by Travis Johnson, Stock Gumshoe | August 19, 2016 4:44 pm
So… what’s been happening with the stocks I follow and write about for my favorite Irregulars? We’ve had a couple weeks pass since I last checked in, thanks to my vacation and the Pan Mass Challenge, so there’s a bit to catch up on… (and thanks again to those who sponsored me, once I get the last checks forwarded to the PMC I should be near last year’s phenomenal and humbling $32,000+ total — and the PMC overall aims to hit $46 million this year, so you’ve helped to do something tremendous!)
Before I check in on a few stocks I like, I should tell you about the one trade that I’ve been kind of itching to make this week. I haven’t made this trade, and probably won’t get a chance to because I’m mentioning it to you today, but I really want to short Energous (WATT) — though I might well buy puts instead of shorting the stock, since that’s generally what I do to make sure I have a handle on my maximum potential loss (a tiny stock can always double overnight on an acquisition or big announcement, even if you think it’s unlikely, and that makes it extra dangerous to short them).
Why would I bet against WATT? Because too many people are betting on it, and the promises by some pundits are absurd and way out of touch with even the “overpromising” that the company has been doing itself — and because Ray Blanco at Agora Financial is again sending out an ad that promises WATT will solve the “deadly flaw” that every device has (battery limitations)… and implying that Apple will be using WATT’s technology in their next iPhone, and send WATT stock soaring when Tim Cook introduces the next iPhone on September 7.
There’s a cohort of folks who are skeptical of WATT, as you might imagine, since the short ratio is up to 20% now (that’s the percentage of the float that is sold short), but I think there’s likely to be at least a 20% downdraft that has the shares down near $11 over the next month or so.
If you remember, Blanco had widely-distributed ads promising that same thing on June 13, when Apple had their last event (the WWDC), and that drove the price of WATT up to $14… only to see it crash to $11 during the actual WWDC keynote as it became clear that no, as anyone who had looked at the details would have foreseen, they did not say anything about Energous or wireless charging. He’s not the only one, so we might see other newsletter folks get into the “Apple’s going to announce an Energous deal” rumormongering as well — newsletters love to send out ads that tie into Apple announcements, and Nick Hodge pitched WATT well before Blanco did (he had a similar ad earlier this year).
This is the headline of the new ad from Microcap Millionaires:
“On September 7th, This No-Name Company Is Set to Expose the #1 ‘Deadly Flaw’ in Every Single Smartphone and Tablet on the Planet…
(And Tee This Bleeding-Edge Industry Up for a 79,900% Multi-Year Tear)”
Well, again, the September 7 date is real and it will be a catalyst for Apple — that’s when almost everyone expects to hear from Apple about their next device, and the stakes are very high (I do own Apple as well, both options and shares, and I think it’s likely to be over $110 in October). But the Energous connection to Apple is extremely tenuous, and Energous will not have their wireless charging chip in the next iPhone (and, likely, won’t be mentioned at all in Apple’s presentation of the new product), and his continuing assertions that it will post 3,000%+ growth in the near term are really setting up high expectations for investors who believe these newsletter ads.
The Apple/Energous “connection” is really just based on the fact that Apple “must” be working on some sort of wireless charging (if for no other reason than that their competitors already offer it), and that Bloomberg ran a story back in February about a rumor/leak that Apple’s wireless solution would be different and new and they were working with possible suppliers and hoping to have a wireless charging solution that’s better than the current technology (which requires the device to be touching the charger, or within a few millimeters). That sent folks charging into Energous not necessarily because theirs is the only possible solution Apple might choose, but because it’s the only “pure play” publicly traded company that claims to be ready to release its “charging at a distance” technology in the near future (I expect Apple’s own engineers are also working on a variety of different wireless charging technologies, as are folks at every other mobile device and IOT company).
