tweeted on Friday:

I also added Resolute Energy (REN), a Permian player I have been in and out of over the past 6 months, and added back Granite Oil (GXO).  There was a good comment to my last portfolio update that gave me some perspective on the concerns I had raised about Granite.  I wanted to add to Jones Energy (JONE), but it moved so quickly off of the OPEC news that I didn’t get a chance.

Finally I added to a derivative play, CUI Global.  CUI Global is a bet on Trump as well as OPEC.  The company has said in their presentations that they have struggled gaining traction with their GasPT products in North America because of the dour investment climate for oil and gas infrastructure.  This should change under Trump and with support to oil prices.  Its no guarantee that CUI Global will be the beneficiary, but if their product is as good as they profess it to be, it should be the preferred measurement tool for new projects.

I also added a position in Contura Energy.  It was written up here.  I think this article will move behind the paywall soon, so I would recommend reading it sooner than later.

Where we go from here?

I’ve taken on some risk as the market has moved higher and especially after the OPEC agreement.  But I do not expect this to last long.  I’ll be paring back positions over the next few weeks.

I don’t feel like I know what to expect from this new US regime.  Tweets like the one’s Donald Trump made over the weekend, promising a 35% tax against companies moving production abroad, leave me wondering where we end up?  Are these just empty threats, impossible to implement?  Or is this only going to escalate?

It’s uncharted territory.  If government spending increases significantly, taxes are cut and trade restrictions are imposed, I’m not sure where it leaves us.  Will bond yields rise, setting off a negative market event?  Will investors continue to pile into domestic US equities?  Will stocks based in foreign locales or with manufacturing operations abroad sell-off on concerns over tariffs being implemented.  The answers are just way beyond me.

Lacking confidence in the answers means I have to get smaller.  That’s the only response.  Since July (my year end) I am up nearly 30%.  I feel like I am pushing my luck asking for the same kind of performance in the second half of my fiscal year.

Portfolio Composition

Click here for the last four weeks of trades.

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Week 241: Surviving

Portfolio Performance

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See the end of the post for the current make up of my portfolio and the last four weeks of trades

I had more than one acquaintance send me news that Orange Capital was shutting down.  I found this sad.  Those of you that have been following the blog know that Orange Capital and myself came into large positions in Bellatrix at about the same time.  The fall of 2014.  Both of us saw a company with excellent assets, the potential for significant growth, and a valuation that was compelling.

Unfortunately for us, while company specific factors lined up, the macro backdrop was quite the opposite.  As a consequence in the last year and a half Bellatrix has dropped from my original average cost of $6 down to, at one point, below $1 and current $1.42.

How Orange Capital and I responded was quite different.  Strong in their conviction that Bellatrix had solid assets and weather the storm, Orange Capital held their position and continued to buy more.  Myself, never all that sure whether I am missing some vital information, always wary of “giving it all back”, threw in the towel at around $4.50 in late November, capitulating into an interim low.

That I happened to be right in this case isn’t the point.  I didn’t forsee $20 oil or a $1 handle in front of the AECO spot contract.  I am positive that Orange had a better researched position than my own.  That I was right was, to a large extent, just luck.

What is demonstrated though is a difference in philosophy between what I am trying to do versus many money managers. I’m not a big believer in my own infallibility.  As my positions go down, I try to reduce them.  I’m not perfect in this respect, but its something I try to follow.

This is a methodology that I am finding has its shortcomings in this bear market.  You end up selling a lot of stock only to see bounce back shortly after.  I’ve been whipsawed on a few positions.

The other point I want to discuss, which is semi-related to Orange Capital, is the topic of blowing up.

The point of existence of a hedge fund is to risk money in order to make more of it.  You can argue the particulars of that statement, that risk reduction can occur through various hedges, diversification, concentration, whatever your flavor is, but the bottom line is that the money should be at risk somewhere or why is the fund even there?

But that’s not my job.  While part of what I am trying to do is of course maximize my profit line, my first mandate at this point in my life is also very clearly and in capital letters, TO NOT BLOW MYSELF UP.

I see some of the funds shutting down and stories about others that are down 15 or 20% this year already.  If a hedge fund is down big going into this weekend (I suspect that this is not completely uncommon and that there are many I have read about that are down far more) their primary motivation has to be to get it back.  They need to make money to survive.

I am down 9% since the beginning of the year as well.  But while it would be nice to get it all back, my primary motivation right now is not that.  My motivation is simply to make sure that my family and I are in a position to live comfortably regardless of what happens.  Whether that is 9% higher or not is really not the fundamental point.  Most important, and what I guard against with absolute vigilance, is insuring that my capital doesn’t permanently disappear.

