Holiday review
17th July 2018 |
A review of the Frontier Tech Investor portfolio before Q2 earnings are reported and before I go on holiday.
My mind is never far from the market. I guess I’m lucky that technology and the financial markets are my biggest passion in life after my family and good food. However, it has been two years since I took a holiday away from the markets with my family and Mrs Treacy has ordered that now is the time. I’ll be away from the markets between 17 and 31 July so I thought it would be a good time to reach out and update you on recent developments in the portfolio and on my buy-up-to values.
We bought Cyberdyne as it first broke above ¥2,500 in 2016. Since then, it has been largely range bound with the lower boundary near ¥1,250. The primary reason the share has underperformed this year is because sales of the HAL cybernetic system have been up but not enough to deter doubts about the company’s business model. The share bounced again from the lower side of its range on Friday and the recent weakness of the yen should act as a tailwind for the company as it attempts to boost sales overseas.
Abcam reported interim earnings on 12 July with a prediction for full-year revenue growth of 10.7% and margins to remain about the same as last year at around 70%. The share pulled back sharply on this news because it was not quite as good as some investors had been hoping for.
Abcam is a company well positioned to continue to benefit from the explosion in experimentation in the biotechnology sector. The most impressive thing about the share’s trends is that it has posted a series of 150p reactions one above another since 2015. The pullback on Thursday signalled that if all remains consistent then the share just entered the next one of those consolidations.
When I originally wrote up Autodesk as a free play on synthetic biology I was happy to do so because I had confidence in its underlying business model of providing invaluable software to graphic and graphics designers everywhere. The share has seldom looked back since it adopted a subscription business model in 2016 and I expect the next leg higher for the share before too long.
I am raising the buy-up-to price on Agios Pharmaceuticals to $100. The share had bounced nicely from the $80 and I expect the pattern of higher to lateral ranging to persist. The company continues to iterate on its cellular metabolism research and I believe the outlook remains positive for continued upside.
Alkane Resources has deteriorated along with the gold price and remains under pressure. I have not sold it because I view the share as an option on the trade war between China and the US escalating. As the owner of one of the few promising sources of higher than average grade rare earth metals in the world, the company has potential to turn around in a hurry if the situation continues to deteriorate and China once again bans exports of rare earth metals.
Advanced Micro Devices launched its 7nm chip a month ago which takes it to performance parity with Intel’s 10nm chips and the share finally broke out to new highs. The share has also benefited from flooding in Sichuan province in China where approximately 30% of the local cryptocurrency mining operations have been wiped out. Sichuan is a hot area for crypto mining because it has such cheap abundant hydro power. The risk of course is that by placing mining rigs so close to the rivers, they have a tendency to be flooded.
A press release on 5 July announced that Advanced Oncotherapy “has selected RayStation as its treatment planning system for the first LIGHT (Linac Image Guided Hadron Technology) system at the proton therapy facility under construction at Harley Street in central London.” I consider that further progress on the timetable to be up and running with treatment for external tumours this year.
Becton Dickinson has rallied nicely over the last few weeks to retest its peak from back in February. The next major data point will be on 2 August when the company reports its 2nd quarter earnings.
Cisco is another company that has adopted a subscription business model and its share has responded in a similar manner to other companies that have adopted that model and it has generally been rising since. The technical detail of building out 5G networks means a lot more switches and routing equipment will be required and that is what Cisco specialises in.
Over the last couple of weeks, Amazon’s Web Services arm has announced it plans to enter the $14 billion switches market, which is not especially good news for Cisco. It still has a competitive advantage but it is going to have a harder time defending it with Amazon’s impending entry into the market. The share is back testing the $42 area and this is exactly where the price needs to find support if medium-term scope for continued upside is to be given the benefit of the doubt.Â
Editas is currently sitting on a profit of 78% and continues to bounce from the region of the moving average. The much-anticipated conclusion of the long-running court battle on exactly who owns the intellectual property rights is due for conclusion this year but wind remains at Editas’ back and I have a great deal of confidence that will remain the case.
Garmin took a leg higher in October and has spent the last nine months ranging. It is firming once more and while there is no major news to report, the company’s earnings are due on 1 August and the estimate of 86.6₵ a share suggest the market is enthusiastic about sales in the 2nd quarter.
Haydale is a cutting-edge development stage company in the exciting graphene sector and its technology sets it in a good position to prosper over the medium term. So why is the share falling and the worst performer in the portfolio to boot?
It’s about money.
On 13 June Haydale announced that its revenue was going to be about 15%-20% higher but that is below expectations. Meanwhile, its loss for the year is broadly in line with last year’s but again that is below expectations. The reason for this is because some of the orders it was expecting to be paid on did not materialise this year and are now expected to come in the first quarter of 2019. The company has been clear that it believes these are timing issues rather than any particular challenge with its business so we can expect a bump in revenue within nine months.
Additionally, Ray Gibbs is stepping down from the board and transitioning from his position as CEO to concentrate on sales growth in the UK and abroad. A search is now on for a replacement. Losing the CEO when sales have not been coming on target is a not very good for sentiment but it is not disastrous.
The share dropped precipitously again today and it is now in the region of the lows last seen in late 2017.
The big question is whether this is the point of maximum pessimism or whether the company has a more fundamental problem than delayed orders.
The UK was the seedbed for graphene and it is home to a number of companies attempting to pioneer utilisation of the wonder material. Each company claims its method for producing the material is beyond comparison. The bigger challenge is sales. Haydale needs to boost sales but it does at least have the products it is selling. That is the most important point. I am of the opinion that this is the point of maximum pessimism. However, in order for me to be proved correct we are going to have to see some positive news come in over the coming months on the sales front.
