Technology Opportunitymedia.angelnexus.com/pdf/tao/tao-august-2016-jm9.pdf · 2018-02-16 · August 2016 Issue 2 Technology Opportunity & History has shown us time and time again

August 2016

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In this month’s Issue:

• Words of advice at all-time highs

• 3 New Biotech Recommendations

• Portfolio News

• Position Adjustments

Trading at All-Time Highs“Be fearful when others are greedy, and greedy when others are fearful.”

Of all of the advice ever given out by Warren Buffett, the words above just might be the most important. Acting contrary to the masses, or at least recognizing when they’re being overzealous, is one of the most reliable ways to exploit the market’s inefficiencies. It can also sometimes be the only way to save your neck from the next big crash.

Anyone who’s been reading these pages long enough knows that I’m not a fear monger by any means, but with the market trading at all-time highs, now is as good a time as any to talk about general strategy and mitigating risk.

To be perfectly clear, we are always buyers here at Technology and Opportunity... and always will be. There will never be an issue of this newsletter where we don’t make at least one new recommendation. We do this not to meet any particular quota, but rather because it aligns with our overarching thesis on how the market works.

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History has shown us time and time again that even in the face of the most brutal crashes, the broader market goes up over the long run, with innovators leading the way. As investors, we can only act on the assumption that this will continue to be true. After all, even if you’d bought at the peak of every major bubble in history, as long as you had held steady through those storms, you’d be wealthier for it today.

Of course, as Keynes once pointed out, markets can remain irrational longer than you might be able to remain solvent. In writing this newsletter, we like to assume a steady flow of disposable cash for investing. Depending on your financial situation, though, this may or may not be the case for you.

Because we have such a large and diverse subscriber base, it’s simply impossible to tailor an ideal portfolio for every single reader. Ultimately, our job is to educate and guide, not tell any of you exactly what to do.

I stress this point because readers sometimes take the words of these pages for gospel. As much as I appreciate the trust in our recommendations, I would hope it’s understood that the way you allocate is entirely up to you and your individual situation.

If you have the means and risk tolerance to spread across each of our recommendations as they come in, then power to you. If you’re strapped for cash, don’t have an emergency fund, and/or may need to liquidate your portfolio in the near future, though, you probably shouldn’t be buying every stock we write about. Likewise, you may often want to close out positions sooner than we recommend if your situation calls for it.

One strategy I would highly recommend for anyone with solvency concerns, especially with the market trading near all-time highs, is to put in your trailing stop-loss orders. This way, you won’t get caught with your pants down in the event the market plummets, but you also won’t be left out in the cold if the rally continues breaking through the ceiling.

In addition to putting in any stop-losses, now is a good time to start trimming some fat. As the year comes to a close, we will be doing just that by securing a few gains and dropping some of our portfolio laggards. This will serve not only to increase your buying power in the result of a crash, but it will also allow for you to take advantage of tax-loss harvesting for your 2016 return.

That said, we’re going to start small this issue with a single sell recommendation:

Sell Apple Inc. (NASDAQ: AAPL) for ~15% gain

We recommended Apple (NASDAQ: AAPL) in May, just three issues ago, following a sharp

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sell-off as investors worried about the company’s ability to continue growing sales. These fears were warranted to some extent, as China was making moves to box Apple out in favor of domestic competitors, but we called out panic selling and decided to exploit the opportunity.

Many readers saw the recommendation a bit strange considering our “Death of the iPhone” thesis, but, as I’ve clarified before, iPhone is not synonymous with Apple, and the company has a history of pivoting to a new flagship device. One subscriber even went so far as to call me a fraud when I recommended Apple, but with its stock up 15% and Himax (NASDAQ: HIMX) up 16.9% since our initial recommendations, the writing is on the wall.

That said, Apple stock is poised for another round of selling, as its iPhone 7 is expected to underwhelm. As OppenheimerFunds analyst Andrew Uerkwitz puts it, minor changes in phone design are [emphasis mine] “unlikely to either drive enough existing users to upgrade sooner or attract more switchers than before from Android devices.”

All said and done, Oppenheimer is predicting a 6.4% year-over-year decline in iPhone shipments in 2017. This is a stark contrast from the consensus estimate of 5.5% growth, so if Uerkwitz hits, you can expect a shock to Apple’s stock. If this happens, it’s likely we’ll buy back in on the dip, but for now we’re going to take the 14.8% gain off the table.

Sell Apple Inc. (NASDAQ: AAPL) at market for a 14.8% gain.

Three New Biotech Recommendations

Some of our long-term subscribers may have noticed that it’s been a while since we dove into any biotech stocks here at Technology and Opportunity.

We’ve made out quite well trading this volatile sector in the past, with firms like Prana Biotechnology (NASDAQ: PRAN) returning subscribers as much as 212% in just a few short months. We’re even sitting on Opko Health (NASDAQ: OPK) — our only open biotech stock — for a solid gain of ~20%. But for the most part, I tend to reserve any biotech recommendations for a separate newsletter I manage, called The Cutting Edge.

