Well, we still have one more day of (slow) trading before Labor Day, however I feel comfortable in saying goodbye to the Dog Days of Summer. Don’t get me wrong, from Tailwinds’ perspective it has been a very good summer. After posting 12% and 1% returns in June and July respectively, we finished with a very nice 4% gain in the month of August. Which, in light of being negative for most of the month was a tremendous surprise.
However, with the light trading and weak overall small cap environment, we are happy to be rid of summer. It seemed that good news was frequently yawned at or created a selling opportunity. Let’s get back to an active small cap market, can we?
At Tailwinds, however, we continue to thrive in a tough environment through quality stock picking and a little fortuitous timing. Our strength in August was strikingly similar to July, in which one stock provided the vast majority of the performance. In July, Cryoport led the way as the market caught on to the uniqueness of their offering and the explosive growth coming at them. Similarly, we had Fusion Telecommunications hit radar screens in a big way in August as their deeply discounted valuation was finally made clear to the market.
We’ve been saying for quite a while that Fusion is an incredible value. In our June Review / July Preview piece, we said the following about Fusion.
“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 Price-to-EBITDA basis, FSNN is our cheapest stock.”
Well, we found out what the catalyst was when Fusion made a paradigm changing acquisition, agreeing to merge the much larger Birch Communications into Fusion, with the valuation for the transaction at $3.85 per share…only a 200% or so premium to the then-current share price.
The result of this is that Fusion stock was up 128% for the month of August, all occurring in the last four days. This alone is what sparked the strong performance for the Tailwinds Select Portfolio and helped to drive home a couple key points.
- Diversification is good…to a point. It’s important to own a meaningful position in each company (what good is finding winners if you make no money?), but also to have enough balls in the air that you don’t miss good opportunities is key. We’ll never follow more than 20 names, but, if we were stuck in only three or four names, we could easily miss some big winners.
- Buy off the radar screen names. Fundamentals drive the day and when you see a disconnect between fundamentals and share price, there is opportunity. Looking at StockTwits (an active chat room), there were all of two active posters on FSNN last month, ourselves being one. No one cared…now they all do.
- When swinging for the fences, let the ball clear the wall. What this means is that, when investing in high risk stocks, you’ll have winners and losers. Their is tremendous upside and downside in these stocks. Make sure the upside is fully realized before selling. If you take money off the table up 20% in a high risk name, you have just risked more than that for a small gain…which makes no sense. Let the winners ride and generate real returns or play in a less risky sandbox.
The bottom line here is that our strategy of finding unique opportunities, buying them when they are out of favor, and riding the wave of excitement higher can generate huge returns over time.
Changes to the Tailwinds Select Portfolio
In August we had several changes in the portfolio. The first change was adding Dyadic to the portfolio. This company is a very unique, off the radar screen opportunity…the kind of company that, like a Fusion, offers deep value but offers much more upside.
Dyadic has a unique protein expression host, C1, that has the potential to help change the way biologics are manufactured, thus lowering the cost of biopharmaceutical production. We wrote about it here, but, in a nutshell, C1 has proven itself effective in other applications and it is showing great efficacy in early trials in biologics. Meanwhile, the Company is fully funded and is actually repurchasing shares. The risk / reward is truly off the charts.
Besides Dyadic, we had several trading calls made in the Select Portfolio. We added to our AQMS position, as it has backed off substantially lately and we love the stock. We funded this with an across the board reduction in each other position.
Secondly, we reduced our Fusion position by 1/2 after it had rallied 120%, which had made it a dramatically outsized position. We still believe in Fusion, but taking some money off the table after a huge move is always warranted. The funds we raised were put into biOasis and Resonant.
biOasis’ position was increased as the Company is making internal changes that appear to have positioned it for success. Their new CEO, Mark Day PHD, is a rock star. But, equally importantly, he is surrounding himself with highly pedigreed individuals. Look at the recent board additions and you can see that the track record of creating value is tremendous and we wanted to bump this position; especially since it had decreased in relative size due to underperformance lately.
Resonant is also hitting their stride. They were determined (not announced publicly, but through a cellphone tear-down) to have landed Samsung as a client. This is absolutely huge in terms of both business opportunity but proof of their product’s quality and effectiveness. However, during the summer doldrums, RESN traded lower. So, we added on the weakness and are very excited for the future here.
Summer is over. The kids are back to school. Traders should be returning to their desks. Our portfolio appears to be poised for a big fall (season, not drop). We are excited about the future and look forward to watching it unfold.