Posts tagged ‘nanotechnology’
Get Out of Stocks!*
Get out of stocks!* Why the asterisk mark (*)? The short answer is there is a certain population of people who are looking at alluring record equity prices, but are better off not touching stocks – I like to call these individuals the “sideliners”. The sideliners are a group of investors who may have owned stocks during the 2006-2008 timeframe, but due to the subsequent recession, capitulated out of stocks into gold, cash, and/or bonds.
The risk for the sideliners getting back into stocks now is straightforward. Sideliners have a history of being too emotional (see Controlling the Investment Lizard Brain), which leads to disastrous financial decisions. So, even if stocks outperform in the coming months and years, the sideliners will most likely be slow in getting back in, and wrongfully knee-jerk sell at the hint of an accelerated taper, rate-hike, or geopolitical sneeze. Rather than chase a stock market at all-time record highs, the sideliners would be better served by clipping coupons, saving, and/or finish that bunker digging project.
The fact is, if you can’t stomach a -20% decline in the stock market, you shouldn’t be investing in stocks. In a recent presentation, Barry Ritholtz, editor of The Big Picture and CIO of Ritholtz Wealth Management, beautifully displayed the 20 times over the last 85 years that the stocks have declined -20% or more (see chart below). This equates to a large decline every four or so years.
Strategist Dr. Ed Yardeni hammers home a similar point over a shorter duration (2008-2014) by also highlighting the inherent volatility of stocks (see chart below).
Stated differently, if you can’t handle the heat in the stock kitchen, it’s probably best to keep out.
It’s a Balancing Act
For the rest of us, the vast majority of investors, the question should not be whether to get out of stocks, it should revolve around what percentage of your portfolio allocation should remain in stocks. Despite record low yields and record high bond prices (see Bubblicious Bonds and Weak Competition, it is perfectly rational for a Baby-Boomer or retiree to periodically ring their stock-profit cash register, and reallocate more dollars toward bonds. Even if you forget about the 30%+ stock return achieved last year and the ~6% return this year, becoming more conservative in (or near) retirement with a larger bond allocation still makes sense. For some of our clients, buying and holding individual bonds until maturity reduces the risky outcome associated with a potential of interest rates spiking.
With all of that said, our current stance at Sidoxia doesn’t mean stocks don’t offer good value today (see Buy in May). For those readers who have followed Investing Caffeine for a while, they will understand I have been relatively sanguine about the prospects of equities for some time, even through a host of scary periods. Whether it was my attack of bears Peter Schiff, Nouriel Roubini, or John Mauldin in 2009-2010, or optimistic articles written during the summer crash of 2011 when the S&P 500 index declined -22% (see Stocks Get No Respect or Rubber Band Stretching), our positioning did not waver. However, as stock values have virtually tripled in value from the 2009 lows, more recently I have consistently stated the game has gotten a lot tougher with the low-hanging fruit having already been picked (earnings have recovered from the recession and P/E multiples have expanded). In other words, the trajectory of the last five years is unsustainable.
Fortunately for us, at Sidoxia we’re not hostage to the upward or downward direction of a narrow universe of large cap U.S. domestic stock market indices. We can scour the globe across geographies and capital structure. What does that mean? That means we are investing client assets (and my personal assets) into innovative companies covering various growth themes (robotics, alternative energy, mobile devices, nanotechnology, oil sands, electric cars, medical devices, e-commerce, 3-D printing, smart grid, obesity, globalization, and others) along with various other asset classes and capital structures, including real estate, MLPs, municipal bonds, commodities, emerging markets, high-yield, preferred securities, convertible bonds, private equity, floating rate bonds, and TIPs as well. Therefore, if various markets are imploding, we have the nimble ability to mitigate or avoid that volatility by identifying appropriate individual companies and alternative asset classes.
Irrespective of my shaky short-term forecasting abilities, I am confident people will continue to ask me my opinion about the direction of the stock market. My best advice remains to get out of stocks*…for the “sideliners”. However, the asterisk still signifies there are plenty of opportunities for attractive returns to be had for the rest of us investors, as long as you can stomach the inevitable volatility.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold long positions in certain exchange traded funds, but at the time of publishing SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
NVEC: Profiting from Electronic Eyes, Nerves & Brains
Recently, Seeking Alpha Editor-in-Chief Mick Weinstein interviewed me with the purpose of reviewing an equity investment I find attractive. For the “stock-jock” Investing Caffeine followers, I am publishing the January 5th interview below.
What is your highest conviction stock position in your fund – long or short?
I don’t really have a highest conviction stock, per se, in my fund since I treat all my stocks like children – I love them all. Having said that, NVE Corp. (ticker: NVEC) is a holding of mine that exhibits many of the characteristics I look for in an investment. The Eden Prairie, Minnesota based company is named after “Nonvolatile Electronics,” which refers to memory technology that retains data even when power is removed – a critical attribute for certain applications.