With that said, my biggest transaction over the past month is irrelevant to this blog.  I paid down my mortgage in full. I also went to a mostly cash position in my RRSP (the Canadian equivalent of an IRA).  My investment account, which I track here, has more risk to it at the moment than I would perhaps like, but that is because, as I tweeted on last Wednesday, I thought there was a decent chance of a rally, which we seem to be getting.

So what do I see that is making me take such a bearish, worried stance? A couple things, and I will get into those in a minute, but the overriding factor is the same one that led me to sell Bellatrix in November 2014.  It simply isn’t working.  And when it doesn’t work I have to stop doing it before I suffer a permanent and significant capital loss.

As for those other things, the two legitimate concerns I see are the same one’s everyone else is talking about (which is partly why I think we might be due for a rally).

  1. The collapse of oil bringing about energy company bankruptcies that a. lead to investor losses that start to domino into broad based selling, and b. lead to bank losses and bond losses that cause overall credit contraction
  2. The collapse of China’s banking system leads to currency devaluation and god knows what else.  Kyle Bass wrote a terrifying piece (which I would recommend reading here) about how levered China’s banking system is, how their shadow banking system is hiding the losses, and about how government reserves are not large enough to pacify the situation without a significant currency devaluation.

Just how and to what extent these things come to pass is about as certain to me as $20 oil was in November 2014.  I have no clue.  But they are there, they are clearly worrisome, and what I have been doing is not working.  So I have to act accordingly.

What I did this Month

Not a whole heck of a lot.  In my online portfolio I added back two stocks and sold a few other. I bought small positions back in Relypsa and TG Therapeutics a few weeks ago.  I also made a couple of more buys on Wednesday of last week, adding (very small) positions in Cempra, Apigee, Five9, Ardmore Shipping and DHT Holdings (I subsequently sold DHT on Friday in favor of Teekay Tankers).

This week I added a small Air Canada position back and made two adds to existing positions: Radcom and Intermap.  Radcom gave a very positive quarterly update, said that the recent contract for NFV deployment is much bigger than the $18 million originally announced and that we should expect more contracts in the second half of 2016 or beginning of 2017.  I’m pretty sure this contract is with AT&T.  And while Radcom doesn’t give guidance they did say they expect $20 million of cash by the end of the first half of 2016.  This would be up from current $9 million.  They clarified that the cash is due to new revenue not deferred payments which exemplifies how profitable the new NFV contract is.  I think its quite a good growth story in a landscape bereft of them.

Intermap closed their $125 million SDI mapping contract and I don’t think the market is giving them full credit it for it.  I would expect that as the money rolls more believers will jump into the stock.  Intermap remains highly speculative but if they can follow up this contract with another large contract the upside for the stock would be significant, making it just the sort of market-insensitive story that I like to have in this environment.

Portfolio Composition

Click here for the last four weeks of trades.

week-241

Week 223: Playing the Volatility

Portfolio Performance

week-223-yoyperformance

week-223-Performance

See the end of the post for the current make up of my portfolio and the last four weeks of trades

Monthly Review and Thoughts

I was on vacation for three of the past four weeks, so my portfolio changes have beeen minimal.  It was nice time away but the timing was unfortunate; the market swooned but bounced back before I got back.  There were plenty of opportunities I missed out on.

As it were, the only two I was able to capitalize on were Mitel Networks and New Residential.  In both cases I had old stink bids that got hit (a little over $6 for Mitel and $12.50 for New Residential).  But even in these cases, the positions I ended up with were much smaller than I might have had I been actively watching the action.  I’ll talk about Mitel a little later on.

I haven’t been tweeting a lot either, but I can’t attribute that entirely to being away.  I find my mind hesitating on any conclusion.  Its very difficult to tweet when each comment requires a couple of caveats a maybe and at least two possible scenarios.  There are only 140 characters.

David Tepper was on CNBC a few weeks ago sharing his thoughts about the current state of the market (click here for one of the clips).  Most of the summaries I’ve read focused on his comments about the S&P possibly going to 1,800.

What I took from the interview was uncertainty.   The direction of money flows are criss-cross, whether the tide is still coming in or starting to go out is more uncertain then it has been in recent years. When quantitative easing was in full swing there was a clear easing of liquidity, now its much more muddled.  And Tepper isn’t really sure where it will all settle out.  It might be higher, but he seemed to suggest that he thought it was more likely to resolve itself lower.

If David Tepper isn’t sure of path of least resistance, I bet you can say the same for the market.  And that to me says we are in for volatility.  Which is what we are getting.

If we are going to be in market where directionality is wanting and volatility rules then the right approach is to not believe too much too fast.  Sell the rallies and by the dips.

