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Posts from the ‘TG Therapeutics (TGTX)’ Category

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 258: In Search of the Next Big Thing

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’m wrapping up the fifth year of the blog and portfolio I track here.  Unfortunately it was my worst year since inception.  With about a week to go I’ve eked out a miserly 3% gain.

In my last few posts I touched on what I think I’ve been doing wrong.  My observation is that I am spending too much time looking for value and not enough time looking for growth and finding major trends underway.

To put that in context, let’s look back at the last number of years for a minute.

I did well in 2009 and 2010 as I bought stocks that benefited from the infrastructure build-out in China, in particular a number commodity producers, mostly copper/nickel (FNX, Hudbay, Quadra) and met coal (Western Canadian Coal and Grande Cache Coal).

In 2011 I extended that thesis into pulp stocks, with wins from Mercer International and Tembec.  In 2011 I also made a few bets on gold stocks that paid off.

In 2012 I stuck with gold and began to see opportunities in small community banks that were recovering but where the market had yet to acknowledge this.  I also saw a slowly recovering housing market, and made successful bets on mortgage servicing stocks like Nationstar, which was a recent IPO, originators like Impac Mortgage, and hated mortgage insurers like MGIC and Radian.

In 2013 I continued the theme of a recovering housing market, with my mortgage insurer bets continuing to pay off, added more underappreciated community banks, and bet on a number of oil and gas opportunities that were taking advantage of the new fracking revolution.  I also correctly discerned that the market would take a more favorable attitude to debt, and so I made some of my biggest gains with stocks with debt, particularly YRC Worldwide, which rose from $6 to $36.

In 2014 my biggest gains were thanks to the ethanol stocks, in particular to Pacific Ethanol, which rose from $4 to $24.  I also did quite well playing the cyclical turn in airline stocks, particularly Air Canada and Aercap.

And how about 2015?  What led to my less than remarkable results?

For one I think that I spent too much time following tanker stocks.  While these stocks were cheap, they couldn’t and can’t shake their cyclical stigma.  Looking at the ships being delivered later this year and into 2017, maybe that is for good reason.

I focused too much on companies that were only marginally undervalued or where there was no real catalyst at hand to improve valuation.  In particular, I wasted far too much time on REITs, both simple single asset REITs like Independence Realty and Sotherly Hotels, and more complicated multi-asset REITs like Ellington Financial, Northstar Realty and even New Residential.  I remember Brent Barber commenting to me at one point to be careful with REITs in the environment we were  entering into, and I should have heeded that call.

I also spent too much time trying to justify the airlines.  As a whole the group is captive to their own history of pitiful returns.  One day multiple expansion may come, but holding too many of these stocks in anticipation of that day is not a good use of capital.

And finally, and more generally, I didn’t have a big theme or trend that worked for me.  There was no China infrastructure, pulp stocks, mortgage servicing, community bank or ethanol idea that I could ride.

For the upcoming portfolio year (beginning July 1st) I am going to focus on finding trends and growth.  The one I have latched onto so far is the move of telecom service providers to software defined networks and network function virtualization, and more generally, the continued move by businesses to locate resources to the cloud.

So far I have made the bet with Radcom, Radisys Vicor, Oclaro and Apigee.  Each of these is bearing or at least starting to bear fruit.  Unfortunately I also came extremely close to taking a position in Gigamon, a company I really like, but instead waited for it to slips into the mid $20’s. It never did and now its $37+.

While I made a couple of endeavors into bio-tech stocks last year and for the most part got taken to the cleaners on those, I’m not giving up on this sector yet.  I have been prepared to lose a few dollars under the agency of education and I am slowing learning more. I have a few more words about TG Therapeutics below.

Overall I really like the stocks that I own right now.  While the risk of what I own remains high as always, I also haven’t felt like I have had so many potential multi-baggers in some time.

I’ve been talking about some of the above mentioned names in the past few posts.  Below I am going to highlight a few others: a new position in RMG Networks, a position revisited in TG Therapeutics and some more information about Radisys.   Lastly I’ll review Intermap, which is more of a crap-shoot than the other names I own, but if the cards align it most certainly is a multibagger.

As for stocks I haven’t talked about in a while but will have to review in a later post, Swift Energy is treading water in the grey market and the warrants I received post bankruptcy don’t even trade, but I remain optimistic that when the stock gets to a big board it will go significantly higher.   While I remain wary of the Iconix debt load a few astute moves by management and the stock will trade at a more reasonable free cash flow level.  And Accretive Health, a very small position that trades on the pink sheets, is struggling through its transition but will soon begin to on-board patients via its long term agreement to manage services for Ascension, the largest non-profit health system in the United States.

It was a tough year but I feel good about the future.  Hopefully its a year that I have learned a little from, and that will set me up for a better one to come.

RMG Networks

RMG Networks provides what is called “digital signage” solutions.  They provide the hardware, content, content management system, and maintenance of the product.  The easiest way to understand “digital signage” is to see a couple of examples:

whatisdigitalsignageThis is a small company with 37 million shares outstanding and about a $37 million market capitalization at the current share price.  Yet even though the company is tiny, they do business with 70% of the Fortune 500 companies.

