I haven’t looked at a spiel from Michael Robinson in quite some time, so when a few readers forwarded his latest pitch for the Nova-X Report I thought I’d take a quick look for you. That newsletter, which is currently being sold for $99, is getting the hype treatment with his pitch about marijuana investing, like most other growth-focused newsletters who don’t want to miss the boat, but the article I saw hinted at some of the “regular” investments in his portfolio… so that’s what we’re going to look for today.
The marijuana part of the ad, by the way, does not really hint at his current recommendations (the ad part is from December, anyway, so it’s getting a bit long in the tooth)… but the hinting in his current “article” is from just the past week, so perhaps it will give some real idea of what he’s recommending now.
And yes, for those who are asking, I continue to not dip my toes into marijuana investing — not because I’m against legalization, or because I have a moral objection (I’d say it’s about the same as alcohol, and should be treated similarly), but because so many of the companies are ridiculous story stocks that skyrocket by 1,000% and then fall by 99%. There is little fundamental basis for most of these stocks, and marijuana is a plant that’s pretty easy to grow just about anywhere… which means it’s a commodity where the prices should fall dramatically as legal production ramps up.
There are a few stocks that have begun to develop brands that might remain compelling and valuable, like Canopy Growth in Canada (WEED.TO, TWMJF), and I’d probably look at those first if I were inclined to put a lot of time into these stocks… but I’d have to understand the market a lot better in order to justify valuing even that market leader at a billion dollars when they have only $20 million in revenue. Even if they get up to $100 million in revenue in a year or two, as is possible, that’s hard to stomach for a company that actually has to invest in facilities and grow plants and process marijuana and distribute and sell it — this is not a particularly high margin business, and it should be fairly expensive to scale it up unless you’re going to grow outside and start using big agriculture’s industrial farming techniques.
So perhaps others will enjoy the “real” companies like Canopy, and while I’m not buying I wouldn’t try to talk you out of researching them… but I have no interest at all in looking at the dozens of micro-companies that have no real business, no brand, no unique product or meaningful revenue or anything else to distinguish them, and just add the word “cannabis” or “marijuana” to their letterhead. Those stocks have had 1,000%+ runs a couple times as well, but almost all of them have given up those gains almost as quickly — a 20 cent stock that goes to $7 is exciting, but not if you’re the sucker who was convinced by the growth move to buy it and purchased at $4 on the way up and wasn’t nimble enough to sell before it fell back down to 20 cents. Those stories repeat over and over in marijuana-world, they happened each of the times there was a major legalization vote (Colorado a few years ago, California this past year, etc.), and those companies really have no “there” there, betting on one of the teensies to be a survivor is a bet with very, very long odds, even if you’re not worried about the US Federal Government cracking down on marijuana again. That doesn’t mean everyone should avoid them — some people like long odds gambling and see the huge potential reward as fair compensation for the strong likelihood of a 99% loss, but I don’t like to spend a lot of time researching or writing about ideas like that.
Most marijuana microcaps and startups and penny stocks are not investments, they’re speculative thrill rides — and those can be fun and I wouldn’t begrudge you playing with them if you have money to risk, but, despite what they told you about keeping your hands and feet inside the car at all times when you were a kid on the roller coaster, you should always remember to unbuckle and jump out of the car whenever you see it starting to go down. Companies that are trading just on speculation and sentiment have no clear fundamental basis for any particular stock price (like revenue, or even revenue growth, or earnings, or assets), and that means they tend to have no floor when sentiment shifts and they start going down.
So that’s my long way of saying I’m not going to try to ID whatever pot stocks Robinson was teasing back in December, but I will try to identify the stocks he’s teasing today. Here’s a bit of his pitch…
“How to Beat the Market by Ninefold…
“Here’s the thing Wall Street doesn’t want you to know: This remains a stock picker’s market.