If I’ve done one thing right in the last four weeks it is that I have manifested these convictions in my trades.  I sold out of a lot of positions as the market rose last week.  I will be ready to buy them back if the market falls back far enough.  Without QE, without China, and without sensible leadership from any of the market groups, I think we simply flounder around aimlessly, at worst with a downward bent.

A Position in Mitel

Mitel develops and installs unified telephone systems for businesses.  They also provide white label back-end services and software for carriers so they can offer their own telephone products to business.

With Mitel’s legacy business, called the “premise” segment, they install a telephone platform on location, including the phones, connections and back-end.  Upon sale of a telephone system Mitel generates revenue from upfront hardware and software sales, and a small amount of recurring revenue for maintenance and support.

The premise business has been shrinking as companies migrate toward a cloud solution.  The cloud system Mitel provides is similar to premise in terms of functionality: the business gets a telephone platform that operates and connects its devices, provides unified voice mail, conferencing, all of the functionality you’d expect.  But the system runs through the cloud, so the hardware component is mostly absent.

With the cloud product Mitel receives recurring revenue for each end-user that is hooked up.  For their retail customers (those who purchase cloud services directly from Mitel) they receive around $45/month revenue per user.  For their wholesale clients (carriers who resell the service as their own) they receive somewhat less, but at a much higher margin as they are only providing the software and support.

In April Mitel expanded into a third segment, mobile, with their purchase of Mavenir for $520 million. Mavenir offers a 4G LTE solution to telecom carriers.  4G LTE is the next evolution of telecom transmission.

4G LTE is slowly being adopted by carriers for its functionality and costs. With respect to functionality, 4G LTE allows for something called Rich Communication, which makes it easier to do things like video calling, group messaging or video streaming over mobile.  As well 4G can deliver voice over the LTE connection rather than the legacy voice network which is expected to improve call quality.

For carriers the cost advantage is that once installed 4G LTE uses less bandwidth, which limits the requirements of additional spectrum that they have to buy.

Mitel’s shift to cloud and mobile means that the overall business model is shifting towards one of  recurring revenue through subscription/licenses.  Below is a snapshot of recurring revenue growth for each of the segments.

recurringrevs

The overall premise business is shrinking by about 5% to 8% per year as companies migrate to a cloud or hybrid cloud/premise solution.  The cloud business has been growing at 20%. Mavenir grew at 30% in the second quarter.

Overall the company has been growing only nominally as the premise business, which makes up 75% of revenue, declines have overshadowed the smaller, growing cloud and mobile businesses.  But this will change as the other two segments become larger.

The early indications are that the Mavenir acquisition is going well.  Second quarter revenue for the mobile segment (which is essentially Mavenir), was $45 million.

mobilerevs

On both the second quarter conference call and at subsequent conferences Mitel has noted an acceleration in Mavenir’s wins since they have been acquired.   The concern of many carriers with respect to choosing the Mavenir solution was that it was a small company with limited resources and a small global footprint.  Mitel’s acquisition has alleviated those concerns.  At the time of the acquisition Mavenir had 17 footprint wins with carriers.  Since April Mitel/Mavenir have won 10 more footprints including 1 major cable company in the United States.

Mitel provides the following roadmap for earnings in 2017.

earningsroadmap

If I use the above roadmap and assume that Mitel can continue 20% growth in both the cloud and mobile business and that the premise business declines at 5%, I can see Mitel earning over a dollar in 2017.

I only wish I would have bought more of the stock when it was in the $6’s.  The timing was unfortunate.  As it is, I am contemplating adding to the position if it dips back into the $7’s.

There are a couple of decent Seeking Alpha articles on Mitel here and here.

Wading into the Biotech Controversy

I decided to jump in with the sharks and take a position in Concordia Healthcare.  I also took a very small position in Valeant Pharmaceuticals.

Concordia has a similar business model to its much larger competitor Valeant.   Its a roll-up strategy.  In the last year they have acquired three pharmaceutical companies: Donnatal, Covis and AMCo.  In the process they have increased their revenue from a little over $100 million in 2014 to over $1 billion in 2016.  Below is a table of the companies acquisition pre-AMCo.

acquisitions

The stock has been hammered as Valeant has been singled out for pushing through price increases on many of its newly acquired drugs.  The comparison is not unwarranted as Concordia has much the same strategy as Valeant, raising prices on newly acquired drugs where the market has been inelastic.

In both the cases I haven’t been able to get a solid handle on the extent of the price increases.  Articles point to 20% plus increases in some drugs.  Others go on to point out that these list price increases are not representative of what is actually paid, and that the actual price increases are more modest.

