The Speculative-Group: March 2018 Assessment


Background We just lately launched 4 groups: The principle distinction between the 4 groups are as follows: Group Minimal Coupon/ Yield Particular Options Common Weighted Period (in years; as much as) Forms of Securities Goal Whole Return (each year) Most Draw-Down (as much as) I(ncome) 5% No overlaps (identical issuer) 5 Bonds, child bonds, Most popular shares , CEFs 5% 5% R(IC) 7% 7 BDCs, mREITs, eREITs, MLPs, MFs 7% 7% G(rowth) 10% Previous & (anticipated) future 10% revenues & EPS development N/A Any 10% N/A S(peculative) N/A N/A N/A Any 40% over subsequent 2 years N/A * For the group (as an entire), primarily based on equal sightings, over each quick (12 months) and lengthy/er phrases. Going LIFO with the S-Group Each Trapping Worth – who just lately joined The Wheel of FORTUNE – and I are accountants. One of the crucial artistic accounting observe is methods to calculate the worth of stock. Most companies use the FIFO (First In First Out) or money strategies however some use LIFO (Final In First Out) to measure the worth of their stock. We are going to undertake the LIFO technique right here and would begin the month-to-month protection with the final group that we introduced on: S-Group. There are three motive for this (“Going LIFO”) alternative: The S-Group is the group the place a variety of motion is going down. Greater volatility requires extra consideration. As we get nearer to the top of the (This fall/2017) earnings season it solely make sense to overview the outcomes of the groups’ constitutes. That is extra related in relation to the S & G groups than to the R & I groups. There have been sharp strikes among the many S-Group over the 2 weeks because it was launched. Efficiency Since Final Replace Right here is how the ten constitutes of the S-Group have carried out because the group was launched: AAXN knowledge by YCharts The typical return of the S-Group, assuming equal weightings, throughout a interval of 15 days (February 26th – March 12th) is Eight.19%. That is a formidable efficiency in each absolute and relative phrases. A return of Eight.19% would make most traders very joyful on an annual foundation, not to mention 15 days. Moreover, this return was far and past what any relevant-chosen benchmark would have returned throughout that interval. SPY knowledge by YCharts Throughout that interval, not one of the main indices – SPDR® S&P 500 ETF (NYSEARCA:SPY), PowerShares QQQ ETF (NASDAQ:QQQ), SPDR® Dow Jones Industrial Common ETF (NYSEARCA:DIA) – obtained wherever near the S-Group efficiency. Similar goes for the broader, smaller-cap, indices – iShares Russell 1000 ETF (NYSEARCA:IWB), iShares Russell 2000 ETF (NYSEARCA:IWM), iShares Russell 3000 ETF (NYSEARCA:IWV). The expansion-focused indices – the iShares Russell 2000 Development ETF (NYSEARCA:IWO) and the iShares Russell 1000 Development ETF (NYSEARCA:IWF) – with Three.72% and a pair of.72% respective returns, had been the closest ones. Nonetheless, even right here they’ve returned solely about 30-40% of what the S-Group delivered. Certainly, 15 days is a really quick interval that claims nothing. Nonetheless, it is good and really encouraging to see the S-Group off for a really robust begin! Current Information & Strikes
Axon Enterprise (AAXN) (Sector: Industrials >>> Business: Aerospace & Protection) Robust This fall earnings simply beat the market expectations. EPS of $zero.13 (beats by $zero.15) and income of $94.7M (+15.four% Y/Y) beats by $5.27M. As you possibly can see (from the under chart) these had been the strongest (EPS and income) outcomes the corporate has ever delivered. It is no marvel then that the inventory worth has adopted by way of. AAXN guided for revenues within the $399M-$406M vary; that is 16%-18% income development in 2018. The corporate additionally signifies that the brand new yr is off to a powerful begin, e.g. its second largest order: deploying 11Okay physique cameras (backed by to the Victoria Police in Australia. Quick curiosity stays excessive with ~14.8M shares reported as quick curiosity (as of two/28/2018) versus a float of ~44.8M shares (out of ~53M complete variety of excellent shares); that is a whopping one third of the float. Progenics Prescribed drugs (PGNX) (Sector: Healthcare >>> Business: Biotech & Pharma) The story right here may be very easy: a extremely anticipated approval of the corporate’s flagship drug, Azedra, on April 30th – its PDUFA date. Nonetheless, the current leap additionally had a lot to do with the corporate’s encouraging earnings. The corporate reported a lack of $zero.19/share, beating the market expectations by $zero.04. Income got here in at $Three.89M (-16.Three% Y/Y), beating the market expectations by $zero.69M. Many traders are solely specializing in Azedra whereas forgetting that PGNX already has a working drug – Relistor – that’s marketed and bought by its accomplice, Valeant Prescribed drugs (VRX). The variety of scripts for Relistor was up 19% Q/Q.