As much lament as that may bring to those of you who don’t subscribe to both services, know that there’s a method to my madness. Put simply, Technology and Opportunity is not a newsletter geared towards high-risk investments and trading the same way The Cutting Edge is. Our strategy here is to buy and hold stocks that we expect to grow over the long run without putting any of you at too much risk.

This isn’t to say the information provided in this letter isn’t as valuable (one look at our

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portfolio, and it’s clear we are absolutely crushing it), but we definitely like to play it much safer in these pages for the most part. Speculative trading, to put it bluntly, is not for everyone.

That being said, we don’t shy away from these kinds of investments completely. Every now and then, we like to scratch our gambling itch with the friendly reminder that it’s never a good decision to put all your eggs in one basket — or in this case, three.

CRISPR STOCK #1: Cellectis S.A. (NASDAQ: CLLS)

For those of you who haven’t seen it already, we have a newly published report available on our members-only site entitled “[Gene Editing] The Secret of Life and a Six-Figure Payday.” The report contains our latest recommendation, development-stage biotechnology firm Cellectis S.A. (NASDAQ: CLLS).

You can access that report right here.

I highly recommend that everyone read this report in its entirety, but I’m going to break it down as concisely as possible right here because I know not everyone is going to take the time to go through. The information in that report closely relates to a second recommendation we will be making below, so if you want additional information, be sure to give it a read.

Keeping things brief, Cellectis is a genome engineering company that is a) developing immunotherapies for cancer using a gene editing method known as TALEN (transcription activator-like effector nucleases) and b) pioneering agricultural biotech using a revolutionary gene editing method known as CRISPR through its wholly owned subsidiary Calyxt.

Of the two technologies above, CRISPR is the one that grabs the headlines and currently warrants the most hype. Cellectis’s efforts in immunotherapy are undoubtedly of great importance to the firm, but we ultimately see the biggest speculative upside in its agricultural arm Calyxt.

Calyxt is quite special because it has been granted an exclusive license agreement with the University of Minnesota for worldwide rights to patent family WO/2014/144155 entitled “Engineering Plant Genomes Using CRISPR/Cas Systems.”

CRISPR, for those who aren’t familiar yet, is an incredibly precise and newly discovered gene editing method that’s expected to completely revolutionize genetic medicine, and perhaps just medicine altogether.

As The Atlantic has described CRISPR, “It’s like a computer next to an abacus... a machine-gun

https://www.angelpub.com/pubaccess/tao/report/tao/2028

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next to a spear,” when compared to current genetic engineering technology.

Or as The New Yorker recently put it, “Imagine being able to manipulate a specific region of DNA... as easily as correcting a typo.”

Already, there has been a massive influx of investments in CRISPR, both on academic and monetary fronts. Publications on the topic have more than tripled since scientist Jennifer Doudna first proved the method possible in 2013, and heavyweight investors including Google and Bill Gates have already led funding rounds up to $120 million.

While most of these investments have gone towards medical research, Cellectis, through its agricultural arm Calyxt, has the potential to completely reinvent how we grow food with its exclusive rights to engineering plant genomes using CRISPR.

No matter your opinion on GMOs, it is simply undeniable how profitable gene editing technology can be. Consider that within less than nine years on the market, agriculture giant Monsanto (NYSE: MON) returned investors a whopping 1,170% using far less sophisticated tech.

Already, Cellectis is engineering things like gluten-reduced wheat, reduced fat canola and soybean oils, and potatoes that grow with an additional 15% in usable yield. With its early access to CRISPR intellectual property, the possibilities are near limitless.

See report for official Cellectis S.A. (NASDAQ: CLLS) recommendation.

https://www.angelpub.com/pubaccess/tao/report/tao/2028

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CRISPR STOCK #2: Editas Medicine (NASDAQ: EDIT)

As mentioned above, the bulk of investment towards CRISPR right now is in the medical space. Cellectis, while incredibly well positioned on the agricultural side, is only a genetic engineering play with respect to plants and only a pharmaceutical play with respect to TALEN. For exposure to the medical industry, investors will need to look at firms other than Cellectis, the first of which is Editas Medicine (NASDAQ: EDIT).

Editas Medicine (NASDAQ: EDIT) originally spawned from five scientific founders considered world leaders in the fields of genome editing with specific expertise in CRISPR/Cas9 and TALEN technology. The all-star group of academics includes Feng Zhang of MIT, George Church and J. Keith Joung of Harvard Medical School, David R. Liu of Howard Hughes Medical Institute, and none other than Jennifer Doudna of Berkley.

