Frontier Tech Investor update
12th August 2016 |
It’s only been seven weeks since the UK voted to the leave the EU, and the news flow has been coming hot and heavy. If they say a week is a long time in politics, it could be described as an eternity in the markets. The eurozone and Japan have negative interest rates and most of their respective sovereign bonds are on negative yields. The UK has announced a fresh bout of quantitative easing and this time will be buying corporate bonds. Against that background the spreads on sovereign bonds all over the world have been compressing, which highlights just how desperate for yield investors are. With so much going on there has been a great deal of movement on stockmarkets both up and down.
Today is an opportune time to update you on some of the holdings I recommended in Frontier Tech Investor – not least because 11 August was the first time since 1999 that the Dow Jones Industrials Average, S&P 500 and Nasdaq all closed on new highs on the same day. It’s a momentous event and worth considering the implications of.
We are seven years into a bull market (Wall Street bottomed in March 2009), and this has been fuelled both by the extraordinary largesse of central bank monetary policy and the pace of technological innovation which is transforming lives all over the world. Frontier Tech Investor is aimed squarely at highlighting the investment implications of the latter point, while at all times remaining cognizant of the former.
With a portfolio that is growing by the month, it is perhaps time to reflect on how the constituents are doing and what opportunities they might now present.
Orocobre
Orocobre, which is our play on the insatiable demand for lithium batteries, remains our best performer. If anything, it has exceeded my short-term expectations with the speed it rallied from early April. Nothing has changed in my medium to long-term view on the company. It is still one of the most attractive plays on the evolution of a supply-inelasticity meets rising-demand theme within the lithium market. Very simply there is just not enough global production capacity to keep pace with the growth in demand, not least from electric cars. I believe Orocobre is well positioned to continue to benefit from this trend, which has the potential to remain active for the next three years since the lead time to develop new lithium recovery operations is at least that long.
The share has been confined to a range since early June, which has seen the price come back to test the $4 area. This has at least partially unwound its overextension relative to the trend mean, which is represented by the exponential 200-day moving average. This is at least a near-term area of support, and the price might trade around this level for a while longer as the trend mean catches up with the price. However, a sustained move below the trend mean would be required to begin to question the medium-term bullish environment.
For someone with a long position purchased in April this raises a dilemma. Accepting the possibility the share will likely underperform the wider market in the short term, while waiting for a return to medium-term outperformance, means potentially foregoing some of the accumulated paper profits that will have built up with such a strong advance. What I recommend is to have a stop at $3.80, which is to assume the recent lows hold and the consolidation remains relatively shallow compared to the advance since April. If it falls through that level we might be set up with another buying opportunity later, but preserving profits once accumulated is important if we are to build wealth.
IBM, SAIC, IRSG and Garmin
IBM, Science Applications International (SAIC), Intuitive Surgical and Garmin are all performing as expected. They represent our first plays in quantum computing and deep learning, offensive cybersecurity, robotic surgeons and wearable technology; all of which have mind-blowing potential to change the way we live our lives. I’ll deliver updates on these shares as needed in future, but for now I want to talk to you about some of the other shares I’ve recommended.
SolarWindow
I sent you a message in July to update you on SolarWindow. It is the first company in our moonshot category, has been subject to quite acute volatility and is now well below where I recommended to purchase it. Here is part of what I said in that note:
Starting on 14 July, SolarWindow shares slumped – falling from $3.83 at the close on 13 July to a low of $2 on 18 July, before bouncing back to $2.89 by the close on the 18th.
There was no specific news item to justify this fall as far as we can deduce, but we can conclude that the recent capital raising, which may indicate a slightly longer lead time to commercialisation, may be to blame.
Some of the worries investors have expressed about SolarWindow and small companies in general, is that they may not have the capital required to remain in business. By raising an additional $4.3 million in fresh funds that worry is removed for SolarWindow. This money is earmarked to finance an expanded Cooperative Research and Development Agreement (CRADA) with the US Department of Energy’s National Renewable Energy Laboratory.
In the company’s own words: “Our CRADA focuses on the commercialization of SolarWindow products and includes the following initiatives:
• Build large scale SolarWindow units in preparation for manufacturing and eventual sale to customers
• Develop a SolarWindow product to retrofit the more than 5 million commercial buildings in the U.S. alone
• Advance our proprietary interconnection system for easy connection of SolarWindow into building electrical systems”
Prices have stabilised over the last few weeks around the $3 area. Following such a large drawdown some ranging was to be expected, and that is what we have seen. The price is firming again from the $3 area following what has the hallmark of an opportunistic attack on the share in July, but we will not be able to sound the all clear until prices can sustain a move above the $3.50 area. I continue to rate SolarWindow a HOLD, because if it can indeed reach commercialisation it has the potential to outperform any other position in the portfolio and justify its membership in the moonshot category. The risk is that it takes longer than the company currently envisaged to achieve that goal and investors lose patience.
Cyberdyne
Cyberdyne, along with many Japanese shares, has pulled back over the last month. That has achieved what I refer to as a reversion to the mean – represented by the 200-day moving average, which is the share’s average closing price over the last 200 days. If the medium-term uptrend is to be sustained, Cyberdyne will find support in the region of ¥2,000. I am lowering the buy-between bracket to take advantage of this development and reiterate my positive view on the company’s ability to capture a large portion of the market for assistive living and working.
An additional point in Cyberdyne’s favour is that two of its smaller competitors which IPOed in the USA over the last 18 months are languishing. Both ReWalk and Ekso Bionics are testing their respective all-time lows. That helps to emphasise the point that creating, marketing and gaining permission to sell exoskeletons is no easy task; and Cyberdyne is well ahead of the curve in its attempt to achieve full commercialisation for its range of products.
The risk of course is that the company does not achieve its commercialisation and growth goals.
Acorda Therapeutics
Acorda Therapeutics’ star product, Ampyra, is a steady performer but has been the subject of challenges from generic drug manufacturers. This has forced the company to settle a number claims and has necessitated that it refocus on its pipeline of new products. In that vein, it announced a tender offer for Biotie Therapies in January 2016. It has now been completed, giving Acorda access to its stage 3 Parkinson’s disease drug Tozadenant. While there are still promising avenues for the company’s pipeline, unfortunately the investment crowd is currently more interested in the litigation the company is facing and the share closed at a new low on 10 August.
The share has so far failed to garner enthusiasm for its product offering, and I now recommend that a hard stop be placed just below the recent low. The risk of short-term volatility is now too great with the increasing wildcard of further litigation, to allow the share greater room to range. I recommend a stop at $23 and to close the position on a close below that level.
Best,
Eoin Treacy,
Investment Director, Frontier Tech Investor