I came across the idea from a hedge fund letter I read by Dane Capital.  At first I wasn’t very excited about the idea; it seemed like a turnaround story with a struggling business, something I have been trying to stay away from.  It was really this quote from Robert Michelson, CEO, that led me to persist in my investigation:

I joined the company and was incentivized by two things. One, was on the company’s position in a really interesting growth industry, and two, my ability to make a lot of money and not salary bonus, but through equity. And you know, for me — I guess everyone wants to make a lot of money but I want to be able to make millions and millions of dollars. And you know I certainly go back and do the math and say, “you know, to get where I want to get to and it’s not just me — obviously, I’m doing this for the stockholders — this company needs to be significantly larger.” And I didn’t come to a company that was grow at like you 5% or 10% per year. You know, if you take a look at public companies, they get higher multiples when their growth is 20% plus.

The other thing that made it interesting to me is its size.  I already mentioned that RMG Networks has a miniscule market capitalization.  The company generated about $40 million of revenue in the trailing twelve months.  That means that relatively small amounts of new business are going to have an out sized impact on growth.  I will outline the growth strategy below.

The turnaround story at RMG began in 2014 when Michelson was brought in.  He proceeded to cut what was a fledgling international expansion, reduce the sales staff and bring back R&D spending to a more sustainable level.  We’re just on the cusp of seeing the fruits of that turnaround.

While the graphic I posted above shows five distinct end verticals the company has only made significant penetration into the contact center market.

This, in part, is where the opportunity lies.  Michelson is trying to address new markets.  His focus is the supply chain vertical and internal communications.

RMG’s supply chain solution provides real time data to distribution centers and warehouses.   Think about big screens in warehouses providing information about shipments, and performance metrics of teams.  The company currently sees a $10 million pipeline and has been seeing progress with leads with 40 prospects.   In the last few months they moved ahead with pilot programs with five of those leads.  RMG is targeting $5 billion companies with 80+ distribution centers and they expect to generate $1 million of revenue from each pilot if closed.

As for internal communications, RMG has a solution that delivers the existing content and management system but directly to employee desktop computers, mobile devices or to small screens around the office.

Internal communications is a $2 billion market.  The company has had advanced discussions with large customers to roll out their solution across their enterprise.

Maintenance revenue has been a headwind over the past two years, falling from over $4 million per quarter in 2014 to $3.4 million in the last quarter, but should stabilize going forward.  There have been two factors reducing maintenance revenue.  First has been the election to end-of-life older equipment that has componentry no longer supported by manufacturers.   Second, the new products being introduced can have a list price 40-50% less than their predecessors that were purchased 8 years ago and because the company charges maintenance as a percentage of sales, this has led to a reduction in maintenance revenue.  Both factors should begin to abate going forward.

Since Michelson started with the company a focus on sales productivity has led to an improvement in lead generation and new pilots.  Sales productivity was up 50% year over year in the first quarter as measured by sales orders per sales representative.  Michelson describes management as having “a relentless pursuit on costs” which is validated by the decline in general and administrative costs from the $5 million level in early 2014 when Michelsen took over to around the $3 million level and a decline in overall operating costs from $11 million per quarter to $5.6 million per quarter.

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.

The stock is reasonably priced given the potential upside and it will only take a few good sized contracts to move the needle substantially.  I can see this one becoming a bigger position over time if they continue to execute along the current path.

Wading Cautiously back into a Biotech – TG Therapeutics

Here are a couple of thoughts on Biotechs that have begun to crystallize for me. I just finished reading a book called “Cracking the Code” and have started reading another called “The Billion Dollar Molecule”.  Please let me know if you have any recommendations for other good books or articles to help me with the sector.

While I am still a newbie in the bio-tech world, I am starting to understand a few things about the business.   I would distill the most important of my thoughts into the following three points:

  1. Approval/non-approval of any drug and the subsequent market for it is under SIGNIFICANT room for interpretation. Apart from a few obvious blockbusters that get snapped up by the large pharmas well in advance, there is a lot of uncertainty about what will work and what won’t and if it does work what kind of sales it will generate
  2. There is a big difference between the value of a company in Phase II or II trial that will eventually have to ramp up its own sales and marketing of the drug versus what that drug would be worth rolled into a larger entity that already has the salesforce, marketing engine and infrastructure in place.
  3. Biotechs in Phase 1-3 are event driven, open to interpretation, and their share price is as dependent on the capital markets as it is on the state of their particular research.  In this respect they have a lot of similarities to gold exploration companies.

With those points said, and being fully aware of what remains to be limited knowledge in this sector, as I wrote about last month I did purchase, or re-purchase, a biotech position this month.  I have been buying shares in TG Therapeutics.

The story at TG Therapeutics is the same one I wrote about a few months ago.  But that thesis has moved forward in some ways.

TG Therapeutics has two drugs that are in late stage trials for B-cell cancers.  The first, TG-1101, is what is called a CD20 monoclonal antibody.  To dissect what that means, an antibody is a protein designed to attack a pathogen, monoclonal means it is an antibody that latches on to one particular cell type, and in the case of TG-1101, the cell that is latched onto is a B cell, the latching achieved by way of a protein called CD20, which is expressed on the surface of B-cells. Once TG-1101 grabs onto the CD20 receptor it works eventually to destroy the cell.

The second drug that is in the pipeline is called TG1202, which is a PI3K-delta inhibitor.  An inhibitor blocks a particular pathway (a pathway is a series of action by which a cell changes or creates something), in this case the pathway is called the 3-kinase pathway.  The 3-kinase pathway is one of the most activated pathways in human cancers.  So the theory is that if it can be blocked, cancer development will be stunted.

