Friday File rerun: “Own the Startup that Beat Tesla” (plus some buy and sell notes and updates)

Solving a Penny Stock Millionaire newsletter, plus notes on NXPI, JBLU, FOSUF, AAPL and more

By Travis Johnson, Stock Gumshoe, July 26, 2016

[ed. note: Today’s training ride took more out of me than I expected (I’m raising money for Dana-Farber by riding in the Pan Mass Challenge next week, please sponsor me if you haven’t yet done so!), so I’m afraid I have to leave you with what we’ll gently refer to as a “rerun” — though if you’re not an Irregular, this will be new. What follows was the Friday File sent to the Irregulars on June 17. It has not been updated or revised, though most of the stocks mentioned are similar in price to where they were back then. My disclosures, noted at the end, are unchanged.]

What does one do with a Brexit? What will happen to the markets if the British people elect to leave the European Union when they go to the polls next week? I have no idea, of course, but the common-sense guess about what the near-term financial markets reaction would be is to assume that the US dollar will rise — if people fear how things will shake out with the Pound and the Euro as a result of any upheaval a Brexit vote might cause, they’re most likely to put their money in US dollars, which has been pretty well confirmed as the most popular “flight to safety” trade for all of the European financial crisis moments of the past six or seven years.

And a rising dollar, of course, generally means falling prices (in dollar terms) for both energy and commodities, including gold, and some challenge for some US multinationals (though nothing that they haven’t faced in probably more severe circumstances over the past few years). I suppose there’s some room to imagine that gold could buck that trend, thanks to the traditional “safe haven” status people confer on the yellow metal, but those days of gold going up in dollar terms while the dollar is also rising are very rare (we have had a few of them this year, but the general trend is for a stronger dollar to mean weaker gold).

The longer-term impacts are essentially unknowable, though people on either side claim great certainty — if the UK government follows the will of the people in this referendum, which is far from certain if the voters vote to leave the EU (its non binding), it would take at least a couple years to negotiate the terms of the separation, I expect, and I assume that Britain would strive to remain a part of the common market for free trade among EU states while trying to restrict any influence of Brussels on domestic policy and restricting the free movement of people to and from Britain from the EU member nations. Brussels probably wouldn’t want to give up the free movement of goods and people or make it look easy to leave the EU on beneficial terms and thus encourage other exits, thus negotiation takes place. I bet it takes a looong time, and I bet no one ends up happy. But there’s no reason why it would necessarily mean that Europe or the UK sinks into a quagmire that’s markedly worse than their current situation for a long time, and I’m not planning to adjust my portfolio in anticipation of the Brexit vote — I don’t think I have any companies in my portfolio for whom free trade between Britain and the EU makes or breaks their business, though those who are exposed to international banking might feel it most sharply.

In the realm of things that I can understand, at least some times, we have had some news from a few companies of interest this week — and I had a couple stop losses and one purchase in my portfolio to update for you. First, a quick teaser solution… that is, after all, what we do in these parts.

This isn’t a stock I’ve spent a lot of time looking at, but I can at least answer the “hoodat” question. The pitch is in yesterday’s free Wealth Daily email from Alex Koyfman, and it’s a soft pitch for his Penny Stock Millionaire newsletter ($699).

And, yes, the headline is “Own the Startup that Beat Tesla” — most of the article recounts an interview Koyfman had with the CEO of a company that thinks it has the edge over Tesla’s Powerball when it comes to distributed energy storage (i.e., batteries). Here’s a taste:

“‘Our batteries are better, without a doubt, but that’s not where our advantage lies,’ he continued. ‘It’s our power control that make the difference. The brains behind the hardware. What Musk doesn’t tell you when he talks about Powerwall is that it’s only a battery. You still need a control system to use it. They don’t build those. A third party does.’

“‘So you build the whole package, then, battery and power control system?’

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“‘We do, but we don’t necessarily sell the whole package every time. Our biggest clients make their own batteries and use our power controls to manage them.'”

So part of Koyfman’s spiel is that this makes this little startup more appealing — they don’t just think they have a better product than Tesla’s Powerball, they have clients who use their technology for batteries and power control.

And that’s where it gets specific enough to be certain of a match —

“‘How big are your clients?’

“‘I’m not allowed to disclose the identity of the largest one, but I can say that it’s a major German automotive company’ ….

“… this past March… Daimler AG, owner of the Mercedes-Benz brand, just told Tesla that it would no longer be needing an external source of batteries for its electric car line….

“I listened to him talk as I did a second search, this time using the ticker symbol of the company whose CEO was on the phone.

“Scrolling down the March news, there it was: dated March 11, an announcement of a development contract with a ‘German automotive subsidiary.'”

OK, so “development contract” doesn’t exactly sound like “you’ll make enough money to buy your own Tesla”… but it is a clue. What else do we learn about this little company?