VRX posted income of $24.6M out of Relistor, and this has translated to PGNX posting income (royalties) out of VRX-Relistor that had been ~$zero.7M above expectations. Buyers also needs to understand that PGNX is entitled for a number of milestone funds, primarily based on Relistor annual (=calendar yr) gross sales: $100M in gross sales (out of Relistor) for VRX >>> $10M fee to PGNX $150M in gross sales (out of Relistor) for VRX >>> $15M fee to PGNX $200M in gross sales (out of Relistor) for VRX >>> $20M fee to PGNX and so forth. In 2017, complete gross sales of Relistor had been $73.1M With Relistor gross sales rising, PGNX could get the $10M fee as early as 2019. PGNX additionally has one other scientific examine, known as “1404” (most cancers imaging agent), the place outcomes from its section Three trial are anticipated throughout the second half of 2018 (in all probability Q3). Not but something near Relistor and even Azedra however one thing to search for for. Here’s what Mara Goldstein from Cantor Fitzgerald wrote following the earnings name: PDUFA Coming Up. Since AZEDRA scientific program was accomplished underneath a SPA, and with the PDUFA arising shortly (four/30), we expect the main target will shift to expectations across the industrial launch. The vast majority of PGNX’s industrial group has been put in place, and given the small variety of sufferers, we anticipate a modest ramp. Nonetheless, we expect the shares will react favorably to gadgets like reimbursement and affected person identification. All 5 analysts who cowl the corporate have a BUY score for the inventory: Supply: WSJ TiVo (TIVO) (Sector: Communication >>> Business: Media) Though TIVO posted a income beat in This fall the principle driver right here was the corporate’s announcement that it has employed LionTree Advisors to look at “strategic alternatives.”
The corporate indicated that the strategic alternate options (“to realize long-term shareholder value”) may vary from “transformative acquisitions that would accelerate our growth, to combining our business with other leading players, to becoming a private company.” As a result of this strategic overview, the corporate hasn’t offered a steerage for 2018. This all is clearly suggesting doable (possible?) M&A exercise is on the horizon. JPMorgan’s (JPM) Sterling Auty has i) reiterated its stance leveraged buyout may fetch a mid-$20 for the corporate, and ii) up to date his worth goal to $30, which incorporates $7/share in extra-potential worth from resolving Comcast (CMCSA) as a buyer. TIVO has additionally declared $zero.18/share quarterly dividend, in step with earlier for a ahead yield of four.82% (primarily based on a share worth of $14.95) Granite Oil (OTCQX:GXOCF) (Sector: Vitality >>> Business: Oil and Fuel) Supply: Firm’s presentation, March 2018 GXO within the Toronto inventory change: Truth I: The corporate is at the moment paying a dividend of C$zero.023 per 30 days on a C$2.66 inventory worth. That is a 10.38%. Truth II: The corporate’s market cap is simply ~$70M How come? Document yr in 2017 Optimistic steerage for 2018 Free money circulation that permits it to take care of such a excessive dividend yield Extra particulars might be discovered right here. Granite technique is permitting for diminished prices, enhancing capital effectivity and maximizing restoration.
