Company Notes Digest 12.8.16

posted in: Notes | 0

Each week we read dozens of transcripts from earnings calls and presentations as part of our investment process. Below is a weekly post which contains some of the most important quotes about the economy and industry trends from those transcripts. Click here to receive these posts weekly via email.

This week’s post has a slightly different format than usual because I spent this week at the LD Micro conference in LA meeting with the management teams of a few dozen Microcap companies. The conference is hosted by Chris Lahiji and his team. They always do a great job of putting together under-followed and under-loved companies with market caps less than $100m. The Macro part of the post still comes from the usual large cap companies, but everything else in the post draws from our meetings with the micro-caps.

It is always eye opening to meet with these small companies. The CEOs are scrappy and tenacious–always looking to sell investors on a dream. There is deep skepticism that most of these companies will survive and the valuations reflect that. There have also been structural shifts in the brokerage community that has made it particularly hard for these companies to raise money. That decreases the chance of survival, but also may create opportunities for savvy investors. Still, I’ll make the usual disclaimer that micro-cap stocks are highly speculative, so invest at your own risk.

The Macro Outlook:

Obviously the stock market has done unbelievably well since the election

“obviously, the stock has done unbelievably well since the election and I think it’s based upon the hope…that the Trump administration will be very good for kind of unleashed business per se and maybe improve the GDP and allow banks to do their lending and the banks will benefit a little bit both from higher rates and higher economic activity and possibly some reduced regulation. So, hopefully that will turn out to be true.” —JP Morgan CEO Jamie Dimon (Bank)

Even Italian elections couldn’t shake the market’s confidence

“I don’t think there is reason to talk about a euro crisis. The Italians have a lot of experience dealing with such situations and that’s why I’m not concerned.” —German finance minister Wolfgang Schaeuble (Government)

Donald Trump sounds pleased

“[The Washington post says companies are unnerved…well] they’re so unnerved that the stock market is at an all time record since I’ve been elected…after I won the election, you see what happened. In the history of our country, there’s never been an up this big after an election, so I don’t know how somebody says that people are unnerved, it’s just the opposite. And frankly I think we’re going to go up. We have tremendous room, tremendous margin in our country, but we have to do things right.” —President Elect Donald Trump (Government)

The business community is certainly more optimistic

“To start the third quarter up through the date of the election, global November new business remained slow. But after the date of the election, we saw new business ramp up in both North America and in Europe…November, in Europe, we had our best month of new business in probably two years. Asia was also incredibly strong…I would say that the conversation is certainly more optimistic than it was in May and June, no doubt about that. Now, we’ll see if that turns into increasing levels of business in early calendar 2017.” —Korn Ferry CEO/CFO (Executive Search)

Companies are getting down to business

“the feel before the election was — it was materially slowing out there…All the discussions I’ve had with customers, suppliers, and with everybody out there, there is a high degree of optimism, and certainly my fellow CEOs…look if we truly are going to have tax reform that is really good…And we feel like every customer we touched since…they’re saying it’s going to be easier to do our jobs and we can get on with doing our jobs and that’s the general feeling…it does feel like people are just down to business now and down to business is a good thought for us.” —HD Supply CEO Joe DeAngelo (Industrial Distributor)

The consumer is healthy

“We see a fairly healthy consumer. And so if you look at macroeconomic data, home prices, the consumer balance sheet, debt service ratios, the number of people working, wages going up, etcetera, we see that pretty healthy. We see a mirror of that inside JPMorgan. So we have reporting quarter-after-quarter, credit card sales, deposits, new household accounts, all those types things are doing quite well and we expect that to continue.” —JP Morgan CEO Jamie Dimon (Bank)

Millenials are buying houses

“With the millennial generation now entering their thirties and forming families, we are starting to benefit from the desire for home ownership from the affluent leading edge of this huge demographic wave. In fiscal year 2016, approximately 22% of our settlements included one primary buyer 35 years of age or under.” —Toll Brothers CEO Douglas Yearley (Homebuilder)

But other consumer spending may still be a little choppy

“the four weeks of November was choppy frankly, particularly the week of the election. I think it was worse than a snowstorm in terms of nobody wanting to go out and buy stuff and that’s what I read about other retailers as well. And again, over the last few months it’s been a little choppy a little more in November and a little weaker and so at least, what we can tell you at this point is the first couple of weeks have been okay. And again, traffic has seemed to have stabilized until something changes there, who knows” —Costco CFO Richard Galanti (Retail)

Commercial Real Estate is late in its cycle

“The one area where you look at and you might say, oh my god, there is a little bit of issue, there is commercial real estate…We are cautious. It’s probably getting later in the cycle for some of that. And we don’t do what I would consider we don’t do now and we have never done the riskiest type of lending. So we have always been cautious in real estate.” —JP Morgan CEO Jamie Dimon (Bank)

[Note: now entering microcap land]

And markets can get ahead of themselves

Sometimes market excitement gets beyond clinical reality…(but that’s not the case with us!) —Vistagen Therapeutics (Pharma/Biotech)

International:

A Chinese steel distributor had interesting thoughts on China, but asked to remain anonymous

