Reminiscences of a Stockblogger

Jul 19

Week 262: Simplify

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 made a grand total of two transactions this month. I think that might be a record low for me.

The dearth of transactions is that it is not by design. It’s the result of a shift I made back in February when the market was crumbling. I decided I would get away from anything that looked like a swing trade.

In the past I’ve taken positions in stocks not because I see strong fundamentals or a particularly good event horizon or an industry development. Instead I’ll take it as a trade because the stock has sunk down to what looks like the lower level of a range and I think I can catch a bounce as it traces back.

Its a strategy that I think, overall, has been profitable. Over the years I’ve done it with success with companies like New Residential, Northstar Realty, Brookdale Senior, various oil stocks, and with the tanker stocks.

But its a strategy that expends a lot of brain power and it drains a lot of emotional capital without the opportunity for a big upside. It also tends to put me into positions that I don’t have a lot of conviction in, and when a market event like what happened in January and February occurs, I end up selling stock at the wrong time.

So I’m not doing it any more.

For example, even though the tankers have traded down to what is really very cheap levels, I’m not playing a bounce. I didn’t buy into any of the REITs that have recovered since earlier this year.

For what its worth, its probably saved a few grey hairs as I watch Teekay Tankers and DHT Holdings flounder with no appreciable momentum even as the market as a whole rises. While some REITs have done well, others continue to flounder at lower levels.

It makes for a more boring and arguably slightly less profitable portfolio, but also for one that is easier to stand by through the market gyrations. As Brexit hit and the market tanked for a couple days it didn’t even occur to me to sell any of my positions even as I lost a few percent. The stocks I own I do so because I like them and I want to see them through to the events that I believe will result in their upside.

Without many trades this month I will talk about a stock I bought the previous month but haven’t discussed yet (BSquare), one event worth mentioning (Empire Industries spin-off) my investigation into cybersecurity stocks, and an update on what has been happening in the world of NFV/SDN.

BSquare

I’ve owned Bsquare once before but under a different auspice. The first time around it was because of a good earnings report that made it look cheap. But I didn’t have a lot of conviction in the business so I sold it soon after for a small gain.

This time I’m buying BSquare for the potential that they may be on the cusp of some growth. This is another one of those stories like Radisys, like DSP Group, where you have a so-so legacy business and company that has traditionally floundered but there is a new product coming along that might be able to change that.

In BSquare’s case that product is DataV. DataV is a software application that collects device data, performs monitoring and analytics on the data, and applies rules for predicting future conditions and failures and automating corrective processes within the device.

The product is an example of an Internet of Things application, where a companies assets are connected to the network, information obtained from the asset is used to quickly identify problems, and solutions and operational changes are pushed back to the asset through automated routines.

DataV operates both on the asset and in the cloud at the data center level. The figure below illustrates the functionality at each. The green boxes represents a feature set provided by DataV. At the asset level monitoring and automation of simple rules are performed for time critical conditions. At the data center level further monitoring and more complicated and less time sensitive automation rules are performed, as more complicated analytics like predictive rules and optimization routines are performed.

datav

Unlike some of the IoT solutions I researched, I feel like DataV is going down more of a solution specific path. Rather than providing a platform to be implemented across an company’s asset base like some of the bigger IoT names, DataV is being targeted to customers to deliver specific solutions where there is an existing issue that it can solve. It seems like the right strategy, especially since their target market for DataV is the smaller end of the Fortune 500, who are less likely to invest large amounts of capital up front for a platform solution.

BSquare announced their first DataV contract with a major industrial company back in June. The company described the use cases to be addressed as follows:

Predictive failure. The use of data analytics and real-time device information to accurately predict problems that could impair asset uptime, as well as prescribing remediation steps.

Data-driven diagnostics. Further use of data analytics and historical repair information in order to speed diagnostic and repair time, getting vital assets back in operation more quickly while reducing service and warranty costs.

I also found the following quote from the press release useful for understanding the product:

“This project is emblematic of what is truly possible with IoT: real-time data analytics applied to very large data sets in order to predict future conditions, prescribe corrective steps, and accelerate repair times. Collectively, these DataV capabilities can dramatically improve uptime while reducing cost. We look forward to a long-term relationship with this customer, working closely with them as they leverage IoT to achieve business objectives throughout their organization.

The contract is for $4 million over 3 years.

My hope here is that this is the first win of many. While the company has only one win, they did make the following comment in one of their job postings, which gives me some optimism that there will be further wins:

Bsquare is investing significantly in marketing demand generation tied to its industry leading DataV IoT platform. Market response has overwhelmed our current sales capacity, and we are looking for proven inside sales dynamos to join our team.