“See, as far as the Street is concerned, they’d be happy if you’d just be “passive” – and stick all your money in market-tracking mutual funds or ETFs. Of course, if you’re a bit of a bigger “whale,” they’re happy to charge you a bundle for their analysts’ mediocre “buy” and “sell” advice.Are you getting our free Daily Update
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“But if you did that, you’d be leaving a lot of money on the table.
“You see, having the right tech investing guide could help you beat the S&P 500 by as much as ninefold, as members of my Nova-X Report premium service know.”
And then he gets into specific stocks he’s recommending to his Nova-X folks:
“Nova-X Market Crusher No. 1: OLED Screens for Smartphones
“The world’s top smartphone developers are locked in a pitched battle. So they’re all looking to come out with features that the other guys can’t match.
“Samsung Electronics Co. Ltd. (OTCMKTS: SSNLF) touts that its phones are waterproof. Then along comes Apple Inc. (Nasdaq: AAPL) saying it has the best speakers.
“But all of the top players agree on one thing.
“Super-crisp organic light-emitting diode (OLED) screens are the next frontier. For one thing, they’ll make watching videos on phones a much more pleasurable experience.”
OK, so it’s some kind of OLED stock. Which one?
“Whether these phone makers build their own OLED screens or farm it out to contract manufacturers, one firm stands to benefit.
“As I told Nova-X readers last May, this firm controls more than 3,500 OLED patents. And so it stands to earn licensing fees for every single OLED-equipped phone that is sold.”
OK, I don’t want to get too excited… but that’s my favorite kind of business. If you could wave a magic wand and create your business, it would be something that generated passive revenue for you because of people licensing your invention or your brand or whatever and paying fees and royalties. Mmmmmmm, royalties.
How about some specifics that we can feed into the Thinkolator?
“… this company is geared up for sales growth that should rise from 25% in 2017 to 30% in 2018….
“Investors are just now waking up to this high-growth opportunity, pushing shares of this firm up 52% in the first quarter.”
That, sez the Thinkolator, must be our old friend Universal Display (OLED). That patent number is a few years out of date, they now claim 4,200 pending and issued patents worldwide (about 500 of them were purchased from BASF last year). They do R&D on various OLED technologies, provide some proprietary materials, and license their OLED intellectual property without really having a manufacturing facility (like most semiconductor companies, they farm out the actual fabrication or manufacturing to contract facilities. All of which generates very nice margins, though the actual revenue numbers are not all that high at the moment.
OLEDs have provided the promise of unusual form factors and cool new gadgets for years, things like curved screens or even “roll-up screen” handheld phones that roll up like your window blinds to fit in your pocket like a pen. That promise hasn’t yet turned into real wacky products, but OLEDs have come a long way since I first saw Universal Display teased probably a decade ago (it had the ticker PANL back then), they are no longer just future gadget fuel — they are being used on TVs and mobile devices to create better image quality, better contrast, faster refresh rates for better video, and significantly thinner possible form factor and lower power usage because the phosphorescence of the OLED colors means they don’t require a backlight or liquid crystal backing. So it is pretty cool, and quite real.
Despite that, however, the rampup in earnings and revenues is not particularly linear — OLED has had pretty flat revenue and earnings over the past three years despite the pretty steady increase in the number of products that use their technology. They had $191 million in revenue in 2014, and it was up to only $199 million in 2016… so even if your margins are very high (theirs are, the gross margin is well over 80%), that doesn’t provide a lot of potential for earnings growth.
Clearly a lot is riding on the next wave of mobile phones, which are the highest volume products with screens in the world, and the market every technology component maker wants to be focused on — so the expected high volume next-generation OLED-using phones from Samsung and Apple are the key, and those are presumably the reason why earnings expectations have ramped up from $1 a share last year to $1.45 this year, $2.34 in 2018 and $3.18 in 2019. So there’s not much trailing growth, but there is certainly an expectation of pretty solid forward growth — and at about $80 a share you can justify the valuation if you’re pretty confident in that forward growth. That’s about 35X 2018 earnings, so it’s not cheap but investors are likely paying up for the upside surprise potential — the good thing about a licensing based business like this is that revenue could jump by 20% if the end demand turns out to be better and Apple licenses their technology for the next iPhone, and that might be enough to boost earnings by 25-30%. The revenue number is still pretty small, relative to the size of the market for smart phone (and TV and laptop) components, so that potential surprise upside is probably what investors are buying in for today.