Tell us a bit about the company and what it does.
NVE Corp. is a market leader in nanotechnology sensors, couplers, and MRAM intellectual property (Magnetoresistive Random Access Memory). NVE’s microscopic technology enables the transmission, acquisition, and storage of data across a broad array of applications, including implantable medical devices, mission critical defense weapons, and industrial robots. Major customers include: St. Jude Medical, Inc. (STJ), Starkey Laboratories, Inc., and the U.S. Government.
The company’s coupler and sensor businesses have been ridiculously profitable. Even over a period covering one of the worst global financial crisis in decades, NVE managed to increase its operating margins from an already very respectable 40% range in Fiscal 2007 (ending March) to a stunning 56%+ level in Fiscal 2009.
Beyond sensors and couplers, NVE Corp. is optimistic about the potential for the MRAM market. However, outside of a few one-time licensing fees, NVE is currently generating effectively $0 revenues from this nascent storage technology. Outside of producing small MRAM devices for niche applications such as tamper prevention, NVE Corp. is looking to leverage their IP portfolio by licensing out the patents and subsequently receiving royalties from MRAM device manufacturers. MRAM technology uses magnetic fields to record information, but unlike tape recorders in which a short section of tape holds magnetic information, with MRAM data is held by electrons with out the need of moving parts to read or write data. Believe it or not, this method is highly reliable and is very power-efficient relative to other storage technology alternatives. Currently, the problem with MRAM is the cost prohibitive manufacturing requirements relative to other memories (such as DRAM, SRAM, and Flash), but costs are expected to come down over time. For some MRAM believers, the technology is considered the “Holy Grail” because it may have the potential to combine the speed of SRAM, the density of DRAM, and the non-volatility of Flash memory in a universal source.
If the unproven potential of MRAM ever blossoms, the broad portfolio of NVE Corp.’s MRAM patents should represent a very sizeable profit opportunity. Of course, NVE Corp. must first establish the validity of its MRAM intellectual property and appropriately charge and collect royalties for IP usage. How big can the MRAM market be? Some size the MRAM market in the billions and Toshiba has stated they expect the MRAM market to surpass the size of the traditional memory markets by 2015.
No matter how one measures the size of the market, there will be a substantial revenue opportunity for NVE Corp. if every smart-phone, gaming device and laptop exclusively uses universal MRAM – rather than a combination of DRAM, SRAM, and Flash technologies.
Can you talk a bit about the industry/sector? How much is this an “industry pick” as opposed to a pure bottom-up pick?
Generally speaking, I am a bottom-up investor. I may have concrete views on a particular industry, but the fundamentals of a company will be the main determinant of my investment thesis. Overall, I am looking for market leading franchises that can sustain above-average growth rates for extended periods of time. These traits can come from either a company operating in a mature, sleepy industry (take for example Google in the advertising world) or from a more dynamic growth industry like nanotechnology in the case of NVE Corp.
I believe the nanotechnology industry is in the very early innings of an innovation revolution with regard to new applications and products. Like semiconductors, the economies of scale and technological advances of NVE Corp.’s “spintronic” technology should continually allow faster, smaller, more reliable solutions at lower bit prices. In my view, this snowballing effect will only increase the penetration of nanotechnology solutions and introduce an ever increasing list of new applications.
Can you describe the company’s competitive environment? How is this company positioned vis a vis its competitors?
NVE Corp. has competitors along all three of its spintronic businesses. In their sensor business, most of the competition comes from the makers of legacy electromechanical magnetic sensors, including HermeticSwitch, Inc., Meder Electronic AG (Germany), and Memscap SA (France).
In the coupler space, NVE Corp. faces a larger list of well capitalized, household semiconductor names, including Avago (AVGO), Fairchild Semiconductor International (FCS), NEC Corporation, Sharp Corporation, Toshiba Corporation, Vishay Intertechnology (VSH), Analog Devices, Inc. (ADI), Silicon Laboratories Inc. (SLAB), and Texas Instruments Incorporated (TXN).
A different set of competitors are searching for the MRAM holy grail, including the following companies: Crocus Technology SA (France), Grandis, Inc., MagSil Corporation, Spintec (France), Spintron (France), Spintronics Plc (UK), and IBM.
There is undoubtedly a ton of competition in the spintronics space, but as of October 2009, NVE Corp. has 52 issued U.S. patents and over 100 patents worldwide (either issued, pending, or licensed from others) – many focused on the potentially lucrative MRAM field. Although NVE Corp. has many competitors, they have dominant share in the coupler/sensor market when it comes to high-end, merchant supplied solutions. Moreover, on the MRAM side of the business, the company has already licensed its intellectual property to several companies, including Cypress Semiconductor (CY), Honeywell International Inc. (HON), and Motorola, Inc. (MOT).
