February Performance Review…Tailwinds Continues to Outperform, but Markets Looking Treacherous

February will be remembered as the month that volatility returned to the markets. Well, we hope that’s what it will be remembered for. Because, the alternative is that, in the future, it might be remembered as the month the bull market died.

It seems like a long time ago, but the first few trading days of February were ugly. Stocks took it on the chin across the board, with a violent spike in volatility of unprecedented speed. The weakness in the markets took many by surprise. This was not caused by the percentage movements, which were relatively tame as far as market corrections go. No, instead it was the amazing quickness in sentiment change that rattled the core of investors.

After the first few days, calm returned to the market and it appeared that the Trump Rally was coming back. Stocks bounced, people put cash to work, everyone shook off the feelings of panic and life was good again. At least until the last two days of the month when stocks decided to take another hit.

The action on the last day of the month was particularly disturbing to your author. After spending most of the day in positive territory, the markets sold off rapidly into the close, ending on the low of the day.

I’ve called for increased volatility, and we’re seeing this. But, I’m also seeing cracks in the foundations of the market. The FAANG stocks in particular are beginning to look vulnerable. If they go, the market will certainly be in for a tough stretch.

Meanwhile, the economy remains strong and the Tailwinds Select Portfolio continues to outperform the indexes. In February, Tailwinds was down 2% while the S&P was down 4%. More applicable, the LD Micro index declined over 6% for the month.

This has left Tailwinds up 16% on the year versus negatives for every other index out there in the US. Can this trend continue? Well, in any given stretch, a market correction should hit Tailwinds harder, due to the high-beta and less liquid aspects of the portfolio. However, I would suggest that the strong economy play right into the hands of our group of young, growing companies and we appear poised to continue having an excellent year relative to the markets.

In terms of the individual stocks in the portfolio, there were several that contributed mightily, one way or the other, to performance. I’ll highlight here the five that had movements in excess of 20% for the month, along with the two recent additions.

The big movers…
FTE Networks (FTNW)
: was up 45% in February. Investors are treading cautiously here as this stock has come a long ways. I would only say that I’m not being cautious; I bought aggressively and think this is still by far the cheapest (on a EV to EBITDA basis and on a PEG ratio) stock in my universe. Growth on their high-margin CrossLayer business is astronomical and it trades at about 4X EV/EBITDA. I see great things in the future.

Aqua Metals (AQMS): finally appear to have gotten their production snafus behind them, which pushed the stock up 27% in the month. I think they announce full production soon, which should be a major driver for the shares. It will also, likely, be my time of exit, as previously discussed.

MTBC: up 20% in front of earnings, which are due next week. Another stock that has a very cheap EV to EBITDA and is growing nicely. Expect guidance to be officially raised next week.

Patriot One (PTOTF)B: down 20% on the month, this has been a very strong performer and, on the back of a share issuance, gave up some ground in February. They are now well funded and getting closer to official launch of their product. Weakness represents a buying opportunity in Patriot.

Resonant (RESN): shares in Resonant gave up 27% in February as the Company continues to frustrate investors with a mix of positive announcements around products and customers, but no significant revenue. This looks set to change in the latter half of 2018. There is no real catalyst here, but this stock is cheap and they are doing great things. I continue to add on weakness.

The new additions…
Atomera (ATOM): up 5% since inclusion in the Tailwinds Select Portfolio, ATOM is a tech version of a biotech, i.e. it’s very binary. If the semiconductor fabs integrate their process into production lines, the stock is a home run. If they don’t it’s a pop fly…with the infield fly rule in effect. That being said, I’m feeling confident as a large customer has integrated their equipment into an active fab for testing and I think a first customer could be coming in a few months. Great risk/reward.

Imageware Systems (IWSY): down 7% since inclusion, IWSY has the best backend solution for biometric identification systems. With smart phone penetration hitting critical levels, biometric adoption for all security purposes is going to accelerate rapidly. Expect many positive announcements for the leader in the space in the near future.

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Tailwinds' Disclaimers & Disclosures: For a full list of disclaimers and disclosures, please visit http://tailwindsresearch.com/disclaimer/.