Supply: Firm’s presentation, March 2018 To make a long-story quick… Supply: Firm’s presentation, March 2018 Quantenna Communications (QTNA) (Sector: Know-how >>> Business: ) Supply: Firm’s This fall/2017 earnings name slides Nothing actually thrilling occurred right here over the previous 15 days. Nonetheless, the corporate did announce on: New Wi-Fi options on its QSR10G chipset household that considerably enhance the cellular shopper Wi-Fi consumer expertise with elevated efficiency and longer battery life. A brand new collaboration with Icotera, a number one European developer and producer of FTTH CPE gateways, to ship progressive Wi-Fi gateway options to the European market. As a reminder, let’s take a look at the corporate’s current and future potential:
Supply: Firm’s This fall/2017 earnings name slides Axcelis Applied sciences (ACLS) (Sector: Know-how >>> Business: Semiconductors) Supply: Firm’s This fall/2017 earnings name slides On March ninth, the corporate introduced a strategic settlement with SCREEN Semiconductor Options – a subsidiary of SCREEN Holdings Co. (Japan) – for distribution and help of Axcelis’ full Purion ion implant product line in Japan. The newest quick curiosity knowledge (dated 2/28/2018) exhibits a 255,834 share improve in complete quick curiosity for ACLS, to 2,243,619 shares, a rise of 12.87% because the earlier knowledge reported date (2/15/2018). That is Eight% of the float right here. The “days to cover” greater than doubled – from Three.62 (2/15/2018) to 7.61 (2/28/2018). 2017 was profitable… Supply: Firm’s This fall/2017 earnings name slides …and 2018 is anticipated to be even higher… Supply: Firm’s This fall/2017 earnings name slides
MiMedx Group (MDXG) (Sector: Healthcare >>> Business: Medical Tools & Gadgets) Supply: Firm’s presentation, January 2018 The continuing battle between the lengthy shareholders to the quick sellers – claiming that the accounting (and probably not solely these) practices of the corporate are deceptive/false – will proceed for fairly a while. Class actions and all kinds of authorized procedures involving the corporate are – and might be – going down. Due to this fact, that is undoubtedly a excessive threat play and whenever you say a excessive threat play inside a excessive threat group – it’s possible you’ll perceive that we’re speaking right here a few 50%+ potential transfer, both manner, inside 2018. We would relatively give attention to what we all know, not about what the rumors say. In accordance with a Bloomberg report, nevertheless, the corporate’s enterprise practices are underneath scrutiny from the U.S. Justice Division (“DoJ”). Furthermore, the practices in query are overcharging the federal government (for tissue-repair merchandise) and inappropriately reserving gross sales (for merchandise that allegedly weren’t ordered) The corporate, then again, i) claims that it is unaware of any DoJ investigation, and ii) denies overcharging the federal government. In a current publication, MDXG maintains its long-standing stance “concerted, illegal short selling attack” that “has publicized a continuous stream of misinformation and lies about numerous aspects of the Company’s business” is the reason for the current rumors.
In the meantime, the corporate was awarded with a Regenerative Drugs Superior Remedy (“RMAT”) designation by the FDA for the corporate’s AmnioFix Injectable of the therapy of osteoarthritis of the knee (“OAK”). This designation permits for an accelerated overview of the advertising and marketing utility of the product in addition to for a extra intensive FDA steerage on the product’s growth. That is what we take into consideration: Supply: Firm’s presentation, January 2018 AeroVironment (AVAV) (Sector: Industrials >>> Business: Aerospace & Protection) Market was disenchanted with the earnings report of AVAV for This fall/2017. It wasn’t the quantity for the previous quarter that disenchanted as a lot as ahead outlook. EPS of -$zero.04 that was an alleged miss of $zero.09 versus market expectations. Nonetheless, the $zero.09 is fully attributed to the tax impact/adjustment. Income of $63.94M (+20.Three% Y/Y) that beat market expectations by $1.43M. That half was (greater than) OK nevertheless, gross margin (as % of income) got here at solely 32% versus 36% within the earlier quarter. The corporate defined the lower in margins because of decrease service margin on a UAS program because of unfavorable value changes and an unfavorable gross sales combine. Steerage for 2018 was for: EPS of $zero.45-$zero.65, a lot decrease than market expectations for $zero.73. Income of $280M-$300M, with the midpoint falling wanting market expectations for $298M.