The Chinese real estate market will eventually have to correct

The Chinese government needs to sustain the real estate market but they cannot. Real estate prices in Shanghai are now higher than they are in New York City. That is unsustainable. Developments in 3rd and 4th tier cities are sitting empty. That is unsustainable. —Chinese Steel Distributor

Xi Jinping is looking to increase his power

Xi Jinping is a powerful guy, he could be as powerful as Donald Trump. He’s going to consolidate his government team. He already has been…The Chinese people have a love hate relationship with Xi. They love that he cleaned up corruption big time, but hate that because of it spending from corrupt officials got turned down big time. —Chinese Steel Distributor

Business leaders expect the RMB to be devalued by at least 25%

The Chinese government needs to deal with the currency situation. The currency will be depreciated. The government tried to put controls on the currency but they really couldn’t stop capital from leaving the country. The Central Bank did not really support the currency. Most people expect that the RMB will depreciate by at least 25% and so they are trying to get their capital out of the country. Public companies that are listed in the US are one way to do that. If you buy shares of a local subsidiary with shares traded in North America, you can get money out of the country —Chinese Steel Distributor

Financials:

The world has changed for microcap companies

The market is so different. Guys like you are so different than they were 20 years ago. The OTC, so many investors don’t want to invest purely because we’re OTC. Investors wont invest like they would before. You can’t even give your stock certificate to most brokers if you’re OTC. Investors themselves are far less willing to put money into a deal that is pre-profitable. —Pressure Biosciences (Laboratory Instruments)

Consumer:

These days the sexy growth companies generally aren’t public

Who is to say that there aren’t molecules out there that can be engineered that are more efficient at powering our bodies than today’s natural foods? —Soylent VP Brandon Mackie (Meal Replacement Drinks)

Microcap companies are swinging for their own fences

Cannabis companies have different strategies on how to cash in on the “green rush”

Our strategy was to design and build greenhouses to grow cannabis and rent them to licensed growers, but not obtain a license ourselves. We made the decision not to cross the “green line.” —Americann (Greenhouse Developers)

I had a partner who made a lot of money in a buyout who put all his money into gold in 1995. You know how much money he made on that? I always remembered that and said I wouldn’t let that pass by. When everything started happening with pot I said to myself gold rush, green rush. I’m in. I don’t know how to grow but I do know how to make mobile games. —First Harvest Corp (Mobile Gaming)

Technology:

Many companies were birthed in different market environments but are still standing

UGE was born in the “inconvenient truth” years to install solar on commercial buildings

“In 2007 solar installation costs were $8-$10 per watt. Now it’s $1-$2 per watt depending on the market. Panels were $4 per watt back then compared to less than $0.40 now.” —UGE International (Solar Panel Installation)

Some telecom companies are still living off capital raised in the late 90s

“I call it the original sin of telecom. In the late 90s the industry became so overcapitalized and so many smart people came into the industry, attracted by salaries and government incentives. There’s still enough capital around to pay salaries, but it’s not what people expected. You’d be surprised how many PhDs are working in customer service today.” —MRV Communications (Internet Infrastructure)

Healthcare:

Microcap biotech companies raise lots of money for expensive trials

“The cost per patient for a trial in cancer is about $50-100k per patient. Cardio vascular is cheaper–$15-20k per patient, maybe $40k. It will cost you $1 million the minute you decide you want to do a clinical trial.” —Gemphire Therapeutics (Anti-cholesterol drug)

The companies are all trying to prove that their molecules can hit their “end points”

“25% of Americans have a diagnosed mental disorder. 16% will go through a major depressive disorder in their lifetime” —MYND Analytics (Pyschiatric Testing)

“For years addiction was treated as a personal failure. Today addiction is treated as a disease that can be compared to diabetes. It is not curable, it has to be managed for the time of a person’s life.” —BioCorRX (Anti-Addiction Drug Delivery)

“The leading cause of birth defects in the United States is CMV, higher than down syndrome, but not many people know about it” —VBI Vaccines (CMV Vaccine)

“I hope that the incoming administration lives up to its promise to help vets return to civilian life” —Tonix Pharmaceuticals (PTSD drug)

Industrials:

There aren’t as many small manufacturing companies as there would have been in past eras, but that could change

“The Trump thing was nothing more than something that was happening anyways. Manufacturing was coming back anyways. Today the labor cost advantage in China is being offset by the benefits of local production for US markets” —Uniroyal Global CEO Howard Curd (Synthetic Leather Manufacturer)

Materials, Energy:

There are lots of junior mining companies looking to finance exploration projects

“In mining, you have operations guys and project guys. Project guys want a crisis and if they don’t have one they’ll create one.” —Uranium Resources (Uranium Miner)

Capital is scarce for pretty much everyone in the space

“Public capital markets have been closed to shipping for at least 2 years” —PYXIS Tankers (Product Tankers)

Miscellaneous Nuggets of Wisdom:

If you want to succeed with limited capital, the key is to focus

“The best way to succeed in business is maniacal focus, not a shotgun approach” —Pure Bio-science CEO Hank Lambert

Your employees depend on your success

“At Westpoint they teach you a concept of no excuse. There’s no excuse for not taking your hill because troops’ lives depend on you doing what you say you’re going to do. In business it’s not lives that depend on you, but it is livelihoods” —New Age Beverages CEO Brent Willis

Full transcripts can be found at www.seekingalpha.com