Valeant is also suffering from its own opacity.  There is an excellent four part blog series that I would recommend reading before investing in either Concordia or Valeant.  It is available here.  The author illustrates numerous examples where Valeant had questionable disclosures and raises some questions about the performance of their acquisition post-integration. Most important though, it provides an overview of how to think about the valuation of both companies that I found extremely helpful.

Concordia is not quite as opaque as Valeant, though some of this is a function of its size.  Until very recently the company only owned a few drugs and depended heavily on Donnatal for its revenue.  So its not too hard to separate the contributing parts.

Unlike Valeant, I don’t see evidence that Concordia’s acquisitions have underperformed after being acquired. Donnatal, being Concordia’s largest acquisition prior to 2015, is illustrative.  Donnatal was purchased in May of 2014.  In 2013 Donnatal had revenue of about $50 million.  In 2014 Donnatal had revenue of $64 million.  In 2015 Donnatal is expected to bring in between $87-$92 million of revenue.

Of course some if not most of that revenue increase was due to price increases.  How reasonable are future price increases on newly acquired drugs?  Without a doubt the potential has diminished.  But I think that as the front page headlines fade the reality will appear less dire than it does now.  Keep in mind that the price increases are not comparable to the 5000% jack-up by Turing Pharmaceuticals an other aggressively managed hedge-fund like pharma providers.  Meanwhile Concordia is down 50% in the last month; surely the more robust expectations have been priced out of the stock.

The bottom line is that both Valeant and Concordia have real negatives but they have also experienced really dramatic falls in valuation.  Concordia was a $100 stock (Canadian) a few months ago.  Valeant was over 30% higher.

I can’t take a big position in Valeant because I can’t really figure out how well its doing and I think the difficulty of performing their roll-up strategy  increases with size.  With Concordia performance is easier to evaluate and they are still small enough to be able to find interesting acquisitions and fly under the radar of the news. I think the question is more one of: are the negatives priced in?  And I think there is a reasonable chance that is the case.

A Few Small Bets on Gold Stocks

Gold stocks have been so beaten up that it just had to turn at some point soon.

I also thought I saw was kind of a win-win situation with respect to the September rate hike decision.  Either the Fed was going to hike rates, which would mean the event had finally passed and the stocks could stop pricing in its inevitability, or they wouldn’t, in which case the legitimate question would resurface as to whether we are really passed the QE-phase.

Additionally, there has been a shift quietly occurring in the gold sector.  Many producers are getting their costs under control.  This has been helped by improving currencies for non-US based producers, by lower energy costs and by lower construction costs.  While the market seems to have a curious focus on valuing gold companies on the price of gold, which has been stagnant to down, the margin they make have been improving.

Let’s take Argonaut for example, which is one of the companies I took a position in.  Argonaut has 155 million shares outstanding and trades at about $1.50, so the market capitalization is about $250 million.  Debt is nil and the cash position is around $50 million.  They have been improving their performance year over year.

yoycomp

Argonaut produced cash flow from operations before working capital changes of $28 million in the first half of 2015 (cash flow including working capital was $38 million, but because changes in inventory are such a big and fluctuating part of a gold mining operation I think they need to be ignored).

Sustaining capital expenditures and capitalized stripping at Argonaut’s operating mines (El Castillo and El Colorada) runs at about $5 million per quarter.  So free cash (so before expansion and development capital) is around $35 million for the year.

Argonaut, and other gold producers like them, are not expensively priced at $1,100 gold.  That means there is no expectation of higher gold prices priced into them.  I think there is a reasonable chance we see higher gold prices as there is a reasonable chance that the economy continues to muddle.  These stocks are multi-baggers if that happens.

Oil

I have had some strong opinions on oil over the past few months but I don’t have a strong opinion now.  When oil was in the low $40’s I once again bet on a number of oil stocks including Crescent Point, Baytex and Jones Energy.  I went through some consternation as Goldman Sachs came out with their $20 oil call and I listened to the twitter universe decry the inevitability of a collapse in the oil price.  But in the end it all worked out, and I sold Baytex for a quick 50% gain, Crescent Point for a 40% gain, and Jones for a 20% gain.

With oil back in the $50’s I feel much more non-committal.  For one, I think that at least some of this move is due to geo-political concerns, which isn’t a firm footing to base a stock purchase.  For two, earnings season is upon us and there is at least some risk that the lack of drilling leads to downward revisions in production forecasts for companies like Baytex and Crescent Point.  And for three, pigs really do get slaughtered, so when the market gives you a big gain in a couple of months I have found it more often than not prudent to take that gain and run.

I will be a bit sick to my stomach if Baytex runs quickly back up to $8, or Crescent Point to $25 but this doesn’t seem like the sort of market to be trying to squeeze out the last 10%.

