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Posts from the ‘Radcom (RDCM)’ Category

Week 279: Cautious on trade(s)

Portfolio Performance

Thoughts and Review

I haven’t written a post since my last portfolio update.  Up until this last week I did not add a new stock to my portfolio.  I have sold some stocks though.  Quite a few stocks really.

I have been cautious all year and this has been painful to my portfolio.  While the market has risen my portfolio has lagged.  I have lagged even more in my actual portfolio, where I have had index shorts on to hedge my position and those have done miserably until the last couple of weeks.  In fact these last couple of weeks  are the first in some time where I actually did better than the market.

My concerns this year have been about two headwinds.  Quantitative tightening and trade.

Maybe its being a Canadian that has made me particularly nervous about the consequences of Trump’s protectionism.  With NAFTA resolved I don’t have to worry as much about the local consequences.  But I still worry about how the broad protectionist agenda will evolve.

I continue to think that the trade war between the United States and China will not resolve itself without more pain.  The US leadership does not strike me as one open to compromise.  Consider the following observations:

Peter Navarro has written 3 books about China.  One is called “Death by China”, another is called “Crouching Tiger: What China’s Militarism Means for the World” and the third is called “The Coming China Wars”.

In the Amazon description of Death by China it says: “China’s emboldened military is racing towards head-on confrontation with the U.S”.  In the later book, Crouching Tiger, the description says  “the book stresses the importance of maintaining US military strength and preparedness and strengthening alliances, while warning against a complacent optimism that relies on economic engagement, negotiations, and nuclear deterrence to ensure peace.”.  The Coming China Wars, his earliest book (written in 2008), notes “China’s dramatic military expansion and the rising threat of a “hot war”.

Here’s another example.  Mike Pence spoke about China relations last week at the Hudson Institute.  Listening to the speech, it appeared to me to be much more about military advances and the military threat that China poses than about trade.  The trade issues are discussed in the context of how they have led to China’s rise, with particular emphasis on their military expansion.

John Bolton’s comments on China are always among the most hawkish.  Most recently he spoke about China on a radio talk show.  Trade was part of what he said, but he focused as much if not more on the Chinese behavior in the South China Sea and how the time is now to stand up to them along those borders.

Honestly when I listen to the rhetoric I have to wonder: Are we sure this is actually about trade?

Is it any coincidence that what the US is asking for is somewhat vague?  Reduce the trade deficit. Open up Chinese markets. Less forced technology transfer (ie. theft). Now currency devaluation is part of the discussion.

I hope that this is just a ramp up in rhetoric like what we saw with Canada and Mexico.  That the US is trying to assert a negotiating position before going to the table and reaching some sort of benign arrangement.  But I’m not convinced that’s all that is going on.

If this has more to do with pushing China to the brink, then that’s not going to be good for stocks.

I can’t see China backing down.

From what I’ve read China can’t possibly reduce the trade deficit by $200 billion as the US wants without creating a major disruption in their economy.   Never mind the credibility they would lose in the face of their own population.

Meanwhile quantitative tightening continues, which is a whole other subject that gives me even more pause for concern, especially among the tiny little liquidity driven micro-caps that I like to invest in.

I hope this all ends well.  But I just don’t like how this feels to me.  I don’t want to own too many stocks right now.  And I’m not just saying that because of last week.  I have been positioned conservatively for months.  It’s hurt my performance.  But I don’t feel comfortable changing tact here.

Here’s what I sold, a few comments on what I’ve held, and a mention of the two stocks I bought.

What I sold

I don’t know if I would have sold RumbleOn if I hadn’t been so concerned about the market.  I still think that in the medium term the stock does well.  But it was $10+, having already shown the propensity to dip dramatically and suddenly (it had fallen from $10 to $8 in September once already), and having noted that Carvana had already rolled over in early September, I decided to bail at least for the time being.  Finally there was site inventory turnover, which if you watch daily appeared to have slowed since mid-September.  Add all those things up and it just didn’t feel like something I wanted to hold through earnings.

I was late selling Precision Therapeutics because I was on vacation and didn’t actually read the 10-Q until mid-September.  That cost me about 20% on the stock.  I wrote a little about this in the comment section but here is what has happened in my opinion.  On August 14th the company filed its 10-Q.  In the 10-Q on page 14 it appears to me to say that note conversion of the Helomics debt will result in 23.7 million shares of Precision stock being issued.  This is pretty different than the June 28th press release, where it said that the $7.6 million in Helomics promissory notes would be exchanged with $1 shares.  Coincidentally (or not) the stock began to sell off since pretty much that day.

Now I don’t know if I’m just not reading the 10-Q right.  Maybe I don’t understand the language.  But this spooked me.  It didn’t help that I emailed both IR and Carl Schwartz directly and never heard back.  So I decided that A. I don’t know what is going here, B. the terms seemed to have changed and C. it’s not for the better. So I’m out.

I decided to sell R1 RCM after digging back into the financial model.  I came to the conclusion that this is just not a stock I want to hold through a market downturn.   You have to remember there is a lot of convertible stock because of the deal they made with Ascension.  After you account for the conversion of the convertible debt and all the warrants outstanding there are about 250 million shares outstanding.   At $9.30, where I sold it, that means the EV is about $2.33 billion.  When I ran the numbers on their 2020 forecast, assuming $1.25 billion of revenue, 25% gross margins, $100 million SG&A, which is all pretty optimistic, I see EBITDA of $270 million.  Their own forecast was $225 – $250 million of EBITDA.  That means the stock trades at about 9x EV/EBITDA.  That’s not super expensive, but its also not the cheapie it was when I liked the stock at $3 or $4.  I have always had some reservations about whether they can actually realize the numbers they are projecting – after all this is a business where they first have to win the business from the hospitals (which they have been very successful at over the last year or so) but then they have to actually turn around the expenses and revenue management at the hospital well enough to be able to make money on it.  They weren’t completely-successful at doing that in their prior incarnation.  Anyways, I didn’t like the risk, especially in this market so I sold.  Note that this is an example of me forgetting to sell a stock in my online tracking portfolio so it still shows that I am holding it in the position list below. I dumped it this week (unfortunately at a lower price!).