I would say my conviction that this works out is medium at this point, so like many of my positions I will start small and build as positive data develops. Given the size of BSquare, a $66 million maket capitalization with $27 million of cash on the balance sheet, there is plenty of room for upward appreciation if the product takes off.

I have also looked closely at the legacy business and while I don’t want to spend too much time on it here, I will say that it gives me pause. The company is almost wholly dependent on Microsoft as a reseller and the contract terms with Microsoft have recently tightened. It doesn’t feel like a very comfortable position to be in. Please contact me if you want more of my thoughts on the legacy business or if you have any insights into it yourself.

Empire Industries and their Hydrovac spin-off

In February Empire Industries announced that they were spinning off their Hydrovac business into a separate company. The transaction makes Empire more of a pure play on their amusement park ride business and creates a new hydrovac focused entity.

Both sides of the spin-out look pretty interesting.

Dynamic Attractions, which is the existing Empire business, is still very cheap, trading at around 3x EV/EBITDA with a market capitalization of about $25 million. There is a healthy backlog of $107 million though that is down from year end of $130 million.

There is some talk that the next step will be the divestiture of the steel fab business, which would be another step towards making Empire a pure media attraction product company. The company still has the telescope business and the 30m telescope contract, though recent setbacks make it unclear whether a new site will have to be found for the project before it can proceed.

Equally interesting is the hydrovac spin-off called Tornado. As part of the spin Empire partnered with a Chinese company, Excellence Raise Overseas Limited, who injected a little under $10 million into Tornado. $6.9 million of that is equity, $2.5 million is debt (it was supposed to be $7.5 million but the injection was done in USD and Reminbi and the Canadian dollar has gone up since the original agreement). The equity portion gives the Chinese firm 45.5% of the new hydrovac entity. If you do the math on that the Chinese entity paid about 25c per share. The stock is trading below 15 cents.

Tornado is going to use the cash to set up an operating subsidiary in China and offer Hydrovac services there. In Canada they just sell the trucks. The business in China will be more akin to Badger Daylighting; contracting out the usage of the trucks and personnel.

Here is what the Tornado management said about their new business endeavor in their first ever MD&A:

What I find interesting about Tornado is that at the current price the market capitalization is $9.5 million you are only paying a little more than what the Chinese partner invested in the company. Yet you are getting both the existing hydrovac manufacturing business in Canada, and the new Chinese expansion. While the truck manufacturing business has been poor of late, basically delivering flat EBITDA for the last year, before the collapse in oil prices this business generated $2.5-$3 million of EBITDA.

So there is plenty of upside from the existing business that is arguably not priced in. In addition you have a stake in what happens in the China segment, which is admittedly uncertain.

In addition to what I received with the spin-off, I bought a little bit of the stock because it seems cheap. I would like to buy more but its hard to get a real sense of how substantial the opportunity in China is.

I have no idea if this is a huge market that they will win big with, or whether this is going to be an uphill battle. It seems somewhat positive that the Chinese company wants to take a big slice, presumably they are doing so because they see the market opp, and the Empire management has been pretty astute, but who knows for sure.

So we’ll see. Management is making some interesting moves, they may have some more up their sleeve.

I’m not smart enough to invest in security companies

I spent quite a bit of time over the last month trying to familiarize myself with the cyber security universe. I went through transcripts, listened to conference calls, read presentations and 10-Ks. I looked at Palo Alto, FireEye, Proofpoint, Rapid7, MobileIron and Qualys in some detail and more briefly at Tanium, Imperva and Splunk. I come out of the whole thing still feeling like I only have a foggy understanding of the space.

Of all the firms I think I understand the biggest, Palo Alto and FireEye, the best. Palo Alto is a firewall company and FireEye is an intruder detection and mitigation company. I think on the most simplistic level, Palo Alto is trying to stop an intruder whereas FireEye is trying to detect and stop one once one gets in.

Both companies and for that matter most cyber security companies, provide an appliance (which is essentially a server blade that goes into the stack) supplemented by one or more subscriptions (along with maintenance and support which may or may not be bundled into the subscription price, depending on the company). The appliances sit on premise and perform the basic protection services. Some of the subscriptions are attached to the appliance, and some are not.