What I sold (and one more I added)

As I already said I sold out of most of my oil stocks.  I also used the run-up in tanker rates (they breached the $100K per day rate last week) to sell out of DHT Holdings in the mid-$8s and Ardmore Shipping at $13.  I took some quick profits on my small position in Apigee, which ran back up from $7 to $10 on just as little news as what precipitated its move down from the same level.  And I sold out of Alliance Healthcare after the rather bizarre acquisition of shares by a Chinese investment firm (another case where poorly timed holidays contributed to a larger loss than I might have otherwise taken).

I also had a bunch of stocks that I neglected to add to my on-line portfolio, mostly previously held names like Enernoc, Espial Group and Hovnanian.  I took small positions in these stocks during the last dip but sold out them of quickly as they rose.  My plan is to continue to do this sort of cycling, taking advantage of dips and selling the rips.

With that in mind, I did re-add one last position on the last downdraft that hasn’t recovered like I had hoped and that I think will at some point soon.  Air Canada.  The third quarter is mostly passed and there isn’t a lot of evidence that overcapacity from Air Canada and WestJet is going to hinder their performance.   The stocks has barely budged from $11 while other airline stocks soar.  I think it catches up some of this performance in the near term. (Note that I forgot to add this one to the online portfolio but will correct that when the market opens on Tuesday).

Portfolio Composition

Click here for the last four weeks of trades.

week-223

Week 219: Feeling more like a bear market

Portfolio Performance

week-219-yoyperformance

week-219-Performance

See the end of the post for the current make up of my portfolio and the last four weeks of trades

Monthly Review and Thoughts

In my update four weeks ago I wrote:

When I raise the question of whether we are in a bear market, it is because, even though the US averages hover a couple of percent below recent highs, the movement of individual stocks more closely resembles what I remember from the early stages of 2008 and the summer of 2011.

Since that time my concern that the averages had only been lagging the inevitable has born itself out.  We have seen a 10-15% pull-back depending on the index you are referencing.   It has become clear that we are indeed in a bear market, if not by definition then certainly in spirit.

The next obvious question is – when do you buy?  Every other pullback over the last few years has been a buying opportunity.  Is this pullback, being the deepest of the bunch, the best of the bunch?

I don’t think so.  At least not yet.  There are just too many headwinds right now.

First, returning to what I wrote last month:

When the Federal Reserve ended its quantitative easing program last year I was concerned that the market might revert back to the nature it had demonstrated after first two QE endeavors.  But for a number of months that didn’t happen.  Stocks kept moving; maybe not upwards at the speed they had previously but they also did not wilt into the night.

I am starting to think that was nothing more than the unwinding of the momentum created by such a long QE program.  Slowly momentum is being drained from the market as the bear takes hold.

Nothing has changed here and stocks are still too expensive to say that we’ve passed through this process.  If QE was a positive influence on stock valuations, certainly the lack thereof has to be a negative influence.  While there are a few stocks that are cheap right now, many are not.

Second, when volatility is as high as it has been over the last few weeks it usually indicates the market is breaking down rather than breaking out.  I’ve seen this pattern too many times; increasingly choppy and nomadic market moves tend to break down.

Third, we don’t really know what is going on in China.  Nobody really knew how strong the boom was through the last decade; in fact I made a lot of money following the advice of metal prices over analyst comments.  Similarly, I don’t think there are many that have a good grasp on the magnitude of the slowdown.

None of this means that it has to play out to the downside.  Maybe China will be a blip, stocks will resolve themselves to the upside and I will be frantically trying to catch up.  But betting against the odds is not profitable and these odds don’t feel like they are in my favor.

So what am I doing?  Sitting with a lot of cash ( I have 55% cash in my investment account and 60% cash in my RRSP).  Picking a couple of opportunities where I see them but keeping the size small enough that I won’t be hurt if the markets break down again.  And where I can, holding some shorts to help hedge long exposure.

The last five years have been an incredible opportunity to compound capital.  In 2012, when the Fed was clearly going to announce more QE and stocks were going up every day my strategy was simply to find the most levered longs I could to make the most of the upside.   I remember how I was derided by many for doing that.

To give a particular example, I remember how some folks on twitter wrote snide remarks about my YRC Worldwide position.  What a shitty company it was, how it was inevitable it would go bankrupt (one even wrote that the probability of a YRC banruptcy was 100%), and so on.

I just couldn’t figure it out.  I kept thinking, who cares?  The point of this game is to make money and in that particular environment, with the amount of stimulus we had and with a US economy on the mend, it was exactly the kind of stock that could run as a multi-bagger.