I already talked a bit about my struggle and then sale of Aehr Test Systems in the comment section.   I didn’t want to be long the stock going into the fourth quarter report.  Aehr is pretty transparent.  They press release all their big deals.  That they hadn’t announced much from July to September and that made it reasonably likely that the quarter would be bad.  It was and the stock felll.  Now it’s come back.  It was actually kind of tempting under $2 but buying semi-equipment in this market makes me a bit nervous so I didn’t bite.  Take a look at Ichor and how awful this stock has been.  Aehr is a bit different because they are new technology that really isn’t entrenched enough to be in the cycle yet.  Nevertheless if they don’t see some orders its not the kind of market that will give them the benefit of the doubt.

BlueLinx. I don’t have a lot to say here. I’m not really sure what I was thinking when I bought this stock in the first place.  Owning a building product distributor when it looks like the housing market is rolling over was not one of my finer moments.  I sold in late August, then decided to buy it in late September for “an oversold bounce”.  Famous last words and I lost a few dollars more.  I’m out again, this time for good.

When I bought Overstock back in July I knew I was going to A. keep the position very small and B. have it on a very short leash.  I stuck with it when it broke $30 but when it got down to $28 I wasn’t going to hang around.  Look, the thing here is that who really knows?  Maybe its on the verge of something great? Maybe its a big hoax?  Who knows?  More than anything else what I liked when I bought it was that it was on the lower end of what was being priced in and the investment from GSR showed some confidence. But with nothing really tangible since then it’s hard to argue with crappy price action in a market that I thought was going to get crappier.  So I took my loss and sold.

Thus ends my long and tumultuous relationship with Radcom.  I had sold some Radcom in mid-August before my last update primarily because I didn’t like that the stock could never seem to move up and also because I was worried about the second quarter comments and what would happen to the AT&T contract in 2019.  I kept the rest but I wish I would have sold it all.  In retrospect the stocks behavior was the biggest warning sign.  The fact that it couldn’t rise while all cloud/SAAS/networking stocks were having a great time of it was the canary in the coal mine.  As soon as the company announced that they were seeing order deferral I sold the rest.  I was really quite lucky that for some reason the stock actually went back up above $13 after the news (having fallen some $4-$5 the day before mind you), which let me get out with a somewhat smaller loss.  The lesson here is that network equipment providers to telcos are crummy stocks to own.

Finally, I sold Smith Micro.  This is a second example where I actually didn’t sell this in the online portfolio until Monday because I didn’t realize I had forgotten to sell it until I put together the portfolio update.  But it’s gone now.  I wrote a little about this one in the comment section as well.  The thing that has nagged me is that the second quarter results weren’t really driven by the Safe & Found app.  It was the other products that drove things.  That worries me.  Again if it wasn’t such a crappy market I’d be more inclined to hold this into earnings and see what they have to say.  They could blow everyone away.  The stock has actually held up pretty well, which might be saying that.  Anyways I’ll wait till the quarter and if it looks super rosy I’ll consider getting back in even if it is at a higher price.

What I held

So I wrote this update Monday and Vicor was supposed to report Thursday.  Vicor surprised me (and the market I think) by reporting last night.  I’m not going to re-write this, so consider these comments in light of the earnings release.

One stock I want to talk about here is Vicor, which I actually added to in the last few weeks.  Vicor has just been terrible since late August.  The stock is down 40%.  I had a lot of gains wiped out.  Nevertheless this is one I’m holding onto.

I listened to the second quarter conference call a couple of more times.  It was really quite bullish.  In this note from Stifel they mention that Intel Xeon processor shipments were up significantly in the first 4 weeks of the third quarter compared to the second quarter.  They also mention automotive, AI, cloud data centers and edge computing as secular trends that are babies being thrown out with the bath.  These are the areas where Vicor is growing right now (Vicor described their core areas on the last call as being: “AI applications including cloud computing, autonomous driving, 5G mobility, and robots”).

Vicor just started shipping their MCM solutions for power on package applications with high ampere GPUs in the second quarter.  They had record volume for some of their 48V to point of load products that go to 48V data center build outs and a broader acceptance by data center players to embrace a 48V data center.  There’s an emerging area of AC-DC conversion from an AC source to a 48V bus.  John Dillon, who is a bit of a guru on Vicor, wrote a SeekingAlpha piece on them today.

I know the stock isn’t particularly cheap on backward looking measures.  But its not that expensive if the recent growth can be extrapolated.  I’m on the mind it can.   Vicor reports on Thursday.  So I’ll know soon enough.

The second stock I added to was Liqtech.  I’ve done a lot of work on the IMO 2020 regulation change and I think Liqtech is extremely well positioned for it.  When the company announced that they had secured a framework agreement with another large scrubber manufacturers and the stock subsequently sold off to the $1.50s, I added to my position.

I’m confident that the new agreement they signed was with Wartsila.  Apart from Wartsila being the largest scrubber manufacturer, what makes this agreement particularly bullish is that Wartsila makes its own centrifuges.  Centrifuges are the competition to Liqtech’s silicon carbide filter.  If Wartsila is willing to hitch their wagon to Liqtech, it tells me that CEO Sune Matheson is not just tooting his horn when he says that Liqtech has the superior product.  I’ve already gone through the numbers of what the potential is for Liqtech in this post.  The deal with Wartsila only makes it more likely that they hit or even exceed these expectations.

Last Thought

I took tiny positions in three stocks.  One is a small electric motor and compressor manufacturer called UQM Technologies.  The second is a shipping company called Grindrod (there is a SeekingAlpha article on them here).  The third is Advantage Oil and Gas.  All of these positions are extremely small (<1%). If I decide to stick with any of them I will write more details later.