TG-1101 is in Phase 3 trial in combination with an already approved drug called Ibrutinib, which goes by the trade name Imbruvica, and is owned by Abbvie.  Ibrutinib inhibits another receptor on the B-cell called Bruton’s tyrosine kinase.  Abbvie bought Imbruvica for $21 billion in 2014.   Ibruvica has been approved and has shown strong sales; it generated $1.3 billion in sales in 2015 and estimates are that sales could peak at as much as $12 billion.   TG-1101 is expected to improve both the efficacy and safety profile of Ibrutinib when used in combination and so far the results are bearing that out.

A second Phase 3 trial has TG-1101 and TGR-1202 working together.  TGR-1202 is also in a stand-alone trial.  In the stand-alone trial efficacy rates of TGR-1202 are tracking at slightly better than Ibrutinib monotherapy.  In combination, efficacy is even better.

One of the concerns that I believe has hit the stock is because of results that have recently been released for two other PI3Kdelta drugs in development.  Duvelisib (owned by Infinity Pharmaceuticals) and Zydelig (owned by Gilead), have run into issues with efficacy. The market could be looking at this that the read through to TGTX drug is that it is a PI3K inhibitor so in same class as these drugs and so maybe concerns spill over

Everything I have read suggests that Duvelisib and Zydelig had very similar structures whereas TGR-1202 does not.  More importantly, so far TGR-1202 is showing a good toxicity profile (meaning manageable side effects).  So I think we could see the current read through go in opposite direction as the data is digested.

This Barrons article quotes Wedbush as saying that the Zydelig problems have a negative read through for Duvelisib:

Zydelig safety issues raise red flags for duvelisib program. Given their structural similarities and similar mechanism of action, we believe the new Zydelig-related safety concerns provide a negative read-through for Infinity Pharmaceuticals’ ( INFI ) duvelisib program. Zydelig and duvelisib are both inhibitors of PI3K, a family of enzymes that regulate a variety of cell signaling processes, with Zydelig inhibiting just the delta isoform while duvelisib inhibits both the delta and gamma isoforms. A comparison across clinical studies suggests that duvelisib has a poorer safety profile compared to idelalisib, which we attribute to the potentially immune-weakening effect of PI3K-gamma inhibition.

Zydelig, before the recent issues, was approved and brought in $130 million in sales last year.  I saw estimates that Zydelig could reach peak sales of $1.2 billion by 2020.  If TGR-1202 can continue to show a better safety profile, presumably it should be able to take

The differentiation of TGR-1202 the other PI3Kdelta drugs was addressed by TG Therapeutics in a recent press release:

The integrated analysis, which includes 165 patients treated with TGR-1202 alone or in combination with TG-1101, demonstrates that the toxicities observed with other PI3K delta inhibitors such as liver toxicity, colitis, pneumonitis and infection are rare with TGR-1202 with discontinuations due to TGR-1202 related AEs occurring in less than 8% of patients.  We see this as particularly compelling given the recent setbacks for idelalisib with the closure of a series of randomized studies due to safety concerns.  The data presented today provides strong evidence to support the hypothesis that the adverse events seen with idelalisib are not necessarily a class effect.”

TG Therapeutics has about 55 million shares outstanding.  At the current price the market capitalization is about $380 million.  They have $85 million of cash on the balance sheet which should be good for a couple years of cash burn.

Success in the TG-1101 trial will give them a complimentary drug to the widely used Ibrutinib that can be prescribed alongside it.  Success in the combination trial will give the company a “platform” of two drugs from which others can be layered in order to attack the cancer from multiple angles and deliver the knock-out punch.  There are a couple of drugs addressing other mechanisms of attack of B-cells in earlier stages in the pipeline.  And there are investigations ongoing into whether TG-1101 can be used in the treatment of Multiple Sclerosis.

Radisys – Comments on the B Riley Conference

For some reason I get a lot of emails about Radcom and absolutely none about Radisys. I don’t know why? I would be hard pressed to call Radcom the better investment of the two. Maybe there is more upside to Radcom, particularly if they can evolve their product into something that could be used in a larger market (ie. Data center or security) but in terms of product and sales performance, not to mention stock performance, Radisys is the clear winner so far.

Radisys presented a very bullish call at the B Riley conference.  It isn’t coincidence that the stock moved up from $4.20 to $5 in the subsequent days.

To recap the story, Radisys is growing off of three products. FlowEngine, MediaEngine and DCEngine.

FlowEngine is a software defined network (SDN) friendly load balancer; basically a packet forwarding box. It already has a Tier 1 customer (Verizon) that uses it to triage packets in their network. FlowEngine had no revenues in 2014, had $5 million in 2015 and is expected to double revenue in 2016.

At the B Riley conference Radisys CEO Brian Bronson said it’s a $100 million business in the long term.  Towards the end of the Q&A Bronson pointed out a specific deal in India where they were competing against incumbent equipment manufacturers that were delivering similar functionality in a more traditional appliance for $750,000, while FlowEngine could provide the same for $250,000.

MediaEngine manages and manipulates media, is used in the conference space (I believe Mitel is a customer) as well as in VoLTE and transcoding. It’s the biggest revenue driver of the software and systems segment, had about $50 million in revenue last year, and while further growth is expected, it will not be the driver of growth going forward.