“A tiny company, with shares trading in the $0.20 range, with a market capitalization of less than 0.2% of Tesla…

“… essentially a venture-stage company with fewer than 40 employees, and yet its product was about to become a common feature in some of the most recognizable vehicles on the road….

“Could this company really have $50 million in revenue potential next year β€” a sum bigger than the firm’s entire current value?

“The CEO told me to expect more news flow in the coming weeks, but what happened the very next day was what sealed the deal for me….

“I received a frantic phone call from one of my business contacts….

“‘They halted trading,’ he said. ‘News is pending, but I can tell you right now that it’s about a financing. A major fund is getting behind them.'”

So there you have it — and yes, I can tell you that Koyfman must be hinting at a little Canadian company called Eguana (EGT on the venture exchange in Canada, EGTYF OTC in the US). It’s got a market cap of about $40 million (C$50 million), and, though it kind of looks like a startup company because of its small size and lack of profitability, they’ve been around for 15 years or so.

They’ve arguably had a decent amount of revenue for several years, and last year was their best year yet on that front — it doesn’t look like it’s a particularly steady business, so I don’t know that it’s on any kind of predictable path, but they have over the past year or two been focusing on the battery control business that they’ve established to some degree.

It’s pretty clear that they need to significantly change the scale of the business in order to have a chance of being profitable, boosting revenue in a fairly dramatic way, since for some reason their costs have been increasing more rapidly than their revenue over the past couple years — but there is a decent story and some possibility of future growth if, like Alex Koyfman, you want to connect the dots and try to imagine what their home and commercial battery storage solutions could turn into… or even speculate about what kind of sales they could get out of their potential supply agreement with that unnamed German auto supplier (Mercedes already sells home battery systems that are functionally similar to the Powerball, BMW is rumored to be developing a competitive product but has denied the rumors thus far).

So… no, they’re not going to have $50 million in revenue this year as far as I can imagine, and presumably even next year would be a stretch, but you never really know… it’s hard to say that they “beat Tesla” since Tesla’s Powerwall has more in preorders than Iguana has generated in cumulative revenue in 15 years, but perhaps their products are better (in case it’s not obvious, I don’t know). They did just file to raise $6 million by selling equity (they also have a tiny amount of debt), and I can see why they’re calling newsletter writers and looking for coverage because they really need that cash and will probably need more in short order unless their upcoming orders bring in better gross margins than their recent spurts of big order activity (they’ve been on pace to burn through about $8 million a year).

They say in their latest quarterly press release that they have had their “second consecutive quarter with positive gross margin on low order volumes,” but that’s not entirely comforting — over the past couple years they have had a couple quarters when their cost of goods sold was lower than revenue (meaning they had a positive gross margin), including the first quarter of 2016, but those quarters were also just the very low revenue quarters… so it appears that so far they’ve been able to sell things for less than it costs them to make them only when they sell just a tiny amount of merchandise, once they ramp up revenue their costs have ballooned. That doesn’t mean that dynamic can’t change, just that it’s a worry that catches my mind after browsing through their past few years of financials.

Beyond that, well, I don’t really know anything about the company or the relative merits of their battery control technology — all I can tell you is that Alex Koyfman is teasing the company, it’s really small, and their shares have been rising on news of their equity raise announced a week ago and their delivery of their first power control units to that German customer…. and, perhaps, because a decent-sized newsletter recommended the shares to its subscribers.

First, the purchase — I bought my first position in NXP Semiconductor (NXPI), which I wrote about for you as one of my “Idea of the Month” selections in May. NXPI reported some news that brought the stock down a little bit, and that seemed a good time to begin nibbling for my personal account. Here’s the update from Briefing.com about what happened:

NXP Semi: Color on Standard Products divestiture
Mizuho notes NXPI is divesting its $1.2B/year revenue Standard Products business to a consortium of Beijing JAC Capital and Wise Road Capital for $2.75B. The new company will be branded Nexperia after the close, which is expected in 1Q17. While the transaction would be dilutive, they expect it to drive better GMs, fund a significant deleveraging and potentially a higher multiple as peer analog suppliers with lesser debt trade at 30-50% higher multiples (TXN, ADI); Buy.
Stifel is encouraged by the co’s move to sell its Standard Products group, and believe the sales multiple of ~2.3x compares favorably to recent deals of similar size and structure (IFNNY acquired International Rectifier for ~2.0x and ON is acquiring FCS for a multiple of 1.6x, noting the deal has not yet closed). While the standard products group has significantly improved its profitability through cost controls (and there is little investment needed to maintain its market position), it is more exposed to consumer type markets. The assets do not fit within the core growth strategy and profitability metrics set out by the co, and instead this divestiture will enable mgmt to refocus/retool the co to focus on higher margin opportunities and use the cash to pay down debt and/or buy back stock. While there will be some earnings dilution with the loss of revenue, they believe the benefits of driving down debt (lower interest expense and better debt ratios), and improving its margin profile should prove to outweigh any initial headwinds/impact.