In 2013, a trio of biotech heavyweights including Flagship Ventures, Polaris Partners, and Third Rock Ventures joined forces to raise $43 million to get the company off the ground. In 2014, biotech veteran Katrine Bosley, previously of Avila Therapeutics (acquired by Celgene for $350 million), took the reins as CEO.

In 2015, Big Pharma began to take note. Juno Therapeutics (NASDAQ: JUNO) promised Editas as much as $737 million for licensing of its CRISPR technology depending on certain milestone achievements. That’s just once licensee over a five-year term.

Then in January 2016, backed by Bill Gates and the venture capital arm GV of Alphabet (NASDAQ: GOOG), Editas filed for an IPO and began trading at $16 per share, climbing nearly 15% its first day of trading. The stock soon climbed to a high of $42 but has since reduced close to IPO levels at $20 a share.

High Risk, High Reward

Anyone interested in investing in Editas needs to know that the success of the firm relies heavily on patents issued to co-founder Feng Zhang, who did pioneering work with CRISPR/Cas9 in his lab at the Broad Institute and MIT.

No longer associated with the daily operations of Editas, though, Jennifer Doudna disputes Zhang’s ownership of the patents. Doudna is now battling for control alongside European researcher Emmanuelle Charpentier. The patent office is currently working to figure out who owns what, but, as you might expect, things are a bit complicated.

On one front, there is a dispute in regards to timing. While Doudna filed her initial patent in March 2013 and Zhang filed his seven months later in October, his application was accelerated

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and was the first to be issued.

In addition to timing, there is the important issue of distinction between cell types. While many have credited Doudna with pioneering CRISPR/Cas9 in prokaryotic cells (such as bacteria), Zhang was the first to edit a gene using CRISPR in a eukaryotic cell (such as a human cell), which is arguably a very important distinction.

Oral arguments have been scheduled for November 17, so in addition to the Trump/Clinton presidential race, we’ll also have the Doudna/Zhang patent battle to pay attention to this winter. Better than any Mayweather bout, if you as me.

While it’s obviously still too early to make any definitive statements about the decision in these proceedings, Zhang’s camp does have some advantages heading into oral arguments.

First, the Broad Institute wants to argue that Zhang’s CRISPR-based genome-editing inventions occurred at the earliest date mentioned in its patent applications. Judges have allowed them to file that motion.

Second, Doudna’s camp (University of California) wanted argue that Zhang was dishonest with the patent office about what he had accomplished with CRISPR. Judges have recently denied the request to file that motion — a big win for Zhang.

Third (and this goes back to the distinction between eukaryotic and prokaryotic cells), the Broad Institute is contending that UC’s patent claims are for genome editing in the respective cell type. Judges have granted the right to file that motion, which means they see it as an important factor of the case. This is very good news for Editas, and it gives us enough confidence to warrant the risk of its IP being stripped.

Official Recommendation:

As for the specifics, Editas trades at a market cap of ~$725 million, which, while not traditionally small, is absolutely tiny considering the potential of CRISPR/Cas9. If the firm wins full control over eukaryotic or human cells, the market is going to fawn over this stock.

Net loss stands at about $5.5 million a quarter, with R&D accounting for a little less than half of expenses. With up to $217.3 million in cash and equivalents thanks to backers like Gates and Google Ventures, Editas has more than plenty of breathing room through development. Even as this cash horde dwindles down over the next few years, there will be no shortage of funding so long as Zhang gets to keep his IP.

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We rate Editas Medicine (NASDAQ: EDIT) a “Buy” under $25.00.

The risk level is “High” if you buy it alone. The risk level is reduced to “Medium–Low” if you hedge with Intellia (see below). The average analyst price target is $36.00.

CRISPR STOCK #3: Intellia Therapeutics (NASDAQ: NTLA)

Not too long after Editas found itself entering the public market in January, a second biopharmaceutical company by the name of Intellia Therapeutics (NASDAQ: NTLA) entered the scene, offering $108 million in shares to the public

The company trades with a market cap of $664 million and has a robust pipeline with five therapeutic programs: three self-led, one co-development with Regeneron (NASDAQ: REGN), and two partnerships with Novartis (NYSE: NVS).

Intellia, along with private companies Caribou Biosciences and Crispr Therapeutics, uses technologies licensed from Jennifer Doudna, who serves as a scientific advisor for the firm. Because of this, Intellia represents a potential hedge against Editas Medicine and vice versa.

While we have to give the edge to Editas over Intellia in the patent dispute, it’s impossible to tell at this point who will win. Ideally, you should be equally weighting your positions between the two firms. At most, I would suggest a 60/40 split between Editas and Intellia, respectively.

While the loser of the patent battle is almost certain to collapse in share value, the winner will likely move more drastically in the opposite direction once the litigation risk is lifted. Remember that the most you can lose on either stock is what you invest, but your long-term gain if either gains control of CRISPR/Cas9 IP is reasonably 500+%.

