Things Are Starting to Get Interesting: June Review/July Preview

Elon Musk is the master of disruptive technologies. Most everyone on the planet has, by now, heard of Tesla, a company that is turning the car industry on its ears. Automakers all over the world lie awake in fear of the future that Tesla is unleashing on their 100+ year old businesses.

Another of Musk’s businesses that is slightly less well known is SpaceX. This company, from a commercial standpoint, is actually far more successful than Tesla, having achieved positive cashflow for some time now. The business model of SpaceX is quite simple; they build rockets cheaper than anyone else, thereby taking massive market share in the big business of taking payloads into space.

But, they don’t only build rockets cheaper, they have now learned how to recycle their rockets. Which makes them dramatically cheaper. Musk has singlehandedly changed the cost structure of an industry that had grown stagnant and placid over the years. And, in doing so, he has not only made himself a very wealthy man, but has enriched us all by bringing cleaner environmentally better products to market.

You might ask what all this has to do exactly with the Tailwinds Select Portfolio and its June performance? Well, in June SpaceX, for the first time, took one of their rockets that had already been into outer space and successfully relaunched it into orbit. In doing so, SpaceX officially disrupted the satellite launching industry and put an exclamation point on their, heretofore, unproven business model.

This is similar to what many of the companies in the Tailwinds Select Portfolio are doing; taking their disruptive business models and proving them in real time. June happened to mark the end of the 2nd quarter, a quarter that is turning out to be the inflection quarter for many companies in the Portfolio.

Tailwinds focuses on early stage companies that are looking to bring highly disruptive business models to industries that are ripe for change. Sometimes these companies can be quite controversial. Many incumbent players are justifiably nervous about new competition entering their business. This often results in the shares of the disrupter being subject to rumor and, in some cases, outright attack from competitors.  A disruptive force entering a complacent industry is nothing short of controversial from the perspective of the other players in the space, which often spills over into the stock market’s treatment of their shares.

So, back to June. After a very strong start to the year, many stocks in the Portfolio had suffered through a weaker April and May. Short attacks were actually launched against several of the companies with Donald Trump like fake news trying to shoot holes in business models, reputations, and balance sheets. In general, the portfolio performed like a SpaceX rocket…during the time between the first payload being delivered and the relaunch. It was ugly and took foresight, trust and fortitude to wait it out, knowing that the outcome, if successful, was worth the near term pain.

As the Phoenix rises from the ashes, SpaceX sends their rockets back into space. And, the Tailwinds Model Portfolio backs and fills, before heading north again. Don’t get me wrong, the Portfolio never flirted with negative territory, but before June it just hadn’t been much fun. However, June marked, in my opinion, a turning point for many of the companies in the portfolio and, no coincidence here, a major turning point in the share prices of the Portfolio constituents.

With an up 12% June, the Tailwinds Model Portfolio put up a big month with across the board gains. Even more satisfying, the Portfolio’s performance improved dramatically as the month went on. This came at a time where the overall market was trading rather tumultuously, with the leaders of the recent rally taking severe hits at times.

We believe that, as strong as June was, it is simply the launching point for the portfolio. Why is this? Simply put, we have many disruptive companies in here who are, like SpaceX, reaching the inflection point that proves their business model. Which, in so doing, has these companies poised to see dramatic increases in share price going forward.

In the rest of this article we will detail each company (in order of addition to the portfolio), discussing the recent events that have moved the shares, and, more importantly, why we believe they are on the verge of bigger things in the near future.

Aqua Metals (AQMS, June Performance +6%) As we detailed in an article recently, Aqua has been the subject of a tug of war between shorts and longs. Believers and non-believers. We are believers and feel that very soon the evidence of an effective solution to disrupting a decades old business of smelting lead for recycling will be proven. This is the 1st quarter in which AQMS will report revenues. They shouldn’t be huge, but it’s the launching pad. Management is insistent that they will be at 120 tons per day by year end. If that is the case, liftoff. We should have good signals as to the likelihood of this over the next month or two.

biOasis (BTI.V, June Performance -5%) biOasis has long been an underperformer in the Portfolio. This was due to delays in internal programs, delays in licensing, and lack of funding. With the recent close of an upsized financing, along with the hiring of a superstar CEO (who just bought shares, by the way), BTI.V is positioned for the future. The stock languishes at the deal price for how long? Until the new programs launch and start showing efficacy. In other words, not much longer to wait and the upside is very large if they are successful, making this a great risk/reward at this price.