IBM is well on its way to diversifying almost entirely away from its historic focus on hardware, and cognitive systems is now its largest revenue generator. The share is now bouncing once more from the $140 area and I continue to think IBM represents value as its future of quantum computing and artificial intelligence are more fully realised.
Illumina is the runaway leader in the genetic sequencing sector and the share’s performance continues to exhibit that fact. The company’s earnings will be on 30 July and I would not be surprised to see some consolidation in the share price set in around that date. The price has risen rather quickly of late and some time for a breather is well past due. If we do in fact get that pause, I will then consider raising the buy-up-to price but not before.
Intel’s CEO was forced to resign because of an undisclosed affair with a subordinate that occurred some years ago but was against company policy nonetheless. The share has since bounced and I consider this pullback has nothing more than a blip. Right now, China does not have a domestic chip manufacturing sector that passes muster internationally. It might be a national priority to develop one but it is not a challenge to Intel right now or to its exports into the country.
Microsoft adopted a subscription business model shortly after Steve Ballmer was ousted from his position as CEO and the share has seldom looked back since. The company announced it is bringing out a version of the Surface laptop to compete with the cheapest iPad last week and that helped spur the share to new highs. The quarterly earnings report is on Thursday and again I would not be surprised to see some consolidation of recent powerful gains unfold shortly before or afterwards. Following that event, I will consider revisiting the buy-up-to level.
Northrup Grumman’s CEO is to be replaced by its COO next year. Meanwhile, the company’s Cygnus spacecraft has been docked at the International Space Station for the last 55 days. In that time, it successfully completed a reboost operation where it fired its rockets to raise the station’s orbit, which is the first time a US vessel has been able to achieve that task since the space shuttle mission was shut down. The share has bounced from the $300 area and I don’t expect to see it trade below that level. The company’s 2nd quarter earnings will be reported on 25 July.
Ormat Technologies is the subject of a handful of securities-related class action lawsuits since it had to restate its earnings in March. The eruption of Mount Kilauea on Hawaii’s Big Island and the threat that poses to its power station there has been an additional headwind. I have not sold the share because I believe both stories are relatively short term in nature and the majority of that bad news has already been priced in. Meanwhile the utilities sector generally is defensive and the sector is beginning to return to performance as angst about global trade escalates.
Orocobre announced on 2 July that “Production for the June quarter was the second highest ever achieved at 3,596 tonnes, up 28% on the March quarter. Sales were 3,496 tonnes with a record realised average price of US$13,611 per tonne on a FOB basis which resulted in record quarterly sales revenue of US$47.6 million.” The share has come back to test the A$5 area once more and this is a key level I do not wish to see penetrated if we are to sustain the medium-term bullish outlook.
I last updated subscribers on PureTech Health in late June. Since then the company announced funding from the Crohn’s & Colitis Foundation to fund additional research into identifying bacteria in the microbiome of Crohn’s disease patients that may lead to irritable bowel syndrome. Another affiliate resTORbio announced on 12 July that is has had impressive results from its Phase 2 trials targeting improved immune systems in elderly people.
The share is back testing the 140p level and I expect that will not fall any further than that level.
Sherritt International has been ranging in an inert manner for most of this year, despite the fact that nickel is the best performing of the six major industrial metals this year. Right now the share is trading at a price-to-book ratio of 0.39, which suggests the breakup value of the company is more than double its current price. The company’s earnings will be on 31 July and there is a possibility that it could be a catalytic event for the share provided nickel prices continue to trend higher.
Science Applications International Corporation (SAIC) does business exclusively with the US government. With the prospect of trade wars and increasing spending on security to combat both real and imagined threats, the outlook for the company remains positive.
There is speculation that it is in the running to take Engility Holdings over after that company put itself up for sale. If successful, that would give SAIC a greater share of US government spending. The share has been ranging below $90 since 2017 but I believe there is near scope for a successful breakout.
Smart Metering is going through a soft patch at present but the share is back testing its lows for the year so this is where we can expect it to find support. It is estimated that the smart metering business will quintuple globally within the decade so there is ample scope for the company to branch out beyond the UK’s borders in future. In the meantime, there is still ample scope for expansion in the UK market. Nevertheless, I want to see evidence of the share finding support soon in order to retain a bullish perspective.
2U has been trading persistently above my buy-up-to price since May and remains our best performing position. In the nexus between the opportunities and challenges presented by the exponential pace of technological innovation, education is the one space where we all have a change to improve our lots. Little wonder then that it is where some of the biggest changes are happening to make upskilling more available to anyone seeking it. I am moving up our buy-up-to price to $100 because I continue to view the share as a promising medium-term growth story.
With Canada now a fully open retail market for cannabis, the tide of legalisation in North America has taken an additional step onwards. It is still open to question when or even if the Donald Trump administration will back legalisation, but alcohol and tobacco companies are already positioning for footholds in the cannabis sector so they can benefit from what looks like an inevitable decision in the US.
Constellation Brands, a $40 billion beer and wine company, for example owns 9.9% of Canopy Growth Corp. In the last couple of weeks Imperial Brands teamed up with rapper Snoop Dogg’s private equity firm to purchase a piece of Oxford Cannabinoid Technologies. That is another example of big name brands taking positions in this emerging sector. Canopy Growth Corp’s share popped nicely on the upside following full legalisation in Canada and some consolidation is now underway. I don’t see this as anything other than a pause.
SolarWindow is still traded in the Pink sheets which means it is effectively a penny share even if the price is now $3.81. It announced in June another agreement to further its commercialisation route and I don’t believe we will see it trading back below $3. However, it is still at least 18 months away from first revenue and it has a history of being volatile.
All the best,
Eoin Treacy
Investment Director, Frontier Tech Investor