DCEngine is a rack solution for telecom datacenters.  As they upgrade service providers are migrating equipment to a data center environment, replacing the central office that they operate in today. The DCEngine rack is half as expensive as the competition. Bronson outlined that their advantage with DCEngine is that they are not the incumbent equipment provider, which stands to lose revenue and margins by replacing their fully populated custom solution with a rack populated with 3rd party equipment.

Because most of the rack is populated by third-party equipment, DCEngine is a low margin business, pulling in 15-20% gross margins though it does deliver 10% operating income. More importantly it will begin to pull through FlowEngine sales beginning in the second half of this year, as there will be as many as two FlowEngine appliances installed per rack, depending on the application.  Bronson suggested that at some point it could pull through MediaEngine sales as well but that is the first I have heard of that so I don’t know what sort of volumes we are talking here. Finally, selling the rack makes Radisys the natural player for profesional services (ie. installation, integration and maintenance) which on a gross margin basis are only about 20-30% but most of that drops to bottom line.

I gave my model for Radisys in the last update. What I have learned in the last month only strengthens my belief that I am likely going to be conservative on my revenue growth forecast.

Intermap Gambling

I had a friend go to the Intermap AGM, and some questions he subsequently asked about the company got me to review my research on the name.

I’ll review the details again but first the conclusion.  Same as what I concluded originally, this is a coin flip with a large potential upside if things pan out, and an absolute zero if they don’t.   I still feel the odds are favorable given the reward but only for a small “option” position type that I have reconciled to losing in its entirety.

Let’s review.  The story is that of an Spatial Data Integration contract, or SDI.  An SDI encompasses data acquisition, which in Intermap’s case entails crisscrossing a jet  over the country collecting IFSAR data, and data integration, which includes bringing the mapping data into Intermap’s Orion platform, integrating it with existing data (both geospatial, think LIDAR, and other layer information that can be tied to a GIS location), and building queries to automate searches and perform analytics on the data.

The SDI that Intermap has won is with the Congo.  Intermap is not dealing directly with the Congo. They are dealing with a prime contractor, of which the rumor is a company called AirMap.  The purpose of a prime contractor is to provide the local contact and regional expertise, and to arrange project financing.

The project financing is what everyone is holding their breath on.  You do project financing on a big contract like this SDI to help address the mismatch between project costs and funding timeline by the government.  It basically is put in place to insure that Intermap gets paid on time and has the cash flow to keep executing on the deal.

The project financing was supposed to be completed within 90 days of some date in February.  This would have put the deadline at the end of June at the latest.  On the first quarter conference call management implied that there could be an extension, but that the expectation was, by way of the prime contractor, that the financing would close by the end of the quarter.   Management said that financing discussions had moved away from financial details and were now focused on operational details, which presumably is to say things are progressing.

Intermap has 120 million shares fully diluted, so about a $20 million market capitalization.  They have $21 million of debt, mostly payable to a company called Vertex One.  The relationship with Vertex One is another wrinkle.  Here is Vertex One’s position in Intemap:

  • They owned 19.8mm shares in June 2015 (from here) and have subsequently reduced by 4.1mm (from this Sedar Filing)
  • 7 million warrants at 7.5c (from Gomes and from Vertex One filing)
  • They have a 17.5% overriding royalty on revenue
  • Hold $21 million of debt as already mentioned

The question is, given the distributed position, what is in Vertex One’s best interests?  I remain of the position that as long as the SDI is in play, Vertex One interests are best held by keeping their hand.  The equity upside is at least $1, the royalty will skim off the top, and they will collect on the debt through cash flow repayments.

But if the SDI is lost the relationship with Vertex likely means game over for Intermap in their current form.  Interest payments will overwhelm cash flow generated from data sales and InsitePro.

Its worth noting that InsitePro is a product sold to the insurance industry to help them identify insurance risks such as flood plains.  While InsitePro is an interesting little product, and management has noted that the addressable market is upwards of $500 million with a similar competitor product from CoreLogic currently running at $50 million annual sales, the company is really all in on the SDI and it is the success or failure of it that will determine Intermap’s fate.

So Intermap is a binary bet worth holding a small slice of if you don’t mind taking a significant risk.  I’m ok with it, I still think it makes more sense at this point that the deal closes then doesn’t.  But I won’t be shocked if I am wrong.

Extendicare’s Slide

In retrospect Extendicare was probably fully valued when it crossed above $9 into that $9.50 range. But I like the long-term trends in the business which always makes me reluctant to sell a stock like this. With the stock back down to below the $8 level it looks like I am in for another cycle. While I didn’t add any in the tracking portfolio, I did add to the stock in my RRSP.

I can’t be sure what has precipitated the sell off. It could be that the activist is reducing or exiting. The first quarter results were a little light, they are struggling with the Home Health business that they are integrating and margins are coming up a bit short.

I believe they are correct to expand into the home health space. Government is going to try to keep people in their homes as long as possible because its cheaper.  While the publicly funded side of the business is always going to be constrained by funding, it does give the company a base from which to build a private business, which they are starting to do.

I think of my wife’s parents, who take care of her mom’s parent in their home in Ontario. They get a nurse every day for an hour that is publicly funded but even with that help its becoming too much.  One option is to start paying a nurse to stay longer, or come a second time later in the day, out of pocket.  Its those kind of needs that Extendicare can serve.