It seems as though some investors/pundits think that being right is a philosophical exercise.  And in this game it’s not.   My only measure of success in the market is how quickly and how far that chart at the top of each post trends from the lower left to the upper right.  The rest is sophistry.

While 2012 was the time to buy the levered longs, today the reverse is in play.  You have to be very careful about even buying good businesses that you believe are being mis-priced by the market.  In a bear market just about everything goes down, so you better be sure about what you pick.  Just because it is a good business with a moat doesn’t mean it won’t get sold off with the rest of the market.

I do think that in this environment growth is most likely to come back first.  I am looking for stocks with catalysts and stocks with growth profiles maybe not recognized yet by the market.  Especially if they are beaten down.

Selling Out

I did a lot of selling leading up to and on the bounces of the first decline.  I wanted to get my cash positions up to at least 50%.  I sold entirely out of Hawaiian Holdings, Impac Mortgage, Orchid Island Capital, Ardmore Shipping, DHT Holdings, Air Canada, New Residential and Yellow Pages. I also reduced just about every other position I had.

Since that time I have bought back into Ardmore Shipping and Air Canada to lesser degrees than the level that I had originally held them.  I have added back my full position in DHT Holdings as I see strong fourth quarter shipping rates as a catalyst for some short term gains.  The other stocks I might buy back if the prices become very attractive or if I see changes to the landscape that make me more constructive on the market.

New Positions

Most of my research in the last month focused on biotech firms.  I have to say, its been a lot of fun.  Its fascinating stuff. I even discovered a Vice documentary on how we are using viruses to battle cancer.   The technology leaps are amazing!

I looked at Mylan, Mallinckrodt, Intrexon, Teva, and a whole pile of smaller Phase 2 candidates (including Flexion, which subsequently was clobbered after their FX006 Phase 2b trial had less than stellar results – note though there might be an opportunity with this one).

Most of these names I can’t bring myself to buy because of valuation.  Even though the charts are bad and the stocks are way off their 52-week highs, most still look expensive to me.  But I did take small positions in a couple of names: one large cap pharmaceutical stock (Gilead) and one small cap phase 3 drug developer (TG Therapeutics).   Here is what I think of both of Gilead and TG Therapeutics and why I added them.

Gilead Pharmaceuticals

Gilead is a much bigger company than I typically invest in.  With over 1.5 billion shares outstanding,currently trading at $105, they have a market capitalization of around $160 billion.  The company has very little debt, with cash on hand of $7.4 billion and $12.2 billion in long term debt as of the end of the second quarter.  They also just raised an additional $10 billion of debt this week, which many are speculating will be used for an acquisition.

Gilead produces leading hepatitis drugs (Harvoni and Solvaldi, with Harvoni being the next generation treatmen) and leading HIV drugs (Truvada, Atripla and Stribula).  The two hepatitis drugs accounted for 65% of sales in the first half of the year.  Harvoni, which is new to the market, accounting for almost 50%.  They also make a cancer drug that I will discuss a little when I talk about TG Therapeutics.

In 2014 Gilead had cash flow from operations of $12.8 billion and capital expenditures of $500 million, so free cash flow was $12.3 billion.  In the first half of 2015 cash flow was $11.4 billion and capex was $300 million.  The increased profitability is coming from an increasing number of insurance payers approving coverage of the hepatitis drugs and from the recent introduction of Harvoni.

If you annualize first half cash flow Gilead has a free cash flow multiple of 7.4x, which is a lot cheaper than the other drug companies I have looked at.  Why?  The market is concerned about the concentration of revenues in one drug (Harvoni), potential competition for the hepatitis drugs, and the lack of a pipeline of new drugs.

While these concerns are valid, I think that the discount is over done.  When I look at other large bio-techs Gilead trades at a 30-50% discount on free cash flow, and that seems too large.  It just seems like the relative sentiment has gotten too extreme.  There is also the potential of a catalyst in the form of an acquisition that the market approves of.  Finally, as this excellent 3 part Seeking Alpha article series identifies, Gilead’s pipeline of homegrown drugs is not as barren as is often made out.

I’m keeping my position small.  Much of this thesis is based on valuation and as I’ve already implied, I don’t believe that valuation in a bear market is a terribly strong leg to stand on.  I think Gilead does well and outperforms if the market does well. But it will likely fall along with the market if things depress further.

TG Therapeutics

I owe this idea to a tweeter by the moniker of @Robostocks123, who has been tweeting about TG Therapuetics for some time.

Of all of the late stage biotechs that I looked at, this one made the most sense to me.  TG Therapeutics is a $600 million market capitalization company with no debt and $60 million of cash.  The company is in stage 3 development of a couple of different drugs targeting lymphomic malignancies.