Energous is really not ready for prime time with their more advanced “charging at a distance” networks, despite the fact that they offered a tantalizing demo of that technology a year and a half ago at CES (just as one competitor, Ossia, offered a similar demo this year) — their long-range transmitter that can send recharging power across a room won’t be available for at least another year (they’re now saying late 2017/early 2018), and their “contact” charging solution that might be available by the end of this year requires you to be within a couple millimeters of the (pretty large) charging base and is not, in my opinion, different enough from existing technologies to be particularly compelling, though they also think there’s a midrange step inbetween the two that might come out along the way as well (allowing charging within a few inches of the charging base). So far, it appears that the only solution that has gotten FCC approval is the one that’s most like the existing charging mats.
It’s a very cool technology, and if it turns out to be safe and effective I’d be delighted to see it deployed widely — but the story of WATT over the past couple years has been one of aggressive promises about product rollouts that haven’t come close to being met, with expectations gradually pushed back over and over again, and the stock running up largely due to rumored connections to the iPhone.
But it’s a $150 million stock, so even hard-to-believe marketing has an impact if it hits a huge mailing list like the ones Agora Financial can address — and I suspect that’s a big part of the reason that the stock has again recovered to $14-15 after falling to $11 following the failure of Apple to say anything about WATT at the WWDC conference. So my interest in shorting WATT isn’t necessarily an expectation that the technology will fail in the end (I’m skeptical, but happy to leave room to be wrong if the technology starts to advance more quickly), it’s an expectation that the stock will run up into September 7 because of Agora’s marketing, and that Apple’s next iPhone announcement will have absolutely nothing to say about Energous and the stock will take a big hit as a result. I don’t know where WATT will be at the end of the year, a lot of that will depend on whether they really get a licensed product into production and can project any actual revenue or see any real demand, but my suspicion is that we’ll see the same pattern we saw in June, thanks in part to the promotions from the newsletters — which would mean WATT shares falling after Apple’s next iPhone announcement.
There are real things happening with Energous, we’re told — they think they’ll see orders for their chipsets by the fourth quarter (though we’ve learned to take timing projections like that with a grain of salt from this management team), and the mini transmitter (the one that’s pretty similar to existing “charging mat” close contact technology) is apparently being tested by some “Tier One” partners who could conceivably introduce products by the end of the year… but it seems likely to me that the first partners will run very small test runs, and the first products will be little niche ones who don’t have a lot to lose and are looking for a little differentiation. Think not smartphones, but maybe rechargeable headphones, or radio-control toys, or little Internet-of-Things type sensors. Who knows, the company isn’t saying much.
The only possible connection to Apple, I’d guess, would be — and I expect this is still very unlikely — if Apple packages wireless earbuds with their next iPhone (rumor is that they’re doing away with the headphone port), and chooses WATT’s mini-transmitter recharging technology to be built into the case for those earbuds to recharge them. So if Energous gets any Apple love this year at all, which I think is extremely unlikely on September 7, that’s the only thing I could guess at… but even that seems farfetched, since they’ve already said the mini transmitter won’t be selling until the third quarter and the chipsets in the fourth quarter, and Apple’s not very likely to trumpet something that’s not close to being available… there’s also not a lot of rationale for thinking that Apple will risk the image of a $100+ billion product by letting the iPhone (even the earbuds, if that’s a key part of the new phone) be the guinea pig for a new technology when there are already plenty of close-contact wireless-charging options available (including the inductive charging they already use for the Apple Watch, which has nothing to do with Energous). So that’s the only possible Apple connection to Energous that I can imagine over the next few months, and I’m just throwing it out there to try to be generous — I’d put the odds at less than 1%.
Who knows, maybe that’s even the point that Blanco is making with his continuing push for Energous — maybe he’s just using those dates (starting June 13! Starting September 7!) to rile up folks enough to get them to subscribe, and when they subscribe perhaps he says something more rational, like that it’s a long-term gamble on a technology that might get adopted or reach meaningful scale in a few years. That’s not completely unreasonable… but expecting a windfall because of the next Apple announcement is unreasonable… unless, perhaps, you get a little windfall by betting against the stock.