What I learned about listening to Oil Bears

Its pretty interesting to look back at what has been said about the oil market on twitter over the past 6 months. From January to March there was a decidedly negative bent on oil market tweets. Many of these tweets were made by users with a large follower base, which presumed a degree of authority to their comments. I actually made a list of these tweets at the time, because I really wondered whether the market was as dramatically out of balance as was being suggested.

I’m not going to call out names, but it just reiterates that twitter has to be taken with a grain of salt.

I mostly sold out of my position in Clayton Williams Energy and Surge Energy.  I hold a few shares in one account but am out of these stocks in the practice portfolio.  I’ve replaced the position with another name that feels a bit safer with oil at these levels, an old favorite of mine called RMP Energy.  I continue to hold Granite Oil.

What I sold

I sold out of Health Insurance Innovations after the announcement of the proposed ruling by the Health and Human Services department to limit short term medical plans to three months and not allow renewals.   This is their whole business model, and if it goes I don’t know what happens to the company.  I also noticed that I have been seeing complaints about the company’s call centers aggressive sales tactics pop up, which is worrisome.

I also sold out of Oban Mining, which has been another gold stock winner for me, more than doubling since the beginning of the year.  I just don’t want to overstay my welcome here.

Also note that I did take a position in BSquare, which I will write up in the next post.

Portfolio Composition

Click here for the last four weeks of trades.

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Week 254: Just a Bunch of Company Updates

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

First some house keeping.  RBC’s has added new tools to make it easier to show performance for practice accounts.  I’ve maintained my portfolio manually through an excel spreadsheet for the last couple of years because RBC screws up the purchase values on their portfolio holding page and the gain/loss on individual stocks are, at times, ridiculous (my average cost is sometimes negative).

Recreating the results, even after building a visual basic routine to update the month of trades, was quite cumbersome, so I welcome these new tools.   At the beginning of the post I showed a list of my top ten holdings and below are all my positions, both are from the new tools.

The only information that is lost in this new format are the position by position gains and losses. While this is unfortunate, its so much less work compared to the process I had to go through before that this is how its going to be.

With that said…

I didn’t purchase any new stock in the last month so this is going to be a bit of a boring update.  I’ve be dedicated the space below to a discussion of a few of my larger and/or more interesting positions.

With April/May being an earnings period, there is a lot of information to consume.  I had mostly good news from the companies in my portfolio. I’ve tried to stick to names with solid operating momentum, staying away from those that might be turning it around but where good news has yet to trickle out.  And that has served me well.

As I have remarked before, my portfolio has been sitting in a holding pattern for the better part of a year.  While I am still waiting on a break out from the range, I feel better about the stocks I own than I have for a while.  Not all of them will pan out of course, but a few will, and hopefully 1 or 2 will be the multi-baggers that I depend on for out-performance.

Radcom

There is a lot to write about Radcom.

Radcom’s first quarter results were fine.  The company had revenue of $6.5 million and generated non-GAAP income of 15 cents per share. Perhaps the only negative about the quarter came out in a subsequent filing, that over $5 million came from their Tier 1 client, AT&T.

For the first time the company provided revenue guidance for the full year, a range of $28-$29.5 million.  They said that they were very confident in their ability to achieve this guidance as 80% of it was already secured with contracts.  In a later filing they said that 50% of their revenue in 2016 would come from North America.

Putting that together, Radcom is saying that they will generate about $14-$15 million from AT&T, and another $14 million from their existing non-NFV deployment.

Overall this is all as expected to slightly positive.   But the quarterly results and guidance don’t begin to tell the whole story here.  In fact what is most telling about guidance is what is left out; it does not include any contribution from additional Tier 1 service providers.

The company is actively pursuing additional Tier 1 customers for their virtual probe solution (MaveriQ).  They said they are in discussions with carriers from North America, Western Europe and APAC.  I’ve heard that the number of Tier 1’s is in the range of a handful.

It was reiterated on the conference call that MaveriQ is well ahead of its peers. Competitors either haven’t rolled out an NFV product, or if they have they don’t have real world implementation on it, and it is still tied to hardware.

We have competitors in the market but to our best understanding and everything that I am hearing from the CSPs and say they enrolled out an NFV product, some are saying that they have – they don’t have real world implementation on it. Some seem to be still in the hardware area and you cannot monitor an NFV network with the equipment, that’s why we believe they were the first mover and we were widening the gap with our competition.

This is inline of what I have gathered from one of the leaders in physical probes, Netscout, who recently said that their first virtual device would not be released until May.  I listened to Netscout’s webinar dedicated to NFV where they talked about their virtual probe technology and I was not impressed.  It felt like the event was put together to prove that they were in the game.

I note that Mark Gomes wrote the following on Friday, which corroborates with scuttle I had picked up from a different source:

In fact, word is spreading that RDCM’s product (MaveriQ) scored a perfect 100/100 in its lab trials, while the nearest competitor could only manage a 70/100. In other words, RDCM’s technology lead is wide, making them the de facto leader for NFV Service Assurance.