For example Palo Alto, to the best of my understanding, offers an appliance and 8 subscriptions. These are shown in the diagram below. The red boxes are subscriptions not attached to the appliance while the blue one’s are stand alone

Just to give some color on what these do, Wildfire updates the firewall appliance with new emerging threats, Aperture provides the ability to monitor SAAS applications, Traps, is installed at the endpoint that prevents untrusted apps from operating. GlobalProtect extends firewall capabilities to mobile and offsite devices, Autofocus allows you to access a database of threat tags that help you identify the source and nature of a threat you’ve discovered, and Threat Prevention and URL Filtering provide some of the basic data required for performing the firewall functions.

So that’s Palo Alto. If you go through the universe of companies you will find something similar in terms of an appliance with subscription services and/or stand-alone subscription services.

Where things begin to get fuzzy for me is once we get into the smaller players. So Proofpoint software is primarily geared towards email protection. Rapid7 and Qualys provide data hunting and analytics that try to aggregate and streamline the vast amount of data coming down to what is relevant. Mobileiron’s platform manages security for mobile devices. Imperva provides security to data centers and to a lessor degree to cloud applications and websites.

What I can’t figure out is how it all plays out between these niche companies and the larger one’s like Palo Alto and FireEye. Is there room in IT budgets for all of these products? Do the niche players get bought out by a consolidator? Or does revenue growth start to slow for some of them?

Another question that isn’t clear to me is how the move to the cloud impacts these businesses. Some of these companies still generate a significant amount of revenue by selling the appliances. As those appliances become virtualized and sales are software only, I wonder how margins and revenues will be affected?

In this regard, one of the most interesting things I listened to was this discussion at the Bank of America Global Technology Conference with former FireEye CEO, now Chairman David Dewalt. Dewalt makes a number of very strong comments; that security is going to move to the cloud, that this will be disruptive, that this will change the landscape of what products and services are required, and that it will move dollars from a product or appliance bucket to a subscription bucket.

The final piece is whether spending has been artificially heightened by a few outsized threats. There were some significant breaches in 2014 and even some of the company executives I listened to described the following period as being one where companies were throwing money at the problem without discretion. That appears to be changing now. We just saw Imperva issue pretty dismal guidance. Qualys recently characterized the environment as “much more rational” and that we were seeing more caution on the part of customers, that they were looking to consolidate vendors, etc.

Finally, I don’t really understand the growth expectations behind all the names I looked at. For example, the Stifel universe has 22 cybersecurity companies and the average revenue growth of those companies is 19% for 2016 and 2017. Yet the cybersecurity market as a whole is expected to grow at 6.9%. So who are all these low growth or market share losing companies?

It all sounds like one big bucket of uncertainty. Which is hard to stomach when you are paying the multiples you are for these companies. So the research has been interesting, but I’m not sure I will be adding any of these names soon.

Whats Happening in the NFV/SDN World

There are a whole lot of datapoints hitting the presses in the world of NFV/SDN. Here’s a brief run down of what I have come across.

In the last week AT&T announced that they will offer the code to their SDN platform into open source, that they will be introducing virtual security functions for their virtualized network, and that they will be launching network functions on demand starting with 4 virtualized functions. Of this news, the second may have relevance to Radcom, where there have been hints that their contract with AT&T could be expanded to some sort of security application. The third piece (more details here) refers to a 3rd party server vendor for the white box back end, which certainly could be something Radisys provides.

Along the lines of the third news item, Radisys and AT&T held a joint presentation demonstrating their Mobile-CORD initiative and how you can monetize SDN and NFV. Some more circumstantial evidence of the relationship developing between Radisys and AT&T.

This article (here) compares the move to NFV as being the equivalent to the datacenter move to cloud over past decade. The key difference is that enterprises moved apps like Oracle, Exchange and SAP, CSPs are moving network functions that deliver wireless and wireline calls, text messages, and streaming media, along with services such as VPNs and firewalls. This article specifically highlights service assurance as one of the two most important attributes of software defined infrastructure:

The second important characteristic of a software-defined infrastructure is service assurance. Customers expect seamless voice, video, and media quality and data protection. A truly carrier-grade infrastructure will deliver on these expectations by quickly analyzing the root causes of component failures, remediating those failures before they impact subscriber services, and ultimately, predicting and avoiding outages and performance issues before they occur. All of this can only be accomplished through automated software.

Another article I found interesting was this one, which exposes 10 myths about NFV. Two important points made are that encumbents will have to rebuild from the ground up to make their app virtualized:

The best way to build a carrier-grade virtual network function (VNF) is to take a ground-up approach, starting with a purposefully designed modular architecture that addresses performance, scalability and other important requirements, Luxoft recommends.