I’m not sure I’m willing to pay that much for this stock, since it’s probably going to be very volatile as rumors swirl about iPhone and Galaxy sales and OLED components and what kind of revenue is going to trickle down to Universal Display from those products — Samsung has boosted their license payments to OLED in recent years, but that payment only hit $75 million last year, and Apple’s secretive nature means we have no real idea what their display will be like, or whether it’s licensed from OLED or uses some competing technology. But the company does confirm that they expect to be back “on a growth trajectory” in 2017 after several disappointing years, and investors have taken them at their word and bid up the stock in preparation.
At this valuation I think I’d be more tempted to wait and see if they have another lousy quarter that takes some of the air out of the stock, but it’s certainly an interesting story stock as the next generation of mobile phone screens really hits the mainstream with Apple’s expected adoption later this year. They will probably report earnings in about two weeks (it was May 7 last year), and the expectations are high this time out — anything the company says about the revenue expectations for the rest of the year will probably be watched pretty closely.
And Robinson hinted at a couple other Nova-X picks in his piece, I’ll skip forward to one that perked up my interest:
“Nova-X Market Crusher No. 4: The Must-Own Chipmaker
“One of our favorite chipmakers, which has been in the Nova-X portfolio since October 2014… one of the fastest-growing firms in the semiconductor industry.
“This firm is not only seeing rising sales with top client Apple. It’s making big inroads into top-tier Chinese smartphone builders as well.
“A savvy go-to market strategy has already boosted the company’s sales base – from $1.07 billion in 2010 to $3.29 billion last year. And its revenue base is on pace to approach $4 billion by next year.
“This firm is benefiting from an expanded client list, and it’s also gaining from the rising content of chips in today’s smartphones and tablets.
“The iPhone 7, for example, has 33% more chips than the iPhone 6 had, and the iPhone 8 is expected to have 25% more chips than the 7. We’re talking about more than $30 worth of chips per phone, according to Charter Equity.
“And that trend is clearly boosting this company’s fortunes. Its shares rose 31.2% in the first quarter, which puts us on pace for more than 100% in annualized gains.”
“Annualized gains” don’t mean much to us, of course — not unless you can promise that you’ll also find a stock that rises 30% next quarter, and 30% the quarter after that. But 31% in a quarter is certainly nice… so who is this?
Well, Thinkolator sez the stock is Skyworks Solutions (SWKS), which I also just added to my personal Real Money Portfolio that I cover for the Irregulars — I didn’t buy it back in 2014, unfortunately, though I suppose that also means I didn’t have to fret about whether to sell at a stop-loss in 2015 or 2016 when it dropped 40% from those 2014 highs because of falling iPhone volumes and Skyworks’ inability to find other large customers.
Lately that seems to be shifting, as Robinson teases, and I took a look at Skyworks after reviewing it for a Frank Curzio teaser a couple weeks ago and decided I like what I see… mostly, I must admit, because the expectations of iPhone volumes in this next iteration of Apple’s phone are much higher. I do think Skyworks is likely to remain pretty dependent on Apple, even though that dependency is lessening, but I also think this is a better year to be Apple-dependent than 2015 or 2016 were.
So Skyworks is one of the smaller positions in my portfolio now, and I do think the current price is a fair valuation, but I’m hoping that they will be cautious or have some bad news in the next quarterly release, which is on Thursday (April 27), that might allow me to build my position at lower prices. We’ll see.
And with that, I’ll leave you to your own cogitation — interested in Skyworks or Universal Display as growth picks teased by Michael Robinson? Have other favorites in the “growth” category? Let us know with a comment below.