Further, it’s possible that neither Intellia nor Editas will end up a “loser” once the patent dispute is finally worked out. According to IPStudies, which recently completed a detailed analysis on CRISPR patents, the two companies have complimentary intellectual property.

What this essentially means is that both firms will have the option to license from the winner of the patent dispute to keep their company going. Simply put, if one stock doubles and the other drops 50%, you are still going to come out on top.

Intellia is currently working with a burn rate of ~$7 million a quarter and cash and equivalents of $300.7 million. In terms of solvency, this puts the company right on par with Editas.

We rate Intellia Therapeutics (NASDAQ: NTLA) a “Buy” under $22.00. The risk level is “High” if you buy it alone. The risk level is reduced to “Medium–Low” if you hedge with Editas. The average analyst price target is $35.50.

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Portfolio Snapshot and Updates

ABB Ltd. (NYSE: ABB)

Snapshot:

ABB Group is a multinational industrial automation corporation headquartered in Zürich, Switzerland. The company operates primarily in robotics and power/automation technologies. It ranks as a top 200 Forbes company and is one of the largest engineering firms in the world, with over 135,000 employees, operations in ~100 countries, and annual revenue over $35 billion.

ABB is a company focused on keeping up with technological innovation. A diversified global powerhouse, the firm is found at the center of current developments in fields such as (but not limited to) clean energy, smart grids, microgrids (localized, independent grids), robotics, industrial asset effectiveness, and sustainable transport.

Updates:

ABB reported 2016 second-quarter results on July 21. The firm was down 5.3% for its revenue expectations and missed by $160 million from its expected revenue of $8.67 billion.

Despite missing on the top line, cash flow from operating activities was up an impressive 80%, and margins were also on the rise.

CEO Ulrich Spiesshofer shared the following in the second-quarter release:

We improved our operational margin for the seventh consecutive quarter and significantly increased cash flow through relentless execution amid continued strong market headwinds and economic uncertainties.

In less crucial news, an ABB-engineered plane, the Solar Impulse, has finished its historic round-the-world flight on zero fuel. The plane had the wingspan of a Boeing 747, and it was powered by 17,248 solar cells, which fed a battery to last it through the nights. The plane’s average airspeed was 46 mph. Its journey began a little over a year ago and ended by landing in Abu Dhabi.

We rate ABB Ltd. (NYSE: ABB) a “Hold” under $22.50. The risk level is “Low.”

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Amazon Inc. (NASDAQ: AMZN)

Snapshot:

Amazon is an American e-commerce and cloud computing company. It is the largest Internet-based retailer in the United States and the world’s largest provider of cloud infrastructure services. The company also produces consumer electronics and sells digital media content.

Updates:

Amazon reported its second-quarter earnings on July 28 with $857 million in net income compared to the $92 million in the 2015 second-quarter earnings. Amazon’s AWS division revenue grew an incredible 58% in the second quarter. Net sales for the segment were $2.88 billion, up from the $2.56 billion in sales from the previous quarter.

As usual, Amazon has been pretty busy. The company unveiled its first branded cargo plane called Amazon One at Seattle’s SeaFair Air Show. It’s among a fleet of 40 it’s leased from Atlas and the Air Transport Services Group. These planes are expected to improve supply chain and will allow Amazon to stay on top of its ever-growing sales and Prime members.

Amazon has also launched a new AWS region in India, which introduces its Prime membership and will include unlimited free shipping and Prime Video. This will give Indians exclusive access to Amazon Original Series and Movies.

Thanks to this impressive quarter, Amazon has officially overthrown Exxon Mobil and has become the world’s fourth-largest public company. We’re now up 45% on the position.

Please note that Amazon remains well above our initial Buy Under price, so don’t chase it.

We rate Amazon (NASDAQ: AMZN) a “Buy” under $535. The risk level is “Low.”

Amtech Systems (NASDAQ: ASYS)

Snapshot:

Amtech Systems is a supplier of solar panel and semiconductor capital equipment with a global presence in North America, Europe, and Asia. Amtech’s products and services include silicon wafer handling automation, thermal processing, and various products used for fabricating solar cells and semiconductor devices.

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Updates:

Amtech reported 2016 third-quarter results on August 4. The company recorded net revenue of $33.3 million, with its solar segment bringing in $19 million — compared to the $22.5 million from the preceding quarter. The rise in third-quarter revenue is attributable to increased shipments from solar and semiconductor segments.

Customer orders totaled $30.0 million, with $13.2 million coming from solar. The company is expecting revenue for the fourth quarter to be in the range of $35 million to $38 million with an improved operating margin.

Amtech’s solar subsidiary Tempress Systems, Inc. has also received an order from a top-tier solar cell manufacturer in Asia in July of 400 megawatts for its next-generation Solar PECVD.

We rate Amtech Systems (NASDAQ: ASYS) a “Buy” under $7. The risk level is “Medium.”