Portfolio Composition

Click here for the last seven weeks of trades.

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Radcom’s Growth is Lumpy (and that’s not a bad thing)

I had an interesting comment about Radcom the other day and given today’s release of fourth quarter earnings, it seemed like a good opportunity to expand on my reply.

First let’s talk about the fourth quarter results.

Revenue in the fourth quarter was $10.6 million.  They turned a nice profit, about 17c per share.  But the big news was announced on the conference call.  A new Tier 1 one win:

We are very excited to share that one of these major NFV trials has come to fruition and resulted in RADCOM being selected by a Tier-1 multi-carrier operator. We expect this to result in a formal contract during the first half of 2018 and we’re making preparations for project execution.

Radcom also gave us some guidance for the first quarter and for 2018.  They said first quarter revenues will be below the fourth quarter.  And they said 2018 revenues will be $43 million to $47 million.

What to make of it?

Let’s go to the comment, which was made by Arf.  Arf correctly pointed out that if Radcom grows by 25% in 2019 and 2020, after hitting the midpoint of guidance in 2018 ($45 million), then the upside is not as much as you’d think.  He estimated the stock had maybe 70% upside if they got a 20x earnings multiple.  This is in 2020 mind you.  Given those assumptions, I think that’s probably fair.

So if that’s the upside, why bother with the stock?

My take is this.  Because Radcom customers are large Tier 1 service providers, the deals are slow and sporadic but also unusually large compared to the existing revenue base.  This combination makes it hard to anticipate the growth rate.  Growth is going to be lumpy and its going to depend on the timing of when these deals are signed and when they begin to on-board.

Let’s look at exactly what 25% growth rate is assuming:

So after growth of about $8 million in revenue in 2018, 25% growth adds another $11 million in 2019, and then $14 million in 2020.

That’s a possible outcome, but I don’t think it is an optimistic one.  After the announcement today of the third Tier 1 win I would say it’s also less likely.

I’ve been looking at it like this. From the fourth quarter results released today, we know that total revenue for the year was $37.2 million and AT&T accounted for 60% of it.  So the deal with AT&T was worth over $22 million in revenue in 2017.

I’ve always assumed that a full win on Tier 1 account should be for at least $15 million.  Based on what we are seeing with AT&T, that assumption seems reasonable.  It might even be low if Radcom can penetrate these other carriers to the same degree they have with AT&T (ie. sell them on the new visibility product that they will be unveiling at Mobile World Congress in a couple of weeks).

The Verizon foot in the door win was for $5 million.  My bet is that eventually Verizon will grow to close the size of AT&T.  Let’s say Verizon can be an $18 million win as the deal matures.   Other large wins (with say a Telefonica or a Vodafone or a Bell Canada) should at least be $15 million.

With those numbers in mind consider this.  A $19 million increase by 2019 ($8 million in 2018 and $11 million in 2019) is really saying that by 2019 Radcom will have successfully integrated Verizon to a similar level as AT&T and not much else.  A $14 million increase in 2020 is saying that Radcom finally gets a single third carrier win by that point.

If it’s into 2020 and RDCM only has AT&T, Verizon and one more win, then something has gone horribly wrong with the thesis. Either NFV isn’t getting adopted or a competitor has caught up or something.

What do I want to see?

The difficulty this past year (and what led me to sell out of my position entirely for a couple of months) has been that the lumpiness of the wins has played against Radcom.  They had no new wins that contributed to 2017 revenue.  They were lucky to have a ramping business from AT&T that allowed for growth in the absence of new deals.

This handicap could become an asset over the next year.  Because of the large, lumpy nature of their deals, even if Radcom gets just two wins per year  for the next couple of years the company’s growth rate should go up substantially.

If I assume that Verizon is an $18 million deal in 2019, that the just announced Tier 1 is a $15 million deal in 2019 and that two more deals are announced in the next year and a half and begin to contribute meaningful revenue in 2020, I get a very different picture:

These numbers assume that by 2020 Radcom has 5 wins worth of revenue, ie. AT&T, Verizon, the announced win today and two others that will be announced in the next year and a half   Its hardly more than one more win a year.  In my opinion, this is not wildly optimistic.

So what’s with Guidance?

Any astute bear on Radcom is going to focus on the guidance.  At first I was surprised it was as low as it was, given the Verizon win and the newly announced Tier 1.  They did $37 million in 2017.   The midpoint of guidance is $8 million higher.

But after thinking about it more, it makes some sense.  We know the first phase of the Verizon deal is $5 million.  We know this new Tier 1 deal is only getting signed in the first half, and even then in all likelihood it will be phased in similarly to the way Verizon was.  So $2-3 million in the second half from the new Tier 1 is probably about right.

In other words, it looks to me like Radcom is guiding to known revenue only.  They aren’t assuming anything incremental from AT&T.  They are assuming no further expansion from Verizon this year.  And they are assuming a slow ramp of the new Tier 1 in the second half.

I think they are setting themselves up for raises later in the year.

But I might be wrong.  The other possibility is that guidance reflects an expected slow ramp of the NFV business for Verizon and other Tier 1.  Given how slow it’s been for deals to materialize, this wouldn’t be that surprising.

It doesn’t matter (in my opinion)

Nevertheless, I don’t think it matters if this is a slow ramp or if it’s sandbagging.  The only thing that matters here is whether I am wrong about these deals ramping to $15 million or more on an annual basis.

In fact with this latest Tier 1 win, deal size is the last leg for bears to stand on.  They need to focus on the $5 million Verizon deal, assume that the deal won’t grow much more, and extrapolate that size to the other service provider trials.

Indeed if I am wrong and Verizon maxes out at $6 million or $8 million or this other Tier 1 maxes out at $5 million, then Radcom is going to struggle.  But if these are $15 million plus deals, and because there is every indication that there will be more to come, then it’s just a matter of waiting until it plays out.