Amdocs provided some color around the cost advantage of virtual probes in this interview.  Justin Paul, head of OSS marketing at Amdocs, said the following:

The fixed video network model uses virtual probes instead of physical probes. This is because traditional, physical probes can’t probe a virtual network and the cost of a virtual probe is significantly lower than a physical one. We’re working with Radcom to implement a vProbe solution with a North American CSP and we’re seeing from the work we’ve done there that physical probe is 20-25% less costly than a physical probe. In addition, you can throw up a ring of probes around a specific area to address a specific peak in demand and redeploy those licences elsewhere when the peak has passed. They’re cheaper to buy and they offer greater flexibility and agility to operators because of that redeployment capability.

Since the results of the first quarter Radcom announced a share offering.  What has followed is an ensuing sell-off in the shares ha culminated Friday when the pricing of the shares came in at a disappointing $11.

Maybe I am too sanguine but I am not worried about the sell-off and while the dilution is unfortunate it is not overly material compared to the eventual upside.

Whether Radcom did a poor job selling their story, were poor negotiators, or just deemed the institutional backing and analyst coverage as being worth the cost of dilution at a somewhat low-ball price is unclear to me.

In the same article I quote above Gomes commented about over-subscription.  I have heard similar comments from another source.  The price action on Friday where the stock traded enormous volume and did not dip below the offer price suggests significant demand even as some shareholders throw in their cards in frustration after what could be perceived as a poor deal.

So the evidence is that the offer price is not a function of lack of interest and not a reflection on investor enthusiasm for their business prospects or for the strength of their MaveriQ solution.  And that was the real negative here; does $11 reflect poorly on Radcom’s business?  If it does not, and is a function of their willingness to concede in order to improve their balance sheet and get institutional support then really its not very negative at all.

I added to my position in the days leading up to the pricing.  That’s unfortunate.  I could have gotten those shares lower on Friday. But I do not see any reason to back track on those purchases.

I sat on a 1-2% position with Radcom for a couple years, all along thinking that this was an interesting little company with a promising technology that was worth keeping close tabs on in case they were able to step into the big time.  That is exactly what they’ve done with AT&T and are on the cusp of doing with other Tier 1’s.  I would be want not to do exactly what I anticipated doing in the event of such a progression.   And in the long-run I don’t think I will care too much that I bought the stock a day or two too soon.

Radisys

The first quarter results marked another step along the trajectory towards transforming Radisys’s business. The company continues to add to its suite products and services designed to facilitate the migration of service providers towards virtualizing their networks.

The company hit the high end of their guidance and then raised their guidance for the rest of the year.  They raised revenue to the range of $195-$215 million from $180-$200 million previously.  They left earnings per share guidance with the range of 22-28 cents on the expectation that additional costs would be incurred to support the expected revenue ramp.

he guidance raise was in large part due to the new DCEngine product.

DCEngine is a rack frame pre-installed with open-architecture software and white box hardware.  Its designed to be an alternative to the “locked in architecture” sold by the incumbent providers, and is consistent with the move to virtualize network functions (as opposed to tying them to hardware) so that upgrades, additional capacity and new functionality can be installed via software installs rather than hardware swaps.

DCEngine had its first order from Verizon, a $19 million order, at the end of the fourth quarter and this order was fulfilled in Q1.  On the first quarter call the company said the order from this service provider was expanded to $50 million, with the rest of the order expected to occur in the second quarter.

While this a large order for a company Radisys size, what is most interesting is that Brian Bronson, the CEO, referred to it as a “rounding error” in comparison to what Verizon needs to build out.

DCEngine is a low margin product, somewhere south of 20% gross margins.  But volumes could be significant, and management said that once the product gains traction that DCEngine orders “should be in the hundreds of millions.”

In addition, there is ancillary revenue to be gained from DCEngine sales.  Right now Radisys populates each rack with two white box switches.  In the second half of 2016 the company’s FlowEngine product will be upgraded and allow Radisys to replace those switches with it.  FlowEngine is a 60%+ gross margin product.

Second, the move from central office to data center is complicated and often requires support services from Radisys.  Providing the rack positions Radisys as the natural support resource, which on the call the company said can add another 10 points of operating income.

The company painted a positive picture of growth going forward.

They said that in addition to the Verizon order they were in discussions with a dozen service providers for DCEngine and expect to have 4 to 6 in trials by the end of the year.

With MediaEngine Radisys continues to ship product to their Asian servicer provider customer and said they are  “increasingly confident in our ability to secure further orders.”

They also see strong orders for FlowEngine in the first half from their Tier 1 carrier and while that might taper off somewhat in the second half they are still expecting revenues for FlowEngine to double year over year and there is the opportunity that more orders will materialize in the second half.

There are a lot of evolving parts with Radisys which make it difficult to pinpoint a forecast.  If I assume that revenue can grow 10% in 2017 on top of midpoint of guidance growth in 2016, that gross margins stay constant and SG&A and R&D costs increase modestly, I easily get to an EPS above 40c in 2017.  This seems like pretty conservative projections and yet it should easily support a stock price that is 50% higher.

guidanceWhat is interesting is how sensitive the numbers are to incremental revenue growth.  15% revenue growth produces and EPS above 50c while 20% revenue growth in about 60c.

What this makes clear is that there is real upside if the product suite begins to gain traction and realizes some of the expectations management alluded to one the conference call.  The speed of the move up above $4 makes it difficult to pinpoint exactly where one should add to their position, but I feel like somewhere in the low $4’s, high $3’s will look like a good price in the long run.