The first drug, TG-1011, is in a phase 3 trial as a combination with another drug, Ibrutinib, which is owned by Abbvie.  Ibrutinib has already been approved to treat b-cell lymphoma’s but there are a number of patients taking Ibrutinib that have had to discontinue treatment early because of adverse side-effects.  Combining Ibrutinib with TG-1011 is expected to improve the effectiveness of the treatment and, most importantly, reduce adverse reactions and so far the results bear that out.

While we won’t know the phase 3 results for a few months, the Phase 2 results looked pretty promising.  First with respect to adverse events, the combination of TG-1011 and Ibrutinib led to very few serious side effects:

adverseeventsAnd with respect to efficacy, the combination showed improved results over Ibrutinib alone.

responserateThe immediate opportunity is that after approval TG-1011 will be prescribed alongside Ibrutinib.  Ibrutinib is relatively new but already is experiencing fairly significant revenue.  Below is an excerpt from Abbvie’s last 10-Q (Abbvie calls it Imbruvica):

ibrutinibI’m sure some will see the following as a promotional red flag but TG Therapeutics put their own quantification to the opportunity in this slide at their recent presentation at the Rodman & Renshaw Annual Global Investment Conference:

potentialTG Therapeutics second drug in Phase 3 is TG-1202.  The 1202 drug is a PI3K-delta inhibitor, again targeting lymphomic malignancies.  It is the same type of compound as another already on the market called Zydelig (from Gilead with $50mm of revenue in the first half of 2015).  A third similar compound called Duvelisib from Infinity Pharmaceuticals is in phase 3 trials.

Both drugs from the competition suffer from varying degrees of toxicity problems.  Specifically with Zydelig patients can experience very bad diarrhea that can become life threatening.  The consequence is that often patients don’t stay on the drug long enough to fully recover.  Lymphomic malignancies are extremely difficult to fully wipe out and so you need a drug or combination of drugs with low toxicity so that treatments can run their full course.

TG-1202 appears to have a much improved toxicity profile versus the alternatives while having similar effectiveness.

While TG-1202 is showing promise as a single agent the ultimate game plan of TG Therapeutics is to combine TG-1202 with other drugs.  The first combination that is being investigated is alongside the TG-1101 compound.

A phase 3 trial is just about to begin using the combination of 1202 and 1101.  The trial includes the potential for accelerated approval of the drug combination if a significant overall recovery rate is observed among the first 200 patients.  As I already mentioned earlier stage testing of TG-1202 on its own showed both good tolerance from patients and good efficacy.  The hope is that together with TG-1101 TG Therapeutics will have a real winner, and one that does not depend upon a third party drug lie Ibrutinib.  A further possibility that will be investigated down the road is that a 3-drug combination of TG-1101, TG-1202 and Ibrutinib may provide even more benefits.

TG Therapeutics is taking the attitude that no one drug is going to cure the blood cancers they are targeting.  So their approach is to layer together drug combinations, first by adding TG-1101 to Ibrutinib, then by combining TG-1101 and TG-1202, and later by adding in combinations of earlier stage drugs in their pipeline like IRAK4 and Anti-PDL1.

Obviously I’m not an expert in this field, so maybe someone will be able to point out a fatal flaw in this idea.  What I see is a company with upcoming catalysts and with a stock price that does not, in my opinion, reflect the potential success of those catalysts.  So its a buy, but a small position because we know that when biotech’s go wrong, they go wrong badly.

Apigee

In addition to my two bio-tech buys, I added a small position in one tech name.  I found Apigee while scouring the 52-week lows a few weeks ago.  When I was first looking at the company it was trading at about a $180 million market cap with no debt and $90 million in cash.

I am going to do my best to describe what Apigee does without using the word platform.  Because everywhere you read about anything tech you read about the platform, and I honestly believe that at least 50% of the time what that really means is the author doesn’t know exactly what it is the company does so using a term that implies a vague, black box it will be less likely to arouse suspicions.

So what Apigee does, as I understand it, is write code that allows companies to have their internal databases, servers and applications accessed by users (it could be a consumer of the data for personal or commercial use or another company leveraging the data or functions from an application to build upon their own application), but with restrictions in place that limit what data can be consumed and by whom, what app functionality is exposed and what modifications can be made, and that give the company the ability to track, monitor and extract information about what the API clients are doing and how their data and applications are being consumed.

So they sell an API platform.

I think its a pretty decent business idea.  There are plenty of non-tech companies that are getting dragged into the mobile world and to think they are going to hire programming staff that will create mobile interfaces that function and perform effortlessly, be secure, be expandable over time and serve the needs of clients seems like a tough gig to me.  I’ve worked in a dedicated software firm for seven years and its tough to have good code even when this is what you do.  Having a third party provider of the necessary middle man interfaces makes sense.