I can’t recommend that you go out and buy puts — they’re very illiquid and pretty expensive, and there’s substantial risk that some other rumor might heat up WATT shares and send them soaring even as investors are disappointed over the lack of a WATT wireless recharging announcement from Apple in a few weeks… you really can’t predict the price of a “story” stock with any precision, and this is nothing if not a story stock. So the wise move is probably just to avoid WATT, but sometimes you do a little gambling based on a feeling… and I feel like WATT has a good chance of falling 20-30% again on another non-announcement from Apple on September 7. We’ll see. If I end up making that trade in the final days before the iPhone announcement, I’ll let you know.
If you do feel like you want to be long Energous, and you buy into the story and think they’re finally going to stop pushing out those dates for their products and get something done by next year (I’m not trying to be patronizing, there is a reasonable argument for speculating on WATT longer-term), you’ve perhaps got a little more cushion now because they did at least announce a private placement to raise $20 million recently that should keep their cash burn under control for a couple more quarters… but I’d suggest waiting for the shares to fall before thinking about buying, either on September 7 or when their next disappointment or delay hits.
And we’ve had a few quarterly earnings releases that seemed worthy of a note, here are my thoughts:
GSV Capital (GSVC) reported earnings that were more or less as expected — the NAV was down a little bit as pre-public companies continue to get valuations that are less exciting than they were a couple years ago, but they announced an ongoing dividend (4 cents this quarter), fitting with their new status as a pass-through investment company, and they did get some attention by investing in Snapchat during the last quarter.
Snapchat! Wait, get me some shares!
It’s OK, calm down. They invested $4 million into Snapchat. Net assets for the firm/fund are about $225 million, so that’s less than 2% of the portfolio allocated to Snapchat, and that’s buying Snapchat shares when it has a $20 billion valuation already (that may well be eminently reasonable, Snapchat is having huge success, but it’s not like they’re getting in on the ground floor). That still might drive GSVC shares up a little bit if Snapchat keeps getting funding at higher valuations or gets fired up to go public (the reason GSV was able to buy in was that Snapchat had a funding round for $1.8 billion during the quarter, that’s a lot of private equity money flowing in), but it’s not going to be the big driver of GSV’s net asset value (NAV).
NAV for GSVC is now $10.22 per share, so the stock still trades at a steep discount to NAV — and I still think the stock has a chance to get to $10 by early 2018 if Palantir or Coursera or one of their other substantial investments (Spotify, maybe even Snapchat) has a big and successful exit or just gets a lot of press and drives individual investors mad with lust… GSV shareholders want new investors to be so desperate to get a piece of Palantir (or whoever) before its IPO that they’ll pay a big premium for GSV shares just for that bit of exposure.
That’s not guaranteed, for sure, but it has now happened twice (with Facebook and Twitter) and I think it’s a reasonable bet that it could happen with one of their positions. Worth watching, but this one is one of those “it happens or it doesn’t” positions for me — it’s a small allocation, I’ll likely hold it for the next year and a half or so waiting to see how it works out… unless it either hits my stop loss on the downside (low $4s) or gets up to NAV, or perhaps beyond NAV to a nice premium, to inspire me to take profits.
(For what it’s worth, my other “private equity fund” investment, the Sharespost 100 Fund (PRIVX), did not get an allocation of Snapchat shares — don’t know whether they tried to or not, or whether they like the stock at the current price, they’ve been reluctant to get involved with the most ridiculously valued “unicorns” in the past.)
Sandstorm Gold (SAND) was also pretty much as expected when they released their earnings a couple weeks ago. I wrote quite a bit more about SAND earlier this week when Tom Dyson was pitching it as a “Gold Multiplier,” but it always seems to inspire a few words from yours truly.