I just don’t buy the former scenario. It doesn’t make sense to me.  These are large service providers.  They are in the ballpark of AT&T and so the size of the deals should be in that ballpark when they are rolled out across the network.

What’s more, the revenue is recurring.  A recent article in Light Reading clarified this for me.  In particular:

Essentially, Radcom’s customers pay a constant, recurring and regular fee to use the vendor’s software, no matter how many instances they deploy and how many customers they are supporting with the software. So whether an operator is deploying Radcom’s probes in one market or ten, and supporting 50,000 customers or 5 million, the fee remains the same — the cost to the operator does not scale as it uses the software more. The traditional model of linking technology payments to boxes or instances or customer metrics doesn’t apply with Radcom.

I know I’ve been talking the Radcom story forever and I’ve been both very right and very wrong about it at various times.  But unless someone can tell me why Verizon or Telefonica or Bell or any other Tier 1 wouldn’t have a deal size roughly comparable to AT&T, then I am going to say that right now things look as strong as I’ve seen them.

Therefore I am pretty excited about where Radcom is going.  It’s my largest position right now.  It’ll probably continue to be painfully slow, but the end goal seems clearer than ever.

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 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 278: Shorter Posts and thoughts on Credentials

Portfolio Performance



Top 10 Holdings


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

Thoughts and Review

I had such a good response from my post on Radisys that I decided to change things up for the blog.  Rather than posting monthly letters summing up all my thoughts, I am going to deliver updates in a more traditional blog format.  I will write as things come up. So this update will be more brief, and will not cover any lengthy company updates.

I had a pullback in the last month.  I guess it shouldn’t be unexpected.  The previous three months were almost parabolic.  Having a portfolio that is weighted only to a few stocks, any kind of lull in the performance of those stocks can cause big fluctuations.  Right now my portfolio is heavily dependent on the performance of Radcom and Radisys. Both stocks had corrections leading into and following their third quarter earnings.

The good news is that nothing has occurred with either to warrant a change in mind.  While I expressed some concerns about Radcom in my earlier post, I felt a lot better about the stock after their Needham conference presentation.  I even bought some back over the last couple days.

I sold out of a number of oil stocks.  I still hold positions in Swift Energy, Journey Energy, Zargon Oil and Gas and a very tiny position in Gastar Exploration.  Other than Swift Energy, none of my positions are very big.  I started by selling Granite Oil after these comments on InvestorsVillage (here and here).  Looks like I was wrong there.  Later, as the price of oil began to break down I sold Jones Energy and Resolute Energy.  Both of these are levered plays and I expect out-sized moves as oil corrects.

I added a couple of new starter positions under the theme of Big Data: Attunity and Hortonworks.  The latter has begun to work out but the former has not at all.  I’m doing some more work to understand if I just made a mistake on Attunity.  With the new blog format I will write-up the positions and my thoughts on the Hadoop market (which led to my investments) in separate posts.

I also added a position in Nimble Storage.  The company has some good technology, can compete with Pure Storage and take market share away from incumbents like NetApp.  Again I’ll give more details in a later post.

Finally I mentioned in my last post that I had taken a very small position in Supernus Pharmaceuticals.  I’ve held that position over the last month and watched the stock correct downwards almost every day.  This is a big biotech sell-off and I don’t think the move has much to do with the company itself.  Supernus is growing very fast, there appears to be plenty of opportunity for further growth, and the pipeline of new drugs seems to be quite robust.  I’m seriously considering adding a big chunk to this one.

Credentials

One final thought on the topic of credentials.  As I have written in the past, I manage my own family’s money.  Recently I had an opportunity to expand that to a number of friends.  But before going too far down that path I wanted to understand the regulatory requirements.

It turns out that in Canada at least, managing money and taking any sort of payment for it is very regulated.   It requires a number of courses, which is reasonable, but also years of very specific experience under the tutorage of a dealer.

Clearly I am not going to take 3 or 4 years to work as an understudy just so I can start a small part-time business on the side for a few friends.

My frustration is that there is no distinction between someone trying to scale into a large fund, soliciting money from the general investing populace, and someone who wants to do what I was looking into; basically help out some buddies and get paid on performance to do it.  These two activities do not seem equivalent in terms of public risk.  But in the eyes of the regulator there is no distinction.

I’m not a conservative in most ways but this certainly gives me sympathy to the position that abhors regulation.  I’m in a region that is suffering, I have a ready-made opportunity to create a small business, and the government has basically said no you can’t do that, because we know best.  Because as anyone who has read this blog for the past 6 years knows, I am clearly not qualified to pick stocks.

Portfolio Composition

Click here for the last four weeks of trades.

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Third Quarter Earnings Updates: RDCM and VICR

I had such a great response from my single story formatted post on Radisys that I decided to change things up a bit for the blog.  Rather than posting monthly consolidated letters where I sum up all my thoughts, I am going to try to deliver updates in a more traditional blog format, writing as things come up.

Vicor

Its interesting to contrast Vicor with Radisys.  Both companies are in a similar place; they have a large opportunity ahead of them, that opportunity is beginning to realize itself with new orders, the order build should really hit its stride in the second half of 2017, and the next couple of quarters will be relatively weak as we wait for the order book to build up.

The difference between the two companies is the way the market has interpreted the results.  Vicor was up nicely on the day after their earnings release and has held up relatively well as the small cap market has suffered.  Radisys was down and has continued to be down since their release.

Vicor reported  a good quarter.  VI Chip bookings were up 54%.  Picor bookings were up 122%. Only legacy  BBU bookings were down at 14%.

More importantly, on the call the company announced the first of its VR13 orders, “some major million dollar type orders that obviously are well beyond the prototype level”.