Analog Devices, Inc. (NASDAQ: ADI)

Snapshot:

Analog Devices is a semiconductor company specializing in data conversion and signal processing technology. The company develops analog-, mixed-, and digital-signal processing integrated circuits (ICs) used in industrial, automotive, consumer, and communication markets worldwide.

Updates:

Analog Devices reported its 2016 third-quarter results on August 17. Revenue came in at $869.59 million, which was up just slightly at +0.7% from the prior year. A 6.4% increase in earnings for the firm was due to stronger sales in its communications and automotive markets, as well as cost-reduction efforts.

Analog has announced that a cash dividend of $0.42 per outstanding share of common stock will be paid on September 7, 2016, to all shareholders of record at the close of business on August 26, 2016.

We rate Analog Devices (NASDAQ: ADI) a “Buy” under $50.00. The risk level is “Low.”

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CalAmp Corp. (NASDAQ: CAMP)

Snapshot:

CalAmp Corp. provides wireless communications solutions for various applications worldwide. It offers solutions for mobile resource management, machine-to-machine (M2M) communications, and other emerging markets that require connectivity. Its M2M and MRM solutions enable customers in energy, government, transportation, and automotive markets to optimize their operations by collecting, monitoring, and reporting business-critical data from remote and mobile assets.

Updates:

No news or updates for CalAmp this issue.

CalAmp (NASDAQ: CAMP) is a “Strong Buy” under $20.50. The risk level is “Medium.”

Crown Castle International Corp. Inc. (NYSE: CCI)

Snapshot:

Crown Castle owns, operates, and leases shared wireless infrastructure in the United States and Australia. The company provides towers and other structures, including rooftops and distributed antenna systems — a type of small cell network.

Crown provides access to its towers, small cells, and third-party land interests through long-term contracts in various forms, including license, sublease, and lease agreements. Crown also offers network services related to wireless infrastructure, primarily consisting of antenna installations or subsequent augmentations, as well as site development services. The company operates upwards of 39,000 towers in the United States and approximately 1,700 towers in Australia.

Updates:

Crown Castle International posted 2016 second-quarter earnings on July 21. The firm’s total revenue grew an impressive 7%, bringing in quarterly sales of $962 million. Revenue was broken down with Site Rental earning $804.6 million (up 9.2%) and Network services earning $157.8 million (down 2.8%).

CFO Dan Schlanger spoke of second-quarter earnings and outlook for the third quarter:

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Our solid credit profile, underscored by the stability and quality of our cash flows, allows us to both return capital to our shareholders through a significant and growing dividend and invest in growth projects that we believe will generate attractive long-term returns, enhance our long-term growth in dividends per share and reinforce our leadership position in U.S. wireless infrastructure.

Crown Castle International Corp. Inc. (NYSE: CCI) is a “Buy” under $95.00. The risk level is “Low.”

Fanuc Corporation (OTC: FANUY)

Snapshot:

Fanuc Corporation is a leader in industrial robotics, with a product lineup that includes factory automation systems, laser cutting, motion control, and compact motors. Fanuc serves a wide range of industries including aerospace, agriculture, construction, metal forming, and automotive manufacturing.

Updates:

No news or updates for Fanuc this issue.

Fanuc Corporation (OTC: FANUY) is a “Strong Buy” under $27.00. The risk level is “Low.”

Flex Inc. (NASDAQ: FLEX)

Snapshot:

Flextronics International (recently re-branded as Flex) provides customized electronics manufacturing services (EMS) to original equipment manufacturers (OEMs) in the electronics industry. The company also supports supply chain efforts through services packaging, transportation, design, maintenance, repairs, etc.

Over the years, Flex has developed a long customer list of recognizable OEMs including Cisco Systems, Dell, Eastman Kodak Company, Ericsson Telephone Company, Hewlett-Packard, Kyocera, Microsoft, Motorola, Nortel Networks, Sony-Ericsson, and Xerox.

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Updates:

Flex reported 2017 first-quarter results on July 21. Net sales for the first quarter were $5.9 billion, up from the prior year by 5.6%.

Flex had this to say during its press release for the first quarter:

Our first quarter results reflect our continued portfolio evolution with a 20% growth in adjusted operating profit, an increase of 17% in adjusted earnings, strong cash flow from operations and over seven million shares repurchased.

Flex is forecasting the second quarter to have per-share earnings range from $0.26 to $0.30. The firm is expecting revenue to range from $5.8 billion to $6.2 billion.

Flex Inc. (NASDAQ: FLEX) is a “Buy” under $13.50. The risk level is “Medium.”

GoPro, Inc. (NASDAQ: GPRO)

Snapshot:

GoPro, Inc. manufactures a line of standalone high-definition action cameras, with its flagship “Hero” product line. The company also produces various mounting accessories for its cameras and software applications for video editing and social media.