I think Nolan Watson would have liked another six months of weak precious metals prices to give them some more acquisition opportunities (they’ve now cleared all the debt from their balance sheet and have a revolver of $100+ million to play with, but prices are higher now). SAND sure isn’t trading on current earnings, but none of the other guys really are either (they’re on a run rate of roughly 40X earnings right now, FNV and RGLD are trading at forward PEs of 70 and 40, respectively) — it’s all about exposure to gold prices being higher for longer, and the huge potential of those as-yet-undeveloped mines and the possible expansions to current mines.
It’s not cheap, there’s no big surprise, but it’s good that they’ve got a clean balance sheet and can be opportunistic, and it’s still cheaper than the big fellas in royalties/streaming. Here’s what I noted in yesterday’s piece about the Palm Beach Confidential teaser if you missed it:
“If they can keep their overhead costs (mostly property evaluation and SG&A costs) to about $10 million a year, which is more or less where they’ve been of late, and if gold is at $1,500 an ounce in 2020 (a wild guess) and per-ounce costs are at $300 (higher than they were this quarter), then you could be looking at $62 million in free cash flow by then. With a market cap of over $900 million now, that’s obviously not dirt cheap — 15X 2020 forecasted free cash flow. So even though those forecasts would be much worse with gold at $1,000 an ounce or much better with gold at $3,000 an ounce, you’re talking about a fairly steep multiple with some optimism built in.”
That’s the way it rolls, though — when there’s optimism about gold, as there is now for the first time in a few years, these stocks are expensive. I wouldn’t overthink your gold exposure after this kind of bull market, my favorite gold mining ETF (SGDM) has done roughly as well as SAND this year and carries much less risk, but I do think that the royalty and streaming stocks are still likely to have less downside than the more levered gold explorers, “land banks” and prospect developers. I haven’t yet sold any of my positions in First Mining Finance, Brazil Resources or the other little miners I mentioned last month, but they are certainly volatile and I’m more likely to lock in profits in the near term than I am to pile on with more allocation to that sector.
It’s an old saying that you should always “let your winners ride,” but it’s also important not to get greedy when you’re dealing with hugely volatile stocks that depend on things outside their control (like gold prices), which is why I’ve taken some profits along the way (particularly on time-sensitive positions like options and warrants, where your position won’t have time to recover if gold takes a hit) — if you have a half dozen gold stocks in your portfolio, they could all fall en masse if gold takes a sharp tumble because of interest rates or geopolitics or whatever else, and if you had a 10% allocation to gold miners in January it might well be 20% of your portfolio now… there’s nothing wrong with watching those kinds of moves carefully and taking profits along the way or rebalancing after a good run, particularly if you’re a more conservative investor and hadn’t been planning to roll the dice with large amounts of money but got sucked into the excitement.
How about outside the gold sector? We also saw slightly weak earnings from our volatile pharma royalty firm, Ligand Pharmaceuticals (LGND) — and the stock lost some luster over the past few weeks, with one notable analyst move coming as Deutsche Bank downgraded the shares from hold to sell right after earnings, which seemed to inspire some more profit taking. That analyst downgraded it to hold back in June of 2015 when it was at $90, so if you had bought below $90 (Deutsche put a buy on it around $50 in late 2014) and sold as it was dropping from $130 to $120 or so as they issued “sell” you probably aren’t so upset with them, but I intend to give this one more room than that. (I mentioned short positions earlier, and LGND is another heavily shorted stock — 22% of the float is sold short at the moment.)
I first got interested in Ligand (wrote about it in June 2013, and bought it soon after) because they were taking some of the development cost risk out of pharmaceuticals, with lots of “prospects” that could get developed as drugs and that were partnered with other companies who would do the work (and pay for it) and pay a royalty if and when those drugs make it to market. I like the business plan, with those funded programs that they call “shots on goal,” but it obviously depends on a pretty steady stream of drugs getting approved and new compounds entering the funnel at the top of the business and getting partnered out to drug developers… and what makes it work financially right now are their two biggest royalties, on Novartis’ Promacta and Amgen’s Kyprolis, and both continued to grow at a pretty staggering rate and drive up royalty income (which was 50% higher this past quarter than in the year-ago quarter).