And that Verizon is looking to share risk with vendors, also move might be to subscription type of relationship with vendors:

Verizon, for example, proposes a new business model in which its vendors share the risk in the introduction of new services. If a service succeeds everyone will make money. If it fails everyone shares the risk…Furthermore, virtualization lends itself to usage billing models, not only for consumer services but for business to business services.

I also found this article that talks about the need for both SDN and NFV being brought on by the amount of data that will be travelling the network as the Internet of Things grows:

As the Internet of Things (IoT) becomes more of a reality, and as these companies look to deploy 5G and reap all its promised benefits, most realize that they need to revamp their networks in order to deliver value and to compete (with you-know-who). These trends will result in significantly more data of widely different types traveling across their networks, and to retain service agility on a more-or-less static infrastructure, these operators need NFV and SDN, along with “cloudification” and advances in distributed computing.

This article gives the rather impressive 116% CAGR for NFV and SDN from now until 2021:

Spend on NFV and SDN ramped up in 2015, with analyst firm TBR forecasting the market reach nearly $158 billion by 2021, representing a 116% CAGR.

And finally Mark Gomes gave some interesting scuttle about Radcom in a conversation with an industry contact that he posted over the weekend.

Reluctantly exiting Photon Control

There is nothing more fun than getting this kind of press release about one of your companies while being on vacation with limited internet access.

I have absolutely no insights into how this plays out. Maybe the loan gets repaid and the company puts itself up for sale at a premium. Maybe the company rights itself and gets on with the business of delivering sensors. No idea.

What I do know is that when I don’t know what is going to happen, I am more often than not better off selling first and asking questions later. So I sold my shares.

I note two things since that time. First, the shares have held up reasonably well, so there is clearly someone willing to buy into the panic. Second, there hasn’t been any news that the money has been paid back.

I continue to watch the story because the company valuation is compelling. The market capitalization is $73 million and the company holds $27 million in cash. After subtracting cash, the stock trades at only about 3x free cash flow.

This is too cheap if the business is viable and there isn’t any overhang from executive malfeasance.

The sensor business hasn’t grown like I had hoped, but that still may come and even in its current state it remains nicely profitable. I’d love to get back into the stock, but I need to remove the uncertainty before I do.

Portfolio Composition

Click here for the last four weeks of trades. Note that the two transaction labeled Adj are me manually readding the Empire Industries and Tornado shares. When Empire did the stock consolidation and spin-off my shares were lost in the practice account.

Also note that I bought RMG Networks stock, which I talked about already owning last month. This was another unfortunate example of me forgetting to take a position in the practice account, and as a result having to buy the stock later at a higher price. Oh well, if I am right about RMG Networks the upside will make 20 cents more I paid irrelevant.

Jun 22

7 Comments

Week 258: In Search of the Next Big Thing

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’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:

This 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:

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
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.
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.

May 23

10 Comments

Week 254: Just a Bunch of Company Updates

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

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.

What 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.

The 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.

Interestingly, 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.

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:

Air Canada has a lower operating margin
Air Canada has a comparatively higher debt load
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:

The Airline industry is always terrible
Air Canada has gone through bankruptcy before
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.

Apr 25

22 Comments

Week 250: Getting back to even

Portfolio Performance

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

Thoughts and Review

I’ve been trying to stick to core ideas over the last four weeks, not taking fliers and taking a very close look before I purchase anything. If you remember, last month I reflected back on the last year, where I really didn’t do all that well, and concluded that my so-so performance could be attributed to too many mistakes with peripheral ideas that I either held too long or should not have gotten into in the first place.

At the same time I’ve been willing to tweak my exposure to stocks up a notch because my two main worries have abated. As I wrote in my February post what worried me was:

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

Both of these events seem off the table, with the first maybe completely eliminated and the second at least postponed.

Still the market is back to that 2,100 level and it is difficult for me to get excited about another move higher. Where I can I have added some index shorts and also some individual tech name shorts to balance in case of a pullback.

Still finding new ideas

Even as I try to be cautious, I still have found a lot of new stocks this month. I added positions in Swift Energy, Clayton Williams Energy, Granite Oil, Medicure, Rentech and Oclaro. It was a busy month and there are lots of stocks written up below. I feel pretty good about all the ideas, with the usual caveat that if oil starts to go south my oil stock positions will be reduced quickly (not Swift though, which is a special situation as I will describe).

Canadian Dollar Doldrums

I’ve had some decent gains in the last month and am back within a a few percent of my highs. But quite honestly my portfolio would be back to its high already if this damn Canadian dollar wasn’t killing me.