Medicure

I was pleased with the first quarter results announced by Medicure.  Sales were down to $6 million from $9.5 million in the fourth quarter.  Earnings per share were 5c again down from the fourth quarter.  None of this was unexpected after the run-up in earnings in Q4 due to Integrillin shortages.

Earnings as reported by the company are also being depressed by higher intangible amortization due to Medicure reversing some of the write-down of intangibles related to Aggrastat in the fourth quarter of last year.  These intangibles show up in the cost of goods sold (which is why margins were down to 86% in the quarter) and most drug companies exclude them from their adjusted earnings.  Without the intangible earnings would have been 8c per share.

As the slide below, from their first quarter presentation, demonstrates, first quarter sales of Aggrastat were down sequentially as wholesalers that had stocked in the fourth quarter due to shortages of Integrillin purchased less but still up from the third quarter.

q1salesThe company also provided data for hospital bag demand, which was down again from the fourth quarter but to a lessor extent than sales, and up significantly from Q3.

q1bagdemandInterestingly, the company gave a couple data points to help investors normalize their sales data.  They said that first quarter sales understated demand by “a couple million dollars” because of the destocking.  They also said that they are currently shipping 1,700 bags per week, which works out to 20,000 per quarter and means that bag demand has continued to ramp subsequent to the first quarter.

The day before earnings Medicure announced that they are in the process of filing for bolus vial format approval – this will make it easier for hospitals to use Aggrastat. Some hospitals struggle with delivering high dose bolus via intravenous pump instead of syringe. The company provided the following clarification on the conference call:

Although the current bag format can be used to deliver the HDB as well as the maintenance infusion, some physicians and hospital catheterization labs prefer to administer the initial bolus dose with a smaller volume of drug product.  Moreover, the availability of a ready-to-use bolus vial will provide greater operational similarities and efficiencies for hospitals transitioning to AGGRASTAT.

Finally, although there is nothing concrete yet, the company reiterated its interest in purchasing Apicore, the generic supplier that they own 5% of, have a purchase option on the remaining interest, and are in partnership with for the production of a as of yet unnamed generic later this year.

There were a couple of questions in my last post about Medicure.  In particular what generic Integrillin meant to Aggrastat and second, whether Aggrastat itself would have a generic equivalent soon.

The second question came up because when you look at the patents that Aggrastat has, some of them run out as soon as 2016.  While its still not totally clear to me everything I have read suggests that when a drug is approved for a new indication it extends the exclusivity of the drug.   Medicure was granted patent until 2023 on the high dose bolus.

I still haven’t found the smoking gun that addresses this type of situation specifically but I did find a number of resources that indicate that generics will not be allowed until the high-bolus patent expires. This link to the FDA describes the periods of exclusivity for various NDAs. This slide show describes how a new drug is patented and how the exclusivity period is determined.  This q&a describes how a patent is extended with a label change for a new indication and how that will keep a generic off the market. In the book “Cracking the Code” authors Jim Mellon and Al Chalabi write:

Quite often, drug companies therefore try and extend patent life by tweaking the molecular structure of their drugs, changing the dosages or combining their drugs with other therapies to try and create a novel but similar product that allows the patent life to be extended.

Also worth noting is that Medicure does not refer to generic tirofiban (the drugs name) competition as a risk factor in their AIF.

As for the generic competition from Integrillin, it is real and occurring but Medicure allyed concerns by updating their price competition slide to include the cost of the generic.

pricecomp

Aggrastat remains the cheapest of the bunch.

I have added to my position around the $5 range and even caught a couple purchases in the $4’s.  Unless I am wrong about the direct generic competition being years away I think the stock is too cheap and should trade up to a high single digit number on the current level of Aggrastat sales alone.  If there is a positive event with Apicore, the new generic introduction, or additional sales from new indications for Aggrastat, then all the better.

Air Canada

I continue to believe that Air Canada is misunderstood.  Maybe some day I will be proven right.

The stock trades at a significant discount to all of its peers.  The justification behind the discount amounts to:

  1. Air Canada has a lower operating margin
  2. Air Canada has a comparatively higher debt load
  3. Air Canada’s strategy of capacity additions is bound to end in tears

I get that (1) and (2) validate a somewhat lower multiple than a debt free, high margin peer.  But the current discount is too much.  As for the third justification, I think it fails to recognize what Air Canada is trying to accomplish.

Air Canada is adding capacity, but it is not to serve a slow Canadian economy. Capacity is being added to international flights in what they see as under-utilized Canadian/international hubs in Toronto, Montreal and Vancouver.  The strategy is to pin-point international demand where the location of the hub and cost structure puts them at an advantage against the competition.

Air Canada is also taking advantage of what is actually a lower cost structure on some routes (due to Canadian dollar based expenses and new airplanes with better efficiency) to claw back trans-border traffic that they lost to US carriers during the dark period of their bankruptcy and near-bankruptcy.

Finally Air Canada has added new planes and routes that increase their flexibility to redistribute the fleet during slowdowns like the one that we have seen in Alberta.  It didn’t seem to get a lot of focus in the first quarter follow-up but the Alberta slowdown barely blemished their results.