Of course the question is whether Apigee has the best solution out there.  While I can’t speak directly to that I can fall back on the results.

revenue

Apigee is growing revenue, growing gross bookings and adding clients.   Note that I added the 2015 data to the company slide below.

But I am still not completely sold on the stock, and I have kept my position quite small.  My problem is that Apigee is far from being cash flow positive.  And I really have a problem holding stocks will lose money as far as I can model out.

Below is my model.  The 2016 numbers are based on their own midpoint guidance while 2017 is based on my estimate of 25% revenue growth, some improvement in margins as subscription and licensing takes a bigger piece of the pie, and modest operating cost increases.

forecast

The company says they expect to be cash flow positive in the second half of 2017 so maybe my expectations are too conservative.  And really, that’s kind of the bet here.  The story is an IPO gone bust, but the results so far suggest the business is on solid ground.  If the company puts together a couple more quarters of beats that profitability number is going to start to come in and I bet the stock gets back to its IPO price.

Where I am at with Oil

If I were a promoter I might say that I nailed the bottom in oil stocks.  A more honest appraisal would point out that it took me three tries.

Those that follow the blog will recall that I had tried and failed to pick a bottom in July.  I was in the process of my second try when I wrote my mid-August update but that one didn’t stick either, as I sold out of RMP Energy and Jones Energy soon after my August 16th post (I kept Granite Oil which has turned out to be a big winner even as other oil stocks have suffered).  My third attempt came on the heels of this release from the EIA, where they revised production downward for the first six months of the year and that one proved to be the winner.

The changes to the EIA data, which clearly show US production has been declining since early in the year, seems like a game changer to me.  Maybe it is not a reason for oil to go straight up, but it might be a reason for it to no longer go down.  Just like the stock market, it’s not when the data begins to get better that matters, but when the data stops getting worse at an accelerating rate.  Its all about the second derivative.

So we will see.  After the EIA release at the end of August I bought Crescent Point, Surge Energy and Baytex, and added back Jones Energy and RMP Energy.  However I knew I would not have the nerve to hold onto these positions if they moved and sure enough I quickly panicked down my positions in each on that first, rather dramatic, correction from $49 (and no I did not catch the top in any of the positions).

I’ve since sold  completely out of a number of the positions (I currently hold Granite, a little Crescent Point and a little RMP) as we seem tenuously on the brink of a re-test.  While I want to believe that an oil turn is upon us, I’m just not sure.  I am really torn about whether to believe the Goldman Sachs of the world or side with the tiny minority that think that all the data doesn’t quite make sense.

Because the reality is that to be an oil bull you have to believe the data is wrong and the forecasts are wrong.

One opinion I will note is this interview from BNN ith Mike Rothman of Cornerstone Analytics.  Rothman believes, if you can believe it, that we will see $85 Brent at year end.  Check out the date – he called this on August 25th, when oil was carving out its bottom in the $30’s.

Rothman’s thesis is basically that the IEA numbers aren’t right and everyone, all the experts and so on, are at their root basing their opinions on this one set of numbers.

And they have an unfortunate problem that I think is well known where they are chronically underestimating demand.    Typically the problem is in the emerging markets… we’re seeing a major episode of that… a lot of the assertions I’m sure you have heard, I’m sure the people listening to this program have heard is that the oil market is oversupplied by 2-3mmbbls and that demand is weak.  Demand is at record levels.  Its not an opinion its an assessment of the actual data.  The problem is the underestimation of the non-OECD.

I am somewhat sympathetic with this view.  I remember back to pre-2008 when the IEA continually underestimated demand.  Meanwhile we know that world production declines by 4-5% and that decline is, if anything, accelerating.  Wells have to be drilled to stem that decline and it still requires capital to drill wells.  I have to ask – is that capital really getting the return to justify its expenditures?  Because if it takes 2-3 years to get back your capex then its not worth doing even if you are a national oil company.  You’ll end up deeper in debt.  I don’t know, maybe everything I read is gospel but it just doesn’t sit right with me.  I would love to see well level analysis and economics of new developments in Iraq, Iran, Russia, all these countries where it is supposedly so profitable to ramp production and where all those production ramps are sustainable.

But with all that said, I remain neutral in my actions.  I’m not going to pound my fist and say the market is wrong.  I’m just going to quietly write that I don’t think things are as certain as all the oil pundits write and continue to be ready to pounce when the skies clear enough to show that an alternate thesis is playing out.

Portfolio Composition

Click here for the last four weeks of trades.

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