About half of my portfolio is in US stocks but as a Canadian I report my gains and losses in Canadian dollars. Lately, every day the market is up the Canadian dollar is up (usually a lot) and because of that a chunk of my gains disappear. To give it perspective: since the beginning of the year the Canadian dollar has gone from about 1.38 US to 1.27. Every $100,000 I had in US dollars was worth $138,000 at the beginning of the year; today its worth $127,000. Its been a headwind.

I’ve been saved by picking some US stocks that have done very well. Radisys continues to be huge. Apigee is a big winner off its lows. Clayton Williams has doubled in a few weeks. Both Iconix Brands and Patriot National have had big runs off their lows. Things would really be rolling if I didn’t have to deduct 10% from the aggregate sums.

Oh well. The Canadian dollar going up means that oil is going up, and living here in Calgary I can tell you that is a good thing. Things are unquestionably slow in the city. If you are in the oil and gas sector, its depressing.

Cowtown Slowdown

As an aside with respect to my home town; I honestly don’t see the Armageddon situation that some have described. I bike past downtown condos every day and while the sun is up so I can’t count the lights, I can count bbq’s and bicycles on the balcony in these supposedly empty apartments. I live in one of the downtown “high-end” neighborhoods where its been said that “every second house is for sale” and yet I see only a smattering of for sale signs and a number of them sold. The restaurants I walk by still seem busy. To be sure, things are slow and if you work downtown in the patch they are miserable, but overall it seems not very different than a year ago. Is this what depression looks like? Or do I just not have the clear perspective of an outsider, what I see being distorted by a home town bias?

Oil move

I’ve given up trying to predict whether this is the real move in oil and if not when that move will come. So just like all the other head fakes, I’ve added positions on the move up with the expectation I can be nimble enough to squeeze out some profits even if this turns out to be another short term blip.

I will repeat what I wrote in September about oil, which could be paraphrased to say “I don’t think anybody really knows”:

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.

With that let’s talk about some stocks because I have a lot to say, starting with two of the three oil stocks I bought (I’ll talk about Clayton Williams at a later date).

Swift Energy

I think this would could be a legitimate 20 bagger if it all pans out. If only I had the confidence to make a Cornwall Capital style bet on it. I tweeted about this last week because I wasn’t sure if I’d be able to mention it in a post before the effective date. Unfortunately that looks to be the case as the stock was halted all day Friday.

Swift is in bankruptcy. At the end of last year they prepackaged a plan with bondholders. That plan has been approved by a judge and the company should be coming out of BK shortly. In the plan existing equity actually does quite well, retaining 4% of the new company shares plus 30% of equity via warrants. The warrants are well out of the money compared to the current pink sheet price. But they are also very long term, with half of them expiring in 2019 and the other half in 2020.

The bankruptcy plan converts ~$900 million of bonds into equity. The company that emerges from bankruptcy will have $325 million of bank debt and, net of cash, somewhere around $250 million of net debt. So the balance sheet is very de-levered compared to the company pre-bankruptcy and also compared to its peers.

The pink sheet implies a market capitalization of around $240 million and an enterprise value of just under $500 million. That means that the market is giving Swift an EV/flowing boe valuation of $16,000. Checking that against the RBC universe, peers trade at between $30K and $100K. On an EV/cf basis, which I again compare off of the RBC price deck for 2016 ($40 oil and $2.50 gas), Swift gets a 5.5x multiple versus 10-20x average for the RBC coverage universe.

As I said the warrants are way out of the money but by my calculations they provide an extremely healthy upside scenario. You get 7.5 warrants per share. Half of those warrants are in the money at ~72 cents, with the other half at ~78 cents. If you get a stock price of 90 cents by 2019 you are looking at nearly a $2 return on your ~20 cents purchase. $1 gets you close to $3 return. See the model below:

Of course a lot has to go right for all this to happen but its a long runway and even at 90 cents you are looking at an EV/flowing boe of around $43K and EV/cf of 15x assuming flat production, $40 oil and $2.50 gas.

The dream scenario is that natural gas prices go up some time between now and 2019. If we hit $4 gas again Swift is going to make a lot of money, and a $2 billion enterprise value is not impossible (would still only be $62,000 per flowing boe on current production). That would give you a 26x return on a 20 cent stock purchase.

On the downside, obviously management is not ideal. Went into downturn with no hedges and way too much debt. Operationally it actually seems like they’ve done pretty well though. And the acreage they own, particularly Fasken, looks like some of the best of the Eagleford.