I think its instructive that with few exceptions when Air Canada comes up on BNN’s Market Call, the pat responses is:

  1. The Airline industry is always terrible
  2. Air Canada has gone through bankruptcy before
  3. It can’t be different this time

What is unfortunate is that there is no quick fix to this perception.  The past couple of years of mostly excellent results are proof that it is going to take time, maybe a full cycle, before portfolio managers become comfortable with the idea that Air Canada has positioned themselves to withstand economic weakness and grow the business in good times. Perhaps when oil prices recover and we see the Canadian economy turn up investors will start to conclude that hey, that was the downturn, and look, Air Canada is still standing.  I’m willing to wait that out as long as the company continues to perform.

Health Insurance Innovations

Health Insurance Innovations turned in a very good first quarter but they haven’t gotten a lot of credit for it.  Revenue was up 88% to $42.5 million. EBITDA grew from a negligible amount in the first quarter of 2015 to $4.2 million in 2016.   Policies in force grew from 195,100 to 258,000 sequentially while submitted applications grew from 153,300 to 192,200.  They saw growth from all their sales channels but in particular Agilehealthinsurance.com, their online sales channel, doubled from 11,000 policies submitted in the fourth quarter to 23,000 policies submitted in the first quarter.  Both revenue and EPS guidance were increased for the year.

I’m not sure why the stock hasn’t responded better.  There is a large short interest, which I don’t really understand, so maybe those players have been doubling down on their bet.  The mid point of EPS guidance is 40c, so the stock trades at 15x this years earnings which does not seem expensive given the growth they are beginning to experience.  I suspect that comments on the conference call are partially responsible for the muted response.  They said their baseline assumption is that growth will level out at Agile until the next open enrollment:

we’re taking a view that says a lot of people bought it during open enrollment that’s why we’re still strong and things are going to level off until the fourth quarter when open enrollment comes in.

Hopefully, we’re wrong and we have dramatic sales in between these open enrollment periods, but frankly given the dynamism of this market, we’re not sure and so we’ve done our best to forecast sales at Agile and the rest of the company over the next six months and that take place in our guidance.

I think this might be conservative.  The story seems to be getting better.  At the current price the growth trajectory that has began to emerge over the last couple of quarters is not priced in. While something has held the stock down since the release of the first quarter results, I doubt that can continue with the release of another strong quarter.

Shorter thoughts on a few other names

Granite Oil

Granite Oil had their credit line reduced from $80 million to $60 million.  While I expected some reduction, this was a bit larger than I had anticipated given that the company has such modest debt levels compared to its peers.  Fortunately the company only has $40 million drawn so the reduction is not really an impediment.

Intermap

Intermap still hasn’t received initial payment to allow it to start its SDI contract in the Congo.  I never expected this to be easy and I acknowledge that the stock is a flyer so I have it sized accordingly.   The bottom line is that the risk reward remains attractive if you treat the position like an option that could expire worthless (or close to it anyways) but also could be a ten bagger.  I note that Mark Gomes, who I quoted above, is involved in Intermap as well and has written a number of good posts on the name.

Rentech

Rentech had a not unexpectedly terrible quarter.  In the fourth quarter the company was pretty clear that the ramp at Atikokan and Wawa wasn’t going smoothly, needed more equipment, that they were still tweaking operation plan, and that they were not even sure Wawa would reach original capacity.  In the first quarter they appeared to get Atikokan on-track which leaves Wawa.  Here is what they said about Wawa on the conference call:

Our production shortcomings appear to be the product of limited experience operating the plant at higher levels of throughput and sustained operations as a result of our past conveyor problems. We are now experiencing the operational and production issues that we should have witnessed last year, but for the conveyor problems.

Even with these recent challenges, we’re still learning how to respond to or prevent these causes of production disruption that are typical of ramp-up of new pellet mills, such as sparks, jams, plugging, dust, moisture content, silica content, truck dump outages, hammer mill clogging, et cetera.

On top of that they experienced weather related weakness at NEWP.  The warm winter in the North East reduced demand for wood pellets.

I have only taken a small position in the stock and I don’t plan to add more until we see positive momentum from the Canadian operations.  But I look at these plants like a mine, which I have quite a bit of experience investing in, and the two things I have learned about starting a new mine is that A. it never goes smoothly and B. the initial start-up problems are typically figured out after some time.  So I think Rentech will get their hands around this, and I want to be ready when they do.

Mitel

I sold out of Mitel, at least for now.  The acquisition/merger with Polycom takes the company further down the path of being a hardware provider for enterprise telecom solutions, which is not really why I found the stock interesting.  The justification around the deal is mostly about cost reductions and synergies, not growth, which again is not inline with my original thesis.  And the combined entity still has to compete against Cisco which is significantly larger and has been taking market share from Polycom.  Until I get a better understanding of where Mitel is going from here, I thought it best to exit my position.

TG Therapeutics

I bought back into TG Therapeutics at $7 last week.  There hasn’t been any negative data to justify the fall in the stock of late.  My original investment thesis still stands, just at a price now that is about 2/3 of what it was at the time.  Really, if anything we are getting closer to the conclusion of their Phase II and Phase II studies.

By the way, if anyone can recommend any good books for understanding biotechnology please send me an email liverless@hotmail.ca.  Thanks!

Portfolio Composition

Click here for the last four weeks of trades.  Note that the 224 share AdjIncr transaction is because when Swift pink sheet equity converted to new equity I lost my shares in the practice account and so I had to restore those manually.

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Week 219: Feeling more like a bear market

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

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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