Updates:

GoPro announced 2016 second-quarter results on July 27. The company brought in $221 million in revenue, up 20% from the previous quarter. The firm totaled over 47.7 million installs for its GoPro Mobile App and GoPro Studio in the second quarter, which is big news considering efforts on the software side.

GoPro now has an inventory of $90 million, which is down by 36% from the first quarter. The company has announced it will be releasing the Hero 5 camera and its drone, Karma, before the holiday season.

GoPro’s stock has increased 27% since the company shared its second-quarter results. The gains come in anticipation of new product launches.

GoPro, Inc. (NASDAQ: GPRO) remains a “Hold.” The risk level is “Medium”

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Himax Technologies, Inc. (NASDAQ: HIMX)

Snapshot:

Himax Technologies, Inc. is a fabless semiconductor company headquartered in Tainan City, Taiwan. The company seems to have intentions to infiltrate the world of virtual and augmented computing. Facebook uses its video processing chips for the Oculus Rift, while Microsoft and Google use its near-field displays for the HoloLens and Project Aura (previously Google Glass).

Updates:

Himax reported its 2016 second-quarter results with a net revenue increase of 11.5% from the previous quarter, bringing in $201.1 million.

The company projects revenue to increase from 5% to 10% in the third quarter and for its gross margin to remain the same.

President and CEO Jordan Wu said this about the second-quarter results:

The sequential revenue growth was due mostly to strong sales in small and medium-sized driver IC business from our Chinese smartphone customers. Accelerating AR/VR related business from LCOS and WLO shipments to our leading U.S. customer also contributed to the second quarter growth.

AR is now getting the attention and consumer validation that Himax always knew would be possible, partly because of the recent success of Pokémon Go. Just a little over a month after being released, the app has had 100 million downloads and 20 million active users. This success is shedding a bright light on AR technology and how it’ll enhance the consumer experience to interact directly with the physical environment with sophisticated holographic imagery, 3D sensing, and real-time surroundings detection.

Himax is well positioned as the provider of choice for microdisplay and related optics, which is crucial for AR devices. We continue to assert that this puts it at the forefront of this emerging market.

Himax (NASDAQ: HIMX) is a “Buy” under $10.00. The risk level is “Medium.”

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Infinera Corporation (NASDAQ: INFN)

Snapshot:

Infinera sells low-cost and power-efficient data communications equipment to network operators building out Internet infrastructure. This includes long-haul, subsea, data-center-interconnect, and metro applications. The company offers high-speed “super-channels” that transport 500 Gigabits per second (GB/s) and metro connections of 100 GB/s.

Updates:

Infinera Corporation reported its 2016 second-quarter results on July 27. Revenue was up by 24.8% from the previous year, totaling $258.8 million.

Despite a solid quarter, it looks as though demand has weakened and will directly affect the revenue outlook for the remainder of 2016.

Infinera’s CEO, Tom Fallon, had the following say during the call:

While I am very pleased with our second quarter and year to date financial results, demand is softening in certain areas of our business and we face a difficult near-term outlook.

J.P. Morgan, Nomura, B. Riley & Co., and Raymond James have downgraded Infinera, as the company is predicting revenue for the third quarter of just $185 million.

Infinera Corporation (NASDAQ: INFN) is a “Hold.” The risk level is “Medium.”

Intel Corporation (NASDAQ: INTC)

Snapshot:

Intel Corporation designs, manufactures, and sells integrated digital technology platforms worldwide. It is the single-largest provider of semiconductors by revenue. It operates through PC Client Group, Data Center Group, Other Intel Architecture, Software and Services, and “All Other” segments.

Updates:

Intel will be acquiring artificial intelligence and deep-learning company Nervana Systems.

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While little is known about exactly how Nervana will fit into Intel’s operation, Diane Bryant, Intel’s executive vice president and general manager of the Data Center Group, has shared the following:

Their IP and expertise in accelerating deep learning algorithms will expand Intel’s capabilities in the field of AI. We will apply Nervana’s software expertise to further optimize the Intel Math Kernel Library and its integration into industry standard frameworks. Nervana’s Engine and silicon expertise will advance Intel’s AI portfolio and enhance the deep learning performance and TCO of our Intel Xeon and Intel Xeon Phi processors.

In a surprise reveal, Intel has also showed off its standalone VR headset prototype, Project Alloy, at an event in San Francisco this month. The device is expected to allow the wearer to see objects surrounding them in the physical world and use hand gestures to carry out commands. The company has also announced it will be working with Microsoft to bring Windows Holographic to mainstream PCs running on Windows 10.

Intel Corporation (NASDAQ: INTC) is a “Buy” under $34.00. The risk level is “Low.”

International Business Machines (NYSE: IBM)

Snapshot:

IBM is an American multinational technology and consulting corporation, with headquarters in Armonk, New York. IBM manufactures and markets computer hardware, middleware, and software. The company provides infrastructure, hosting, and consulting services in areas ranging from mainframe computers to nanotechnology.