Granite Oil

This is an oil stock I’ve held in the past and that I bought again after it appeared that oil was going to make a legitimate run. I have added to it in the last week as oil has stayed very firm in the face of some bad news (Doha, Kuwait).

But I’m a bit worried. Granite just doesn’t seem to be performing like it should. Below is a performance comparison I stole from this Investorvillage post:

The problem with investing in any of these Canadian juniors and intermediates is that production data comes out semi-publically through a subscription you pay for via IHS. I of course, do not have access to this data. So there is a chance that some are seeing declines in January and February and getting a head start selling on what will be a weak first quarter.

Granite also hasn’t put out a new presentation since February, which you can construe a few different ways, both positively and negatively.

Granite may also be in the penalty box because the same management team sold out their shareholders when they took an offer for Boulder Energy (of which Granite had split last year) at around $2.50 per share, or about one quarter of what Boulder traded at last year. I imagine there are pre-split shareholders of both names that decided to jettison Granite in disgust after the Boulder news.

Granite currently trades at a $200 million market capitalization and has $40 million debt. In the third quarter they produced 3,476 boe/d. Their valuation is roughly inline with peers, though Granite’s low debt position should allow for some premium in my opinion.

They have proven themselves to be solid operators; in 2015 they “decreased capital costs by 29 percent through the year to $2.0 million per well” and operating costs from $7.50 per boe to $6.00 per boe (source).

What I have always found exciting about Granite is that they have a low-decline and relatively low risk development opportunity applying a gas injection enhanced oil recovery technique on known reserves. But they also have a very large surrounding land position, which allows for a significant expansion of the program if oil prices recover and make them attractive to a larger acquirer. Below is a map from their presentation to give you an idea of their current drilling focus and more importantly the expansive land package that surrounds it:

So I like Granite as a reasonably safe way to play a price recovery. I am optimistic that the poor share price activity is an opportunity and not an omen. The company remains reasonably priced with low debt and is one of the very few oil companies in Canada that can squeak out profitability with oil prices above $40.

Medicure

I got the idea for Medicure from a radio program we have in Canada called Moneytalks. It used to be that Moneytalks was full of gold and silver interviews and end of the world enthusiasts so for a long time I did not make time to listen. But lately Michael Campbell has been interviewing more real managers who have been giving out the odd gem of an idea with Medicure being one that I was enticed to buy.

Medicure was recommended by a PM at Maxam Capital. I found this excerpt on the company in one of Maxam’s recent letters to clients:

Located in Winnipeg Medicure is a small pharmaceutical company with a drug called Aggrastat that prevents thrombosis and is used intervenously in hospitals. Sales of Aggrastat have been growing rapidly since FDA approval first of recommended dosage in 2013 and then an expanded dosage regime in April of 2015.

On top of their ownership of Aggrastat, Medicure also has an option to purchase a growing generic manufacturer in India called Apicore. This is where things get a bit fuzzy. As part of a financing they orchestrated for Apicore in the summer of 2014 Medicure received a 6% interest in Apicore stock and an option to acquire the remaining shares at any time before July 2017. But in a strange twist, the purchase price of the remaining shares of Apicore is undisclosed. I looked all over trying to find an indication of what the option price is, but to no avail. So trying to value the option is a bit of a guessing game.

Medicure gives a small hint in their presentation that it is probably worth more today than it was in the summer of 2014. They provide the following information with respect to Apicore’s sales each of the last 4 years:

Clearly there has been significant revenue growth at Apicore since Medicure was granted the option to purchase the company.

The balance sheet accounting of the Apicore interest doesn’t help much because the only changes Medicure has made to the value of their position is due to currency fluctuations.

Medicure trades at a market capitalization of a little under $90 million. They generated operating cash flow of $7 million in 2015 and do not have significant capital expenditures. Aggrastat is growing and so one should expect increasing cash flow going forward. And then you have Apicore on top of that, which must be worth something, though its not clear what. So adding it all up, it seems that the current price of the stock does not reflect the cash flow generation capacity of Aggrastate let alone the value of the purchase option for Apicore.

Rentech

I got the idea for Rentech from @alex_estebaranz on Twitter. Up until this year Rentech has operated two businesses: the first being wood processing (wood chips and pellets) with operations in Canada and the United States, and the second being fertilizer, with two plants producing nitrogen based fertilizer.

In 2015 the company decided to get out of the fertilizer business in order to reduce debt. In August Rentech sold their East Dubuque fertilizer plant to CVR. They followed this up with the sale of their Pasadena facility in March of this year.