For those not following the story, VR13 refers to an Intel Skylake chip based server specification whose ramp has been delayed by continual delays in the Skylake chipset.  Intel announced in their quarterly call that they were now shipping Skylake chips for sampling.  Vicor’s announcement provides follow through to that data point.

Vicor also announced some other interesting development news.   In last 3-4 months, they have been doing work on power on package technology, putting point of load power multiplier on the ASIC to provide 100’s of Amps in 6V to 1V range.  Within several weeks they expect to see the first production of once such solution.

I added a little to my position in Vicor.  I think that the VR13 ramp is upon us and results are more likely to surprise positively than negatively going forward.

Radcom

There was something a little bit off about the Radcom call.  Maybe it was my expectation, or at least hope, that there would be some new announcements.  There wasn’t.

It didn’t help that a replay of the call wasn’t posted until this morning.  I wonder whether the delayed move in the stock is because of folks that couldn’t listen to the call and didnt’ get their first impression until this morning.

There were some positives.  There was the extension of deals with two CSPs.  There was the use of the word “accelerating” for several of the CSPs that they are engaged with.  And there was color that 2017 has some upside on smaller non-NFV deals with emerging market CSPs.

But there were also a number of things I didn’t like to hear.  I didn’t like the language around the relationship with AT&T being “ok”, which is the term they used a few times.  And I didn’t like that they continued to be vague about the new product that they won’t talk about and haven’t released to the wider market.

Referring back to my post last month on Radcom, I had been hoping that there might be an announcement piggybacking the announcement by Gigamon and their involvement with AWS and AT&T.  The question was actually asked on the call, and while the answer was cryptic enough to leave the question open ended, its hard to verify that a GIMO/AT&T/AWS connection is there.

Also, if I understand the wording around the estimate that Radcom’s service assurance total addressable market (TAM) is $100 million between now and 2020, maybe 2018 given acceleration, it’s not really that big, and it shows they really do need to expand to new products to grow into valuation.

Finally the guidance that “the models” are saying no deals until the second half 2017 is sobering.  They had originally anticipated deals towards the end of this year, beginning of next year.  This isn’t surprising to me, I mean everything that I have read about service providers is that they move at a glacial pace, but its still a slip from the original color.

So I reduced.  I resized Radcom so it is now closer to a regular sized position for me.  No need to try to be a hero.  I wouldn’t sell any more at these levels.  It was a big move down this morning.  And the upside is still significant, so its a stock I want to own.  But I don’t want to have my portfolio heavily dependent on the story if it won’t play out until the second half of 2017.  I have enough “2017 stories” already.  I’ll keep my reduced stake and wait until we get closer and see where the price shakes out.

 

Week 274: Going with Growth

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

Since March I have been focused on finding companies with growing top line revenue.  I have put less emphasis on EBITDA, earnings and cash flow.  As long as the company is showing growth I’ve been taking a closer look.

This change in strategy has worked.  The market has pushed up the price of stocks with growth prospects, while value stocks, at least the small and microcaps I follow, continue to lag.

But I wouldn’t reclassify myself as a growth or momentum investor just yet.  Once it stops working, I’ll reevaluate, try to figure out what is working next.  I try not to have any allegiance to any particular investing methodology.  I’m just trying to figure out what is working and will take that approach whatever it is.

What remains constant is my process.  Small positions.  Add as they rise and announce positive developments.  Reduce if they fall even if I don’t always understand the reasons.

When things are working at their best this process feels like a manufacturing conveyor of idea generation.  I keep working hard, the ideas keep coming, when an idea doesn’t pan out I throw it away and move on to the next one.

This is the experience of the last few months.  My portfolio gains have been anchored by my two large positions, Radcom and Radisys, but I have been churning out gains from the numerous small positions I have taken on.  As is my method, I have been adding to these positions as they go up.  When a position moves against me, I don’t add and will throw it out if it simply isn’t working.

Last month I wrote:

I have noticed a change in temperament in the subsequent months, and this seemed particularly evident through the second quarter earnings season.   I still had misses.  BSquare had miserable results.  CUI Global was lackluster.  Both stocks fell.  But even then, the moves down didn’t have quite the same conviction as similar such moves in the past year.

Its hard for me to put my finger on exactly what it was that was different, so maybe this is all just sophistry, but it was almost like these stocks were going down grudgingly, because they had to, not because they wanted to.

It still feels this way, though I sense some early signs of headwinds.  But the path of least resistance, at least for most of the stocks I own, seems to be up.  I’ll continue to hold on until there is more evidence that the ride is about to end.

Apart from Radcom, the biotechs and the oils have been working particularly well.  It seems like the biotech stocks have turned the corner.  I took positions in a number of new biotech names: Aequus Pharmaceuticals and Novabay Pharmaceuticals, which I have written about below, as well as Supernus Pharmaceuticals, Verastem and Aeterna Zentaris, which I ran out of time to write about and are all pretty small starter positions anyways.  You will note though that Supernus Pharmaceuticals is a derivative play of Aequus, as the rights of two of the drugs being marketed by Aequus in Canada are being licensed from Supernus, for whom they are growing significantly in the United States.

Oil Gains

I timed the oil stocks well.  As I wrote about last month, I have positions in Jones Energy, Zargon Oil and Gas, Granite Oil, Journey Energy, Gastar Exploration, and Resolute Energy.

However, as I alluded to last month I haven’t had a ton of conviction in the price of oil over the last couple of months.  I wrote:

I don’t have a crystal ball on oil.   I am sympathetic that the builds we have seen (up until this week’s rather massive 14mmbbl draw) are due to the drainage of floating storage.  I’m hopeful that once this runs its course we could see some surprising draws in the shoulder season (this thesis has been expressed by a number of investors on InvestorVillage, not the least being Robry825, who describes his position here and  here).  I’m also cognizant that oil wells do decline and that we simply aren’t drilling like we were a few years ago.  Still, as I’ve said on many occasions before, I play the trend till it ends but when it ends I really don’t know.