Updates:

IBM is reportedly considering an acquisition of the company Revel Systems, which had a $500 million valuation last August. Revel Systems is an iPad point-of-sale company (like Square). If acquired, the company could fit in well with IBM’s Retail solutions segment.

International Business Machines (NYSE: IBM) is a “Buy” under $140.00. The risk level is “Low–Medium.”

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InTEST Corp. (NYSE: INTT)

Snapshot:

INTT is a semiconductor capital equipment company, which means it manufactures machines used in the production of electronic components.

The semiconductor capital equipment industry can be divided into two classes: front-end and back-end. The front-end involves silicon wafer and computer chip fabrication. The back-end involves assembly, packaging, and testing.

InTEST works on the back-end of this cycle, providing automatic test equipment (ATE) used by semiconductor manufacturers to test their integrated circuits and wafer products.

Updates:

InTEST reported 2016 second-quarter earnings on August 4. For the second quarter, the company saw revenue of $10.5 million, down 9.2% from the previous year. Second-quarter gross margin was $5.3 million compared to first-quarter gross margin of $4.1 million.

The company’s second-quarter bookings were up heavily on a sequential basis: $12.6 million compared to first-quarter bookings of $9.8 million.

President and CEO Robert E. Matthiessen had the following to say about InTEST’s second-quarter results:

...revenue growth fueled across all product lines; most notably in the automotive sector of the semiconductor market, as well as demand created by next generation smart phones. The trend of order expansion continued throughout the quarter as well, increasing 28% sequentially, based in large part upon strength from our Thermal Products segment.

The company is expecting net revenues for the third quarter to be in the range of $9.5 million to $10.5 million.

InTEST Corp. (NYSE: INTT) is a “Hold” at current prices. The risk level is “Medium.”

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Iridium Communications Inc. (NASDAQ: IRDM)

Snapshot:

Iridium is a global communications provider. The company offers the world’s most extensive voice and data service through a fleet of next-generation low-orbit satellites. It is currently launching the NEXT satellite constellation to serve the machine-to-machine (M2M) communications market.

Updates:

Iridium reported 2016 second-quarter results on July 28 with revenue of $109.19 million, representing a 7.1% increase year over year. The breakdown of revenue was $83.5 million from service revenue and $25.7 million from equipment sales and engineering and support projects.

In addition to growing revenue, Iridium continues to increase its customer base. The company ended the second quarter with 823,000 total billable subscribers compared to the 766,000 subscribers in the previous year.

Iridium anticipates its first launch date with SpaceX on September 19th, with another launch planned for December for the NEXT Constellation. All told, Iridium is expecting all seven launches of its satellites to be completed by the end of 2017.

Iridium Communications Inc. (NASDAQ: IRDM) is a “Buy” under $9.00. The risk level is “Medium.”

iRobot Corporation (NASDAQ: IRBT)

Snapshot:

iRobot is an American robotics company that serves the consumer, medical, enterprise, and military industries. iRobot’s product functions range from home cleaning to telecommunication to various military operations. iRobot currently generates the vast majority of its revenue from its Home Robotics division.

Updates:

iRobot reported 2016 second-quarter earnings on July 26. Revenue for the second quarter was $148.7 million, essentially flat with last year. Second-quarter earnings per share were $0.17, also flat with 2015.

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In the U.S., there was a 25% consumer revenue growth compared to last year. This growth was driven by the demand for iRobot’s Roomba 980, 600 series Roomba, and the Braava family of wet floor care robots.

iRobot is expecting 2016 third-quarter revenue in the range of $155 million to $160 million.

iRobot (NASDAQ: IRBT) is a “Hold” at current prices. The risk level is “Medium.”

JinkoSolar (NYSE: JKS)

Snapshot:

JinkoSolar (NYSE: JKS) is a Chinese firm that makes a variety of photovoltaic (PV) products, including solar modules, solar cells, silicon ingots, and silicon wafers. The company operates internationally (69% outside of China) in two segments: manufacturing and solar projects.

Updates:

Jinko will report second-quarter 2016 results on August 25 before market open. The earnings release will be followed by a conference call at 8:00 a.m. U.S. Eastern time.

A live and archived webcast of the conference call will be available on the Investor Relations section of JinkoSolar’s website at http://www.jinkosolar.com.

As always, keep an eye out next issue for our take on the results and call.

JinkoSolar Holding Co. is a “Strong Buy” under $22.00. The risk level is “Medium.”

LG Display Co. (NYSE: LPL)

Snapshot:

Not to be confused with LG Electronics, LG Display is its own independent company with a niche focus on panel technology. It is one of two organic light-emitting diode (OLED) companies trading on the public market.