Vuzix (VUZI, June Performance +14%) Augmented Reality remain the hottest buzzwords in technology and Vuzix is the company best positioned to benefit from growth in this space. They are the clear market leader with a product that has just come off its best quarter ever. And, guidance is for substantial growth over the next few quarters. With a large short position, the hiring of a very well respected COO, sales improving, partnerships coming, etc., VUZI appears to be ready to launch.

Resonant (RESN, June Performance +3%) Another Tailwinds’ company that has officially booked their first revenue during the June quarter, RESN shares haven’t followed suit with the fundamentals. Recent design wins, a strong pipeline of deals, no real competitors in the space, and hitting revenues about a year earlier than forecast, one would reasonably expect this stock to be at all-time highs. We think it will get there before the end of the year and this summer should mark the start of that move.

Cryoport (CYRX, June Performance +54%) Okay, so CYRX stock is a beast. Their customer traction is impressive, with no real competitors. Meanwhile, the clients’ demand for their services is set to explode, starting with Novartis’ date with the FDA on July 12th. Personalized therapeutics are the future and, if you want to get the future from the lab to the patients, Cryoport is and will be the only viable solution for the foreseeable future.

3D Signatures (DXD.V, June Performance -8%) Canadian biotechs have been the worst performers in the Portfolio to date, but, life being cyclical, we believe they are poised to be the best soon enough. 3DS is a classic example of a stock suffering through a quiet period, but with a very bright future just around the corner. We will have more to say in a research report that will be forthcoming, but suffice to say 3DS has a lot going for it which should be more visible in the next few months.

Fusion (FSNN, June Performance -3%) A true value play, makes one wonder what the catalyst is going to be for Fusion. Honestly, we don’t know. They continue to grow, both organically (which is accelerating) and through acquisition. On a P/EBITDA basis, FSNN is our cheapest stock.

UGE Inc. (UGE.V, June Performance 0%) Another very cheap stock, UGE is actually growing 5X year over year. The market underappreciates the value added by the company as they develop their projects; don’t paint them as a contractor, they are far more even if they make their money from the construction side. Contracts continue to come together, the business is in infancy, and they just closed on a financing which positions them to not need to access capital markets again. This stock should have a big second half.

Polar (POLA, June Performance +2%) Polar is one of those unique opportunities to purchase a quality growth name after they stubbed their toe on a one-time issue. Verizon revenues were weaker in Q1 and POLA got penalized. However, two other major carriers are launching in real time, Verizon is coming back and international (a far larger opportunity) is poised to really take off. When they report, we believe investors will find out that they missed an opportunity if they didn’t buy beforehand.

Patriot One (PTOTF, June Performance +2%) Okay, in a world of great opportunity, this is one not to miss. Just completing an oversubscribed financing with a big bank that will launch coverage (as we did). Pre-booked enough orders to fill all their supply for the rest of 2017. FCC approval coming in the next couple months, with revenue and partnerships with major integrators (think Tyco, Honeywell, and/or Siemens) coming shortly thereafter. Patriot PTOTF is certainly worthy of a long look.

Catasys (CATS, June Performance +13%) Just look at the public guidance for this company. Revenues to grow 100% plus for several years to come. Five of the eight largest healthcare companies in the US on their platform with two more expected by year end. Margins well over 50%. There is no reason this stock should trade below the level at which they just raised $15M including $6M from the CEO and a board member. Enough said.

Chromadex (CDXC, June Performance -2%) Over 170 million Americans take health supplements on a routine basis. The next blockbuster supplement will be Niagen, which is directly related to increases in NAD, the presence of which is proven to slow the ageing process. If 1 million people take this monthly, it’s a $500M in sales product. Sometime in the next few years, we will likely look back and realize this was easy to predict, but right now you can get the shares before the market catches on.

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