The sale of East Dubuque to CVR was the more significant of the two deals. Rentech received 1.04 units of CVR Partner stock in addition to $2.57 cash. The proceeds have allowed Rentech to pay off about $150 million of debt. Even after the payoff of Rentech retains 7.2 million units of CVR (valued at about $60 million). They have $95 million of cash.

Rentech has 23 million shares outstanding so at $3.30, it holds an $82 million market capitalization. The remaining debt they have is about $136mm. Subtracting what’s left of the CVR units and cash on hand and the enterprise value is low, only about $60 million.

What do you get for $60 million? A wood chip business called Fulghum Fibers, a US wood pellet business and a Canadian wood pellet business. Below was 2015 EBITDA by segment in addition to an EBITDA forecast, which I will talk about shortly.

As you can see the Canadian business is a bit of a mess. They are ramping up new two new facilities and having trouble doing so. It’s costing more money than anticipated, they’ve had to replace equipment and there is some question whether one of the facility can be ramped up to the original capacity expectation.

Nevertheless, even with reduced expectations Rentech expects that these facilities can generate between $13 to $16 million of EBITDA. They sell their pellets to Quebec and Ontario Power for power generation, so they have steady customers for their product.

Rentech has also said they are in the process of taking out $10 million to $12 million out of SG&A.

Basically with the sale of the fertilizer businesses it’s a story about turning around the Canadian business and cutting some costs. If the cost cuts materialize and they can generate the expected EBITDA in Canada, EBITDA can probably touch a number north of $30 million. That would make a $60 million valuation far too low and something at least double that would be more reasonable.

Oclaro

I got the idea for Oclaro from a friend who is always coming up with off the radar ideas. Oclaro makes optical transceivers. The optical transceiver business is not a great business; competition is high and there is always a higher speed device on the horizon to upset any market share gains that you might have scraped together.

You can witness this by taking a look at Oclaro’s gross margins, which tend to hover around the 25% range historically. But Oclaro is on the right side of the cycle right now. The move in the high end of the optical market is towards 100G transceivers, and Oclaro has a leg up in this segment.

In particular there is a large build of long-haul optical in China that Oclaro has been winning business from. They have a contract with China Mobile for 21,000 plus line side 100G long-haul ports. The China Mobile contract is going to be delivered in Q1/Q2. There are also contracts with China Unicom and with China Telecom for 8,000-10,000 ports each so similar size to China Mobile, and these are scheduled for early second half of the year. On top of this there is regional demand from metro China customers that is ramping.

The product wins are leading to a ramp of their 100G production lines:

We will ramp both manufacturing lines for the ACO over this calendar year and we expect to go from shipping hundreds per quarter to thousands per quarter by the end of this year. We continue to believe that the majority of the early demand will be focused on data center interconnect

On their last conference call (second quarter) management made the following interesting comment that demand is exceeding their capacity to build the transceivers:

Our growth in Q3 will not be gated by demand. We’re running very tight on capacity for most of our 100G products, as well as our tunable 10G offerings. As a result, we’re adding significant capacity in all these areas. Our ability to grow will be governed by how quickly our capacity comes online, as well as the capability of some of our piece-part vendors to respond to our increased demand.

In the spreadsheet below I’ve tried to model out what I see happening to Oclaro over the next couple of years and their strong 100G position takes hold. Their fiscal 2016 is half over, with revenues of about $180 million, so I am forecasting some growth over the next couple of quarters there.

In 2017 I am making what is probably a pretty optimistic forecast, with 20% growth in revenue and gross margins increasing to 35%. I’m doing this to get an idea of what Oclaro might be able to generate if things go well. I suspect that the 40 cents of EPS that I estimate would lead to a share price in the $8 range, maybe higher if growth is expected to continue to be strong.

Health Insurance Innovations

I sold some of my Health Insurance Innovations position. Not a lot, but enough to reduce my risk if something goes wrong. I got this across my google alerts and while I don’t know what to make of it, it doesn’t sound positive.

Arkansas News Bureau

LITTLE ROCK — State Insurance Commissioner Allen Kerr said Monday he has issued a cease-and-desist order against a Florida-based company over allegations it has used deceptive practices to try to sell short-term health insurance plans in Arkansas.

Kerr also released a list of tips for avoiding falling prey to dishonest telemarketers trying to sell health insurance plans.

The cease-and-desist order directs Health Plan Intermediaries Holdings, doing business as Health Insurance Innovations, to stop immediately the sale, solicitation or advertising of any insurance plans using unlicensed agents and to stop intentionally misrepresenting the terms of contracts or applications.