On a constructive notice, the corporate was awarded its largest worldwide order: a $44.5M contract to supply drones for the bottom forces of an unnamed Center East “regional power.” Following the earnings/steerage, the inventory dropped greater than 17%, however since then it has gained most of this again, and if we now have to gamble a bit in right here – traders will stay drawn to the drones. The inventory is now buying and selling above the common worth goal of Wall Road, so it will likely be attention-grabbing to see what comes first: analysts elevating their worth goal or the inventory shifting again to/under the $46.75 (median $47.5) worth that analysts are assigning to it. BioLineRx (BLRX) (Sector: Healthcare >>> Business: Biotech & Pharma). Nothing new to report about this small-cap biotech, so one of the best – and solely – factor that we will do is direct you to the corporate’s This fall/2017 earnings name the place the CEO, Philip Serlin, sounded fairly upbeat. Based mostly on what the corporate says, cash ought to enable it to run easily in 2018 and 2019 with out the necessity to increase cash. With the inventory buying and selling that low it might be silly to boost cash now anyhow. The corporate has four (some could say solely 2) catalysts over the subsequent yr. Based mostly on the out there knowledge, i.e. what the corporate communicated to this point, there’s a good likelihood for at the very least certainly one of these catalysts to maneuver the needle right here. Identical to the CEO – we stay fairly upbeat about BLRX. BL-8040 (stem cell mobilization) BLRX just lately initiated its first Part Three examine, which evaluates this system for autologous bone-marrow transplantation in a number of myeloma sufferers. The GENESIS trial is geared toward evaluating the protection, tolerability and efficacy of the mix therapy of BL-8040 and G-CSF, the present customary of care versus the management arm of placebo and G-CSF.
The examine additionally progress on the corporate’s immuno-oncology applications with each Merck (MRK) (the COMBAT examine) and Genentech (underneath Genentech’s MORPHEUS Novel Most cancers Immunotherapy Growth Program). Some might even see this as one (potential catalyst) however because of the completely different nature/mixture of the research (and since any of these could carry completely different outcomes), we relatively see this as a Three potential catalysts for a similar growth. AGI-134 (second immuno-oncology program) On the current ASCO-SITC convention, the corporate introduced AGI-134 pre-clinical knowledge that confirmed exceptional tumor regression. Though the AGI-134 is a down the street growth – it is good to know that the corporate has one thing else, on prime of the BL-8040. AppFolio (APPF) (Sector: Know-how >>> Business: Software program) The corporate reported its earnings for This fall/2017 on the exact same date (after hours) after we launched (pre-market) the S-Group. Despite income rising 35.Three% Y/Y to of $37.9M (beating by $2.42M) the market wasn’t impressed, doubtless because of the EPS allegedly lacking by $zero.02 (although it looks like there have been two market consensus expectations right here with a $zero.03 distinction, so when you take the decrease one of many two, $zero.04, you find yourself with a beat). The next day noticed the inventory worth dropping as a lot as 15.5% – from $45.25 (closing worth on 2/26) to as little as $38.25 (throughout 2/27). Nonetheless, half of the drop has been recovered since. The corporate count on full yr 2018 income to be within the vary of $179M to $182M, which (on the mid-point of the vary) represents a development of 26% Y/Y. Backside Line Very robust begin for the S-Group, already making in two weeks over 1/5 of the goal complete return for the subsequent two years. To wit from a current SA Roundtable interview that Trapping Worth and I did collectively:
Danger administration lies on the very core of The Wheel of FORTUNE, and we’re very happy with offering our subscribers with data concerning threat mitigation methods on prime of routine buying and selling recommendations. All in all, it is secure to say that in comparison with two years in the past, we’re a lot heavier on MLPs and most well-liked shares, lighter on each BDCs and mREITs (although at the moment rising) and far lighter on each eREITs (although just lately rising right here too) and bonds. Nonetheless, this doesn’t suggest portfolio shouldn’t have any threat and/or no pockets of development/hypothesis in any respect. There’s clearly a (very) excessive threat/reward related to the S-Group. Nonetheless, being a diversified mixture of ten constituents from numerous sectors and industries inside a well-diversified portfolio, we imagine cheap (=not too large) allocation to such a group is warranted. Once we have a look at all 4 groups, we assign a 10% allocation for the S-Group as an entire, or 1% per every particular person place. We really feel fairly snug that even when 2-Three performs disappoint – and that is one thing that we actually think about – the opposite 7-Eight performs which might be profitable will make up for the much less profitable performs… after which some.

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Disclosure: I’m/we’re lengthy PGNX, BLRX, GXOCF, MDXG.
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Editor’s Observe: This text covers a number of shares buying and selling at lower than $1 per share and/or with lower than a $100 million market cap. Please concentrate on the dangers related to these shares.

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