There was a similar note from an analyst in Barron’s a few days ago as well, effectively saying that NXPI got a good price for the division they’re selling.

This news brought the earnings estimates down a little bit, so now the expectation is that NXPI will earn $5.73 this year and $7.49 next year. The big increase in revenues is this year, thanks to the Freescale acquisition (revenue is increasing by 50% or more), but even in 2017 it’s expected that revenues will climb a respectable 5.5-6%. I still think there’s too much worry about “peak auto” baked into NXPI shares, and too much worry about any troubles with the integration of these two large companies — a forward PE of 11 is too low for a company that’s well established as a leader in several high-growth areas in semiconductors and should have opportunities to both grow and cut costs.

It’s important not to get too excited and “marry” semiconductor stocks, because, as we’ve seen, the punishing competition can eat their margins in a hurry… but I continue to like NXPI’s strong position in security, automotive and other areas where reliability and trust matter a great deal to the end users. If anyone has an advantage in semiconductors, it’s the large and entrenched leaders who have been supplying happy customers in demanding industries for a long time — not everyone can create a consumer brand or monopoly like Intel did, or own a core communication platform like Qualcomm did for a while, but having a strong market position and being big and able to fight off the little guys without killing your business might be the next best thing. I’ll watch NXPI fairly closely, but I have a good degree of confidence in them at this point and I’m happy to have put a bit in my portfolio at this price. Even if car sales drop from this recent high, the number of chips per car is going to continue to rise.

Speaking of tech, remember Apple’s (AAPL) “big event” this week? It certainly didn’t create monster growth for Energous (WATT), which is what was predicted by Ray Blanco and the pundits who were distributing rumors about Apple’s wireles charging plans, but there certanly wasn’t anything bad about the WWDC presentation and it reflects the growing “stickiness” of Apple’s consumer products and services business. Here’s the Briefing.com note from WWDC, FYI:

Cowen notes that with the introduction of new versions for all four of its operating systems, WWDC highlighted even more seamless integration across AAPL devices/platforms to further bolster the allure/stickiness of the ecosystem. New Apple Pay support for online purchases taps into ~$1.3T mobile/online TAM; while an important evolution, the math is far more interesting if it drives new HARDWARE sales; $125 tgt.
RBC: Key takeaways from the WWDC event include: 1) Siri integration into MacOS, 2) Apple Pay on the Web authentication addition, 3) 15M paid users on Apple Music, and 4) allowing third-party developers to access Maps, iMessage and Siri. They think the software updates, together with changes to the App Store announced last week, are targeted to make users more “sticky” to the Apple ecosystem (improving the service rev stream); $120 tgt.
Needham: The 3 things they liked most from day 1 of WWDC were: 1) device integration drives economic upside; 2) elongating engagement drives higher utility (i.e., pricing power); and 3) privacy differentiation. Bundling products together drives 20-50% revenue upside in other industries. Content upgrades to maps, photos, news, and music are all designed to elongate engagement of users, suggesting revenue upside. New software that automatically integrates photos and videos and puts them to music was especially impressive. AAPL’s obsession with privacy should provide differentiation and command a premium as consumers buy and share more over mobile networks; $150 tgt.

That doesn’t fix the fact that Apple’s refresh cycle for iPhones seems to be lengthening, and there isn’t another market opening to Apple like China did a while back that can really boost growth this year. That’s a problem of products either getting too expensive, now that telecom companies are cracking down a bit on their subsidies for new smartphones, or of existing products just being good enough that the upgrade isn’t really required to get all the functionality you need… which, honestly, is mostly just getting your texts and emails and taking pictures and checking your Facebook and SnapChat accounts. I don’t know whether Apple’s next phone will be markedly different from the iPhone 6S and will inspire upgrades, or if the numbers really will be as weak as analysts are expecting, but I still think Apple is our premier consumer electronics company and deserves some benefit of the doubt. I did take some risk off the table with my Apple shares in the Spring, given low options premiums at the time (I sold most of my shares and bought offsetting call options with some of the profit), so I remain in position to be roughly flat with AAPl between $90-$100 and have some profit if AAPL is back substantially over $100 in October. Where the shares are then depends on how excited people are about the next iPhone, and we’re not going to know that until September if their past scheduling persists. I think of Apple as a blue chip “hold” these days.