Can you talk about valuation? How does valuation compare to the competitors?
Valuation is a key component for all my stock investments. In my valuation work I pore over the income statement, balance sheet and cash flow statement in deriving my price targets.
One area helping NVE Corp.’s valuation case is its improving trend-line of profitability. Over the last 5 years alone, gross margins have gone from 40% to over 70% – not a bad business model if you can execute it. The company also has a pristine balance sheet. Not only does NVE Corp. have no debt, but it also is sitting on a growing mound of cash/investments (over $43 million), representing more than 20% of the company’s market capitalization. Lastly, the company in my view is attractively priced on a free cash flow basis (cash from operations minus capital expenditures), yielding around 6% of the total company value.
What is the current sentiment on the stock? How does your view differ from the consensus?
With small cap stocks like NVE Corp., sentiment and lack of liquidity can create gut-wrenching volatility. Unlike many growth investors who pay more attention to positive momentum factors (price direction), I welcome volatility as it allows me to find more attractive entry and exit points.
With that said, NVE Corp. hit a peak stock price north of $63 per share in early September fueled by 41% revenue growth in their June quarter (fiscal Q1). Subsequently, in fiscal Q2 (ending September 30th), revenue growth decelerated to +14% causing momentum investors to take NVE Corp.’s shares to the woodshed. With the stock down about -35% from its recent crest, I find the valuation only that much more attractive.
Wall Street estimates are calling for further slowing in revenue growth in the coming quarter, so the short term sentiment may or may not continue to sour? Timing bottoms is inherently dangerous and not something I consider myself an expert at. Absent a major deterioration in fundamentals, I stand ready to add to my position if NVE Corp.’s share price falls and valuation metrics improve.
I would argue the typical consensus view advocates selling shares when revenue growth slows. Many of my best performing stocks have been purchased during transitory periods of slowing or cyclical downturns. Let’s hope that’s the case with NVE Corp.
Does the company’s management play a role in your position? If so, how?
Absolutely. There is a continual debate over what is more important, the jockey or the horse? My investment philosophy puts more weight on the jockey than the horse. Obviously, I’m looking for the combination of a talented management team and a solid business model.
When it comes to NVE Corp., Daniel Baker, Ph.D. has done a phenomenal job managing the hyper-growth profile of the company, while preserving prudent and conservative financial values. For the third year in a row, Dr. Baker was also recognized as one of the best U.S. CEOs in the semiconductors and semiconductor equipment industry by investment research and financial consulting firm DeMarche Associates.
At the end of the day, it’s difficult to argue with a track record of success. Since Dr. Baker took over, revenues have more than tripled and earnings have grown from $0.05 in fiscal 2001 to $2.04 in Fiscal 2009.
What catalysts do you see that could move the stock?
Since I hold a longer term investment horizon, catalysts are not a driving aspect to my investment process. But clearly, any additional evidence unearthed in the marketplace validating the growth in the MRAM market, or announcements confirming the value of NVE Corp.’s MRAM intellectual property, should provide support to the stock price.
Beyond that, given where the stock is trading now, I believe merely continuing the execution on their sensor and coupler business provides adequate upside prospects.
What could go wrong with this stock pick?
Investing in small cap technology stocks comes with a whole host of risks. Although I don’t believe the positive scenario of critical mass MRAM commercialization is baked into the current stock price, nevertheless I understand any setbacks announced relative to NVE Corp.’s MRAM prospects or the industry’s MRAM expectations, will likely result in stock price pressure.
NVE also has significant customer concentration, therefore a loss or cutback in sales from a lead customer will probably contribute to price volatility.
From a macro perspective, the company has battled successfully through the economic crisis and proven itself somewhat recession resistant. Nonetheless, the company has sizeable exposure to the industrial segment and would not be immune from the “double-dip” economic recession scenario.
Surely there are additional hazards to this investment, however these are some of the risks I am currently focused on.
Do you have any closing thoughts?
NVE Corp. is not a stock for the faint of heart. However, for those who can stomach the volatility, I encourage you to do some more homework on NVE Corp. Not only will you learn about a phenomenally managed, very profitable, attractively priced nanotechnology company, but you will also gain insight into a leading force behind the eyes, nerves, and brains powering the electronic systems of our future.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own shares in NVEC (and certain exchange traded funds), but did not have any direct positions in the following companies or stocks mentioned in this article at time of publication: STJ, HermeticSwitch, Inc., Meder Electronic AG, and Memscap SA, AVGO, FCS, NEC Corporation, Sharp Corporation, Toshiba Corporation, VSH, ADI, SLAB, TXN, Crocus Technology SA, Grandis, Inc., MagSil Corporation, Spintec, Spintron, and Spintronics Plc, IBM, CY, HON, and MOT. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.