Here is where it’s helpful to have knowledgeable folks to follow.  I mentioned Robry and his extremely bullish outlook in my quote above.   There is another poster on InvestorVillage named Sophocles.  I’ve known and followed him for a long time.    He isn’t always right, but he has an intuitive sense for a commodity bottom well before the data has changed or the experts are revising their forecasts upwards.

He has been steadfast in his opinion about the uptrend for oil prices over the last number of months.

Leaning on the calls of Robry, Sophocles and a few others has helped me hold my oil positions through what was a great deal of uncertainty in September.  I doubt I would have do so otherwise.  I would have been shaken out by the negative Goldman note, a couple of the precipitous two or three day drops, or after the price reacted negatively to what should have been extremely bullish storage numbers.

But here we are at $50 and one thing I have learned is to not second guess where you are going simply because the data hasn’t caught up with the price.  In a real bull market price leads data, and you will never know the why until its too late.

With that said, I thought this IV post was a very good summary of the fundamental oil balance heading into next year.

Shorts and Mortgages

The Canadian government laid out the ingredients for a pretty good shorting opportunity this week when they introduced new rules for insured mortgages.  There is no question that these rules will have an impact on the housing market.  There is a lot of uncertainty about the degree.  I suspect it’s going to have a pretty big impact, especially if some of the comments below on declines in transaction volumes come to pass.

There are two major changes.  First there has been a reduction in borrowing limits for anyone applying for an insured mortgage with a 5 year fixed rate.  They will be subject to a much higher interest rate than before:

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James Laird from Ratehub.ca calculated the following impact of the rule change on a typical borrower:

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Rob Mclister (from the blog CanadianMortgageTrends.com) made a similar observation in this clip, saying that an individual with a $50,000 salary, 10% down, prior to the rule changes could take a $300,000 mortgage, now that has been reduced to $240,000.

Mclister went on to point out that about one third of buyers are first time buyers and at least one third of those would have trouble qualifying for a mortgage with the new rules.

The other change, which applies more specifically to the non-bank lenders, is that a number of mortgage products that were previously eligible for bulk insurance are no longer eligible.  Mclister lists refinances, amortization over 25 years, rental properties, and mortgages over $1 million as being subject to the rule change.

Non-bank lenders don’t have a deposit base for funding.   They therefore require securitization to fund new originations.  In order to securitize the mortgages they need to be insured.   So without insurance non-bank lenders basically have to stop originating these products.

Its not wonder that, as Sherry Cooper said on Thursday, “alternative lenders and mortgage brokers…have suspended activities” in some lines of business and that “the part of business that is no longer insurable can no longer be done by these lenders – they get their funds by insuring mortgages and securitizing – they can’t securitize if they can’t insure”.

Mclister said that “non-bank lenders are going to have heck of time trying to dispose of these mortgages, nonbank lenders are going to have to go to banks to buy mortgages, they are going to jack up financing costs unless regulators level the playing field

Dan Eisner, of True North mortgage, was quoted as saying “many of their funding sources have announced substantial changes or are telling them substantial changes are coming.”

Earlier in the week Eisner was on BNN where he made the rather chilling prediction that transactions would decline by 40-50% across the country.

The final clip I will point out is from the Moneytalks radio show this last Saturday (October 8th, 9am about 40 minutes in).  The show has a weekly segment with a real estate expert named Ozzie Jurock.  I have been listening to Jurock for a long time, years, and I have never heard him speak so negatively about the outlook for Canadian housing.  He has typically been very upbeat and optimistic (which, incidentally, has been the correct position for the last number of years).  Worth noting is that Jurock singled out the non-bank lenders as being particularly hard hit by these changes.

While the cause is different, there are two things at play here that are eerily reminiscent to the United States a decade ago.  First, interest rates have, effectively, jumped suddenly for a number of borrowers (like the adjustable rate mortgages did in 2007).  Second, a formerly reliable source of funds (securitization via portfolio insurance) is now no longer available to some lenders.

I’m not an expert on the companies in this area.  I don’t know all the details of the loan books of Home Capital, Equitable Group or the insured portfolio of Genworth, to take a few names.  But from the simple experience of the United States, I know that when transactions decline and funding sources dry up, house prices fall and the tide for the monolines and originators goes out.  How far is the big question.

As I’ve said in the past, I don’t like to talk about my shorts.  There are a few reasons for this. For one, I short to hedge and tend to have weaker theses around the individual names.  For two, its too much of a negative activity.  You run the risk of going offside companies, other investors, who wants the trouble.

But I took a few shorts in the mortgage space this week.

I still own this damn rental property.  So I need a good hedge.

Radcom and Radisys

Lots of interesting puzzle pieces with both of these stocks.

There was an interesting announcement out of AT&T and AWS (Amazon Web Services) this week.  The two companies agreed to forge “a tighter partnership to develop joint cloud, Internet of Things, and security solutions, targeting enterprises and combining AT&T’s network with the AWS cloud.

I think the big move that we saw in Radcom on Thursday is likely due to this announcement, and the potential implications that exist for Radcom.

There are a few puzzle pieces that revolve around this partnership and Radcom.   They don’t all fit together yet, but they are beginning to.

A few of these pieces are centered around Gigamon.  You might remember me lamenting about Gigamon in a past letter.  It’s a stock I looked at in March, thought it was a great opportunity, but waited for a dip into the mid $20’s that never came.

Well Gigamon announced a few months ago that they would be offering the first visibility solution for AWS.  This includes security inspection of traffic and monitoring of resource access and use.