And my stop losses? Today I sold out of half of my JetBlue (JBLU) position following a Tradestops sell alert. I’ve been testing Tradestops in my portfolio with mixed results over the past year or so, and my general intention has been to follow the stop loss signal for half of my position, and follow my personal opinion on what to do with the other half (sometimes my personal opinion is also that I should sell, in which case I sell it all — and occasionally I overrule the stops and refuse to sell even half, as when Medical Property Trust was irrationally cheap late last year). This time my inclination is to hold JetBlue or even to buy more at these prices, so I followed the stop alert with half of my position and we’ll see how it goes.

And I also sold half of my Fosun (FOSUF) shares, since that also hit a stop loss alert and I don’t see any strong likelihood, given their huge debt refinancing requirements, that they’ll be surging in the near future. Half of my position is in a taxable account, so I’m booking my loss on that to offset some of the capital gains I’ve generated this year from gold-related options and warrants (my JetBlue holdings are also in a taxable account, which makes selling at a loss easier to take). I still like the prospects for Fosun in the long term, since China seems likely to be a tremendous global growth engine for a long time even if the current growth prospects might be a bit worse than hoped, and I will hold my remaining Fosun shares as I continue to watch developments. I’ve given this one more space than most stocks, but it still hit the wider stop loss.

You might not remember me covering this one a couple years ago, but Tekla Healthcare Opportunities (THQ) is a closed-end fund that I’m still holding, despite quite a long period of alternately tepid and disappointing performance. The fund has not closed the discount as I had expected, and much of my original interest in the fund came from the fact that the same managers had for many years managed two other healthcare closed-end funds (HQH and HQL) that routinely trade at premiums or very near Net Asset Value (NAV). The covered call strategy and dividend from THQ have helped it to outperform its peers from the same management team in a weak healthcare investing market so far this year, which means that it is roughly in line with broader healthcare investing funds (VHT or VGHCX, for example)… but over the past 12 months and going back further, THQ has not shown any ability to keep up and investors are not bidding up the shares to close that current 10% discount to NAV.

It appears that this fund may still have the opportunity to be better than average while the health care sector is relatively weak, but it’s barely able to be average at the moment. This is on my watchlist to sell in the next six months, but I’m not in a particularly big hurry. I’d prefer to sell into a bit more optimism, but I may give up on waiting for that and, really, optimism wouldn’t help if the intention is just to move this capital from one health care fund to another (since all other funds would also probably be in an uptrend at that time) — I’ll keep you informed.

And I wanted to close things out with what might be the most important investment I’ve ever seen: I just got an email promo for Whisky Invest Direct, an initiative from the BullionVault folks, that lets you buy Scotch Whisky in the barrel, before the aging process, and profit from the gradual rise in value of that nectar when it is either bottled or sold into a blend after the aging process (5, 7, 12 years — whatever).

OK, I’m kidding — this sounds like a somewhat ridiculous investment, a way to separate the 1% from their money by offering a “steady alternative” that probably has lots of fees and uncertainties that don’t obviously appear at the surface (and who knows, in a decade we may have a whisky glut following the increased popularity in recent years)… but if you promise me that I can get delivery of that barrel of whisky after the aging, then I promise you I’ll take it seriously. I wonder what the regulations are for bottling up my own batch of Gumshoe’s Finest Whisky.

Have a great weekend, everyone.

Disclosure: I own shares and/or call options on Apple, Bosun, JetBlue, NXP Semiconductor, Tekla Healthcare Opportunities Fund, and Vanguard Health Care fund. I will not buy or sell any covered stock for at least three days after publication per Stock Gumshoe’s trading rules.


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Paul
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Paul

I see the auto-correct feature changed “Powerwall” to “Powerball” in a couple of instances πŸ™‚

Griffin
Member
πŸ‘3030
Griffin

Thanks for the teaser Eguana Technolgy (EGT.V EGTYF), Travis. I’m into batteries. I didn’t check all the specifics but Eguana is selling a patented controller for distributed energy storage The controller is compatible with all batteries. The patented part seems to be that it charge and discharge at the same time. I don’t see this as a game changer for residential use. Since they are sourcing their batteries, if you already have batteries your not buying a complete system. Eguana business is going to depend on how well their patents protect them. I’ll wait till some hacker gets to the… Read more Β»

Joe Bashara
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Joe Bashara

What do you think about the court case agsinst AAPL that lost again with regard to Faceb A Judge gave THE PLANTIFF 625 million dollars. AAPL as usual appealed the case. The PLANTIFF was VHC.

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darkpella
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πŸ‘0

Greetings from Italy, Travis. Your article made me curious about Eguana and I gave a quick look at their website.. There’s one thing you forgot to mention… Given its tiny market cap and lack of profitability, it’s hilarious that EGT is traded publicly, though I’m getting to realise that’s what TSV mostly stands for. Besides, your covering on NXPI has forced me to finally inform my self about whether there is any way to invest in the US from good old Europe without having banks and brokers getting all of the return, especially if one ha no million bucks to… Read more Β»