As long as those royalties are growing and show potential to grow further, I’m pretty comfortable leaving the company a fair amount of latitude on performance from other drugs, with the assumption that some of them will become meaningful royalties. They now have 150 programs under development that are funded by outside partners (that’s 150 “shots on goal” in their words, roughly twice as many as they had in the Summer of 2013), with royalty potential for many of them (some are materials sales programs, not necessarily royalties), so much of this is just a bet that some of those will come through — and a few of them might end up being significant, whether it’s one of their high-royalty low-volume drugs like the recently approved Evomela or something much less certain, but with large potential, like the Alzheimer’s Disease drug Verubecestat in Phase III with Merck (since it’s an Alzheimer’s drug, the base assumption should be that it will fail in Phase III). They have really just one program that they’re researching themselves, a diabetes treatment that’s going into Phase 2 this Fall — and which I suspect they would dearly like to partner before it becomes expensive.
There are certainly still negatives and risks when it comes to Ligand — they’re overly reliant on Promacta, which hasn’t hurt yet but certainly could someday; they pay their executives a heckuva lot and most of their profits go out the door in the form of stock-based compensation; they have a tendency to do “financial engineering” to try to boost the shares, like their spinoff of Viking Therapeutics; and there’s risk in the fact that they need some big programs to work out in the coming years; and the stock is expensive even using their “adjusted” earnings numbers at 20 times next year’s earnings… But they’re also growing “adjusted” earnings by 50% next year, analysts expect, and growth is growth — they’re still also delivering growth in both royalty inflows and future potential royalties, so I’m continue to hold and give the shares quite a bit of latitude. TradeStops puts the stop loss on this position at about $87, which seems reasonable to me given the volatility this stock has shown over the past couple years. In this $90-$110 range I’m inclined to consider it a buy, but would keep it a small position.
I’m intentionally not committing a lot of capital to this because of the high risk level, so I haven’t bought any shares in a long time — but 20X forecasted next-year earnings for 50% growth doesn’t usually last for long unless the company is being really sleazy, so unless there’s something really fraudulent going on that I don’t know about you’d probably have to be really worried about their “adjustments” to earnings or the near-term prospects for Promacta or Kyprolis to consider it wildly overvalued.
Finally, a quick note on Criteo (CRTO) — the French ad-tech firm that I’ve had exposure to for a long time and wrote about for the Irregulars starting a couple years ago (it’s also being hyped by a newsletter ad this month, that “tiny dot” pitch). Their earnings were fine earlier this month, in my book, they beat on the quarter but guided a little below consensus, which hurt the stock a bit… but I suspect that it’s mostly the legal fight with Steelhouse that’s scaring some investors away at this point.
I’m still short puts and long calls, and the shares are now low enough that they could be put to me, which as far as I’m concerned would be fine — there’s always risk with a lawsuit, of course, and investors worry when both sides put out “click fraud” press releases, but without being an expert on the law in this case I don’t see any reason why Criteo should have huge reasons to worry, and there’s at least some strength and validation in the fact that their customer base is growing and, apparently, happy and putting more money into their ad buys through Criteo. I think it’s a pretty easy buy below $40, that’s less than 20X what they’ll probably earn per share next year and analysts are raising forecasts, not cutting them.
Disclosure: Of the stocks mentioned above I have long exposure through either common shares or derivatives in Apple, GSV Capital, Ligand Pharmaceuticals, Sandstorm Gold, First Mining Finance, Brazil Resources, and the Sprott Gold Miners ETF (SGDM) and the SharesPost 100 Fund. I will not trade in any of the investments covered in this article for at least three days per Stock Gumshoe’s trading rules.
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