Gigamon is also a supplier of AT&T.  This was mentioned at the Gigamon analyst day but some more detail was given by kerryb in the comment section of this SeekingAlpha post:

I have an investment broker friend who introduced Radcom too contact Alex Henderson of Needham about Gigamon since the stock has done so well and asked the relationship with Radcom, Alex told him that Gigamon is not competition and that Gigamon and Radcom are currently working together for interoperability between their software. Gigamon does the monitoring of the data flows for mainly security and parses out the important information and sends the info to the Radcom MaveriQ software/tool which then takes the information and does the service assurance piece. Gigamon can reduce the processing of the Radcom and other tools by 65-75%.

Gigamon talked about how they were encroaching on the traditional probe vendors at their analyst day.  I listened to that call a couple of months ago, and made note of what they said because it seemed important:

new battlefront in CSP arena is subscriber costs which is the cost to maintain, upsell, attract subs. To do that you have to understand sub experience. Gigamon has capabilities that can reduce this expense significantly, which is exactly why they are seeing traction in CSP arena. In their visibility platform they have ability to look at traffic across all interfaces 2G, 3G, 4G, Wifi, to be able to recognize subscribers intelligently, the devices that subscribers are coming from, the applications that subscribers are using, and to then take high value subscribers and pair them with the tools that are being used to manage subscriber experience. What this allows service providers to do is to match their tooling capacity to the high value subscriber and not waste the tooling capacity on subscribers who really are not subscribing to new services. So as an example in my family, our plan, the people who use it most are the kids, but the person who pays the bills is me, the CSP needs to be able to discern who the high value subscribers are, whether its my traffic or the kids, and then be able to come back and make sure I have a fantastic experience they can bill me correctly for the services I’m using but more importantly can upsell me on new services they want to introduce. They have to have that intelligence in the infrastructure and that is the solution Gigamon is providing. A lot of this functionality used to be part of the traditional probe of the tooling manufacturer but now is part of their visbility platform and is reducing the number of probes that CSPs that to deploy is shrinking or being eliminated because the subscriber visibility in their infrastructure.

The final puzzle piece is Radcom’s announcement on their second quarter call that they were developing a new product for AT&T.  They said this product was “adjacent” to their service assurance implementation and “critical” to making the NFV implementation work.

The scuttle is that the new product provides a security function.  On the second quarter call one of the analysts, George Marima, asked whether the product was the “threat intellect” product or something else and what the licensing model was.  He was referring to AT&T’s announcement in July of “Threat Intellect”, which is a security offering to enterprises “helping to enable businesses to detect, analyze and address security threats faster and more efficiently than ever before.”

Radcom’s response was that it would follow a license model much like the rest of the MaveriQ suite.  But described the model a couple of times to it being an “enterprise” license.

What I wonder is whether Radcom is referring to enterprise in the context of a single license to AT&T or whether this is an enterprise license to the customers of AT&T, specifically those using the threat intellect suite of security solutions that is now likely being integrated as security solution for AWS, see this article for more details on that.  While there are still only a few puzzle pieces here, there is enough to speculate about it, and such a leap would be a huge win for a tiny player like Radcom.

On the Radisys front, in this joint paper (hat tip to kerryb again for digging this up) with Intel Radisys describes their DCEngine in some detail.  On the last page are the following comment about the Verizon deployment of DCEngine this year:

“The success of the initial 20-rack deployment has led the tier 1 CommSP to continue to deploy DCEngine in multiple locations, with hundreds of petabytes of storage and more than 200 racks being installed by the end of 2016.”

On the first quarter conference call CEO Brian Bronson said the orders from Verizon were for “less than 100 racks”.  This was said after the follow-on Verizon order had already been announced so presumably it includes most or all of the orders delivered in the first half of the year.

In the SeekingAlpha comments where this paper was linked to, Mike Arnold added the observation that the average selling price (ASP) of a DCEngine rack is $350,000.  I haven’t been able to confirm that number.  If it’s true, it suggests around 140 racks were sold to Verizon in the first half.

Either way the conclusion is that there has still been a lot of racks sold to Verizon in the second half.  I hoping that this will help lead to an upside surprise when Radisys announces its third quarter results.

Hudson Technologies, R-22, and youtube

I spent one night this month watching youtube videos of air conditioner installers talking about regulatory requirements for refrigerant.

I turned to youtube because I was having a hard time finding information about R-22 conversions.   Turns out that air conditioner techs don’t have time to pen a lot of articles.  They do however like to talk about their trade on camera and take you through the installation process in detail.

Its interesting stuff.  Most interesting is the perception.  The reality is that in the US virgin R-22 is being phased out.  But there is nothing preventing the use of reclaimed R-22.

However the perception for many of the techs I listened to is closer to “the government doesn’t want us using R-22 so we aren’t going to use it”.

It’s worthwhile to weigh these “boots on the ground” opinions before getting too rosy about just how high R-22 prices are going to go.

It’s also becoming clear that there are more legitimate R-22 alternatives than I originally thought.   These are refrigerant blends made by Dupont, Honeywell, Chemours.  This video does a good job of stepping through each of the blend alternatives.

Now again, the reality is that these blends tend to compare poorly to R-22.  They have lower cooling capacity, require more power, and are more likely to damage equipment like compressors on the unit.

Nevertheless, you can drain your unit of R-22, replace a few valves, recharge the unit with the replacement refrigerant, and you are good to go.  Add to that the previously noted perception that the government just doesn’t want you to use R-22, and you probably have more conversions, whether it’s the right thing to do or not.

There is also quite a bit of talk, both in the videos and on some message boards about the price of R-22 rising.  The rising price is a further incentive to switch.  It might not be the right decision, in terms of insuring the best performance and longest life for your unit, but I think its likely getting done more and more as R-22 prices go up.

This video provided some thoughtful  insights about the pros and cons of alternatives.

This has made me a little more cautious about my outlook for Hudson Technologies.  Not enough to sell just yet.  I still don’t think the stock is pricing in the current $15 R-22 price and I also don’t think its reflecting the new contract with the department of defense.  But the upside isn’t quite as high as I originally had anticipated.