Kerr said in a news release that in a phone call with Insurance Department investigators, a Health Insurance Innovations employee offered insurance plans and gave price quotes despite admitting he was not a licensed insurance agent. Also, several company representatives falsely told investigators that two short-term plans, HealtheFlex and Principal Advantage Plan, were in compliance with the federal Affordable Care Act, according to Kerr.

I don’t really know what to make of this news. It’s probably nothing. Still, I felt a little better with a little less exposure to the name.

Radcom

A couple of data points occurred with Radcom in the past month.

First of all Netscout did a call on the NFV market and their service assurance offering. The call was broken into two segments, with the first segment being the more interesting of the two.

In the first segment is an industry expert from Analysys Mason gave a pretty good overview of the NFV opportunity, its risks and why service providers are inevitably going to move towards an NFV solution. His projections for assurance seem a little light based on what I see so far from Radcom, but I guess we will see how that plays out shortly. The call is worth listening to in full.

Second, I listened to the Amdocs fourth quarter conference call. Amdocs gave lots of commentary around what they are doing with NFV and even provided some reference to how RDCM fits in. Here are the comments I note (I highlighted a couple comments in particular):

When speaking about who will be the winners in this new market:

we think that actually the early adopters would come and the disruptor will come from the small companies. There is a lot of startups in this field, and we believe that some of it will go to the tradition, Cisco or Ericsson and the like but a lot of it will go to smaller companies.

Speaking of carrier advantages of NFV and their role as consolidator:

You can imagine that if you have a network that is all software devices, if you want to accelerate capacity or to change features instead of sending a technician that go to the box and do something, you just tweak it on a control plane in the data center. It’s like managing a huge data center. So the bottom line is that the trend is absolutely there. The nets are trying to fight it as much as they can, we are the disruptor, there are very few others, definitely not in our scale. We believe we could be the integrator of small companies.

And in terms of which carriers are getting a head start on their deployment:

In terms of the geographic spread that you asked, AT&T is probably by far the most advanced company with its theory and its power line under the Domain 2.0. You see some activities in Singapore Telecom, in Bell Canada, in Vodafone Group.

…So in the next 12 months to 18 months, you will see the big guys making decisions, that is to say Bell Canada in Canada, AT&T and Verizon in the USA, Singapore Telecom in Asia, Telefônica probably, Vodafone, these are the guys that will make decision.

Finally, what Amdocs will and will not do:

We will not try to build a better virtualized probe than the people that I expect on this or virtualized– if you see packet core (50:39) or something like this, we would not. So we are mainly after the high-end NFV component and maybe some services and integration on the SDN.

Radcom hasn’t performed terribly well as the market has recovered. The stock has been essentially flat. But this isn’t unexpected. It’s still a $100 million dollar company that reported revenue of a little over $2 million last quarter. I don’t expect a significant move in the stock until it either reports some big numbers, announces another contract, or gets bought out. The problem is that the last two items are game-changing events, and you can’t predict if one of them is going to happen tomorrow or next year. So I wait patiently.

Portfolio Composition

Click here for the last four weeks of trades.

Reminiscences of a Stockblogger

Moneyball without the ball

Week 262: Simplify

Portfolio Performance

Top 10 Holdings

Thoughts and Review

BSquare

Empire Industries and their Hydrovac spin-off

I’m not smart enough to invest in security companies

Whats Happening in the NFV/SDN World

Reluctantly exiting Photon Control

Portfolio Composition

Week 258: In Search of the Next Big Thing

Portfolio Performance

Top 10 Holdings

Thoughts and Review

RMG Networks

Wading Cautiously back into a Biotech – TG Therapeutics

Radisys – Comments on the B Riley Conference

Intermap Gambling

Extendicare’s Slide

What I learned about listening to Oil Bears

What I sold

Portfolio Composition

Week 254: Just a Bunch of Company Updates

Portfolio Performance

Top 10 Holdings

Thoughts and Review

Radcom

Radisys

Medicure

Air Canada

Health Insurance Innovations

Shorter thoughts on a few other names

Granite Oil

Intermap

Rentech

Mitel

TG Therapeutics

Portfolio Composition

Week 250: Getting back to even

Portfolio Performance

Thoughts and Review

Still finding new ideas

Canadian Dollar Doldrums

Cowtown Slowdown

Oil move

Swift Energy

Granite Oil

Medicure

Rentech

Oclaro

Health Insurance Innovations

Radcom

Portfolio Composition

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