New Position: Aequus Pharmaceuticals

This is a really tiny specialty pharma company based in Canada.  Market capitalization is only about $15 million after a recent $2 million capital raise.  The CEO participated in that raise to the tune of 800,000 shares.

The company is focusing on the marketing and sales of drugs in Canada. They also have a pipeline of early stage opportunities that revolve around taking existing drugs and repackaging them into a transdermal delivery mechanism.

The company has the Canadian marketing rights for 4 drugs, Tacrolimus XR has been marketed since December 2015, Vistitan has been marketed since May 2016, while Topiramate XR and Oxcarbazipne XR are still awaiting approval from the Canadian Health board.

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Let’s start with Tacrolimus.  The drug is used as an immunosuppressant in patients receiving organ transplants, most commonly kidneys.  Aequus is selling the first generic form of the drug available in Canada.  In other countries, generics make up a significant portion of the market.  In the UK its 53% while in the US its 40%.  Right now Tacrolimus account for $100 million of a total $240 million immunosuppressant market.  The long-term goal here is for Aequus to take a market share that is inline with the US and UK.

Vistitan is a prostaglandin.  Prostaglandins are created naturally within our body and promote or inhibit all kinds of different effects on bodily tissues.  Vistitan contains bimatoprost, which is engineered to increase to fluid flow from the eye, which in turn reduces pressure in the eye.  Therefore Vistitan is used in the treated of elevated interocular pressure, or high eye pressure.  Its most commonly used in glaucoma.  I haven’t been able to get the figure on the Canadian market in 2015, but in 2014 the market for IOP-lowering medication was $140mm and bimatoprost 0.01%, which is a lower dose form of Vistitan that was the only dosage available in Canada, accounted for $42 million of this.

While Topiramate XR and Oxcarbazipne XR are awaiting approval in Canada they have been approved in the United States since 2013 by Supernus.  In the US sales of the two drugs are growing and the combined prescription growth was up 39% year over year in the second quarter while sales were up 47% to $50.3mm.  Assuming similar results in Canada, it doesn’t seem unreasonable to me that sales could exceed $20 million annually.

Its pretty early to be estimating revenue from these products, but in a recent Midas Letter interview, CEO Doug Janzen said:

You have a $20 million business that expects to do $2 to $3 million in sales this year, closer to $15 next year, peaking that at $40 off of existing products

That estimate doesn’t seem unreasonable to me, and may even be low given the corresponding markets in the United States for each drug.

The final puzzle piece here is the pipeline, which consists of 3 drugs in development.  Each of these drugs is already approved and well established.  Aequus is developing a new transdermal delivery method for each.   Transdermal means that the drug will be administered by path.

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For the patch they have entered into a multi-product collaboration with a company called Corium International, which specializes in transdermal manufacturing. The two companies split the costs 50/50.

The three products  are still in very early stages.  One advantage though of the new drug application for a transdermal version versus an entirely new drug is that costs and time to deliver are significantly reduced, estimated to be $15 million and 4.5 years for a transdermal development versus $500 million and 10+ years for new drug.

It seems like a lot of irons in the fire, and a lot of potential, for a $15 million market capitalization.  If the stock dips back below 30c I will probably finish off my position with another add.

New Position: NovaBay Pharmaceuticals

I came across Novabay while scouring through presentations and the Rodham and Renshaw conference.  Most of the participants at the conference are early stage drug companies, but Novabay is an exception, having a product in production called Avenova.

Avenova is a really simple product.   It consists of a compound called Hypochlorous acid in a saline solution.   Hypoclorous acid is a natural compound that is given off by while blood cells to fight viruses.  It’s a particularly potent substance and is used in fighting flesh eating disease (for which Novabay provides Avenova for free) and can kill the ebola virus.

A second advantage of Avenova is that it does not create resistance.  Unlike antibiotics, Avenova can be prescribed without worries of creating anti-resistant strains of the virus that become harder to manage.  This is particularly important in chronic applications like bleptharitis, which I’ll expand on in a minute.

Novabay reminds me a lot of Bovie Pharmaceuticals, which I bought and wrote about back in August.  Both are tiny, have a single product driving growth (J-Plasma in Bovie’s case), are seeing really strong growth, and have plenty of room to run.

The two differences are A. Novabay is cheaper than Bovie and B. the potential market for Avenova is bigger than J-Plasma.

Fully diluted including warrants that are close to being in the money, Novabay has 12 million shares outstanding.  That gives it a market capitalization of $43 million at $3.60.  Bovie has a market capitalization of over $120 million.  Novabay is operating at about $10 million of sales run rate.  Bovie is at about $20 million, but keep in mind that only about 20% of this is revenue from J-Plasma, the growth engine here.

Meanwhile, the potential market for Avenova is really big.  Here is a slide from the company’s presentation:

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The biggest part of this market is Blepharitis, which is a chronic condition of eyelid inflammation.  You can treat it with antibiotics but because it comes back opthamologists don’t like doing that unless it’s a severe case.  This article describes the benefits of Avenova:

Blepharitis has become more difficult to manage because of the resistance bacteria build against traditional antibiotics used for this condition. Hypochlorous acid utilizes a different mechanism of kill from traditional antibiotics and may therefore be less likely to promote bacterial resistance.

I read through a number of forums, which while anecdotal, generally pointed to positive patient experiences.  The most common complaint I heard was that Avenova is not covered by all insurers.  This is simply a fact of the newness of the product.

There is competition. This article describes Blephadex and Ocusoft which are two of the primary competing products.  Ocusoft published this report comparing their product with Avenova.  I think many of their claims on price comparison have been mitigated by recent insurance approvals.

While there may be some headwinds with competition, its such a big market and the patient experiences appears to be varied enough to support a few different products.  Moreover, the company is showing product and revenue growth. Given what remains a fairly low market capitalization, I’m inclined to think the upside justifies the risks.

Portfolio Composition

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