Beyond becoming the new standard for crystal-clear resolution, the flexibility of OLED allows displays to wrap around the edges of devices, providing more surface area and multiple viewing angles.

http://www.jinkosolar.com

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OLED displays can be rolled up into a tube for easy transportation or worn like wristbands. The technology can create a more panoramic viewing experience on curved televisions and can even be used as virtual paper.

Updates:

LG Display is now trading near a one-year high, putting our position at a hefty 55% return in less than 12 months.

The rally comes on the heels of an announced $1.75 billion investment in OLED display production and a significant boost in margins during the second quarter. Keep an eye out next issue, as we’ll determine whether or not to secure the gains on LG.

LG Display Co. (NYSE: LPL) remains a “Hold.”

Micron Technology Inc. (NASDAQ: MU)

Snapshot:

Micron is best known for producing many forms of semiconductor devices. This includes DRAM, SDRAM, flash memory, and SSDs. Its consumer products are marketed under the brands Crucial Technology and Lexar. The company was named one of the Thomson Reuters Top 100 Global Innovators in 2012 and 2013. It is ranked among the top-five semiconductor-producing companies in the world.

Updates:

Micron climbed to its highest price of the year earlier this week, as analyst Ian Ing has released a report highlighting a far more favorable supply-and-demand environment than has been previously expected.

According to Ing:

We see both concrete and more anecdotal evidence that pricing is rising as the supply-demand balance is increasingly achieved... It is an easier environment for DRAM com-petitors to remain disciplined in bit production to keep supply constrained. If history is any indicator, it will be challenging for suppliers to increase their bit outputs for the next two quarters (past seasonal builds), even if they want to.

Ing is maintaining his buy rating on Micron stock and boosting his price target to $21 from $19.

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Jointly, the MKM analyst has boosted his top and bottom line forecasts to $3.17 billion in sales and a $0.12 per share loss versus an earlier model of $3.09 billion in sales and an $0.18 per share loss.

Micron is now trading above our Buy Under price, and we’re up 23% on the position. We’re not going to chase it.

Micron Technology Inc. (NASDAQ: MU) is a “Buy” under $15.00. The risk level is “Low.”

***NXP Semiconductors N.V. (NASDAQ: NXPI)

Snapshot:

NXP specializes in near-field communication (NFC) technology. NFC allows for wireless communication between devices at very short distances with increased security. The technology is being used in public transport, event ticketing, home health care, patient identification, interactive museum exhibits, contactless credit cards, and as hotel keys, just to name a few markets.

Updates:

For the second quarter, NXP reported $2.37 billion in sales, up 57% year over year thanks to a major boost from its Freescale acquisition. EPS came in at $1.39, down 4% but topping consensus of $1.35.

With the acquisition of Freescale Semiconductor, NXP Semiconductors is now officially the world’s leading provider of automotive semiconductor solutions and general-purpose microcontrollers.

For the third quarter, NXP Semiconductors expects revenues in the range of $2.4 billion to $2.5 billion (mid-point $2.465 billion). Gross margin is expected to be in a range of 49.7% to 50.7%, while income is expected at $680 million.

This puts revenue guidance just below Wall Street’s current estimates but earnings exceeding consensus. NXP remains a solid stock long term, but we’re removing our buy recommendation in light of broader headwinds.

NXP Semiconductors N.V. (NASDAQ: NXPI) is a “Hold.” The risk level is “Low.”

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Oceaneering International, Inc. (NYSE: OII)

Snapshot:

Oceaneering International provides engineering services and hardware primarily to customers operating in marine environments. The company’s services are marketed to oil and gas companies as well as the aerospace and construction industries. The company receives the bulk of its revenue from ROVs and Subsea Products.

Updates:

As we had mentioned last issue, the headwinds surrounding Oceaneering have begun to clear. The oil market has finally started to stabilize, and ultimately, oil and gas operators still need ROVs to handle inspection, repair, and maintenance. OII has an ongoing service business that simply isn’t going to disappear.

OII is now showing this resiliency, having reported financial results for the second quarter, which beat on the top line and matched analysts’ expectations for EPS.

The oilfield provider posted earnings of $0.27 per share, in line with consensus estimates. Revenue came in at $625.5 million, well above consensus of $599.9 million. Despite an incredibly rough downturn in the oil market, every segment was profitable for the quarter.

The biggest drag this quarter was the company’s ROV sales segment. Revenue declined 35% year over year but just 5% sequentially to $139.6 million. ROV utilization remained unchanged at 55%, which is a breath of fresh air.

However, CEO Kevin McEvoy expects that the second half of 2016 will be weaker than the first half, with lower operating income from Subsea Products and ROVs, partially offset by an increase in Advanced Technologies.

Fortunately, Oceaneering has plenty of cash and relatively low debt. The firm is well positioned to continue waiting for a rebound.

Oceaneering International, Inc. (NYSE: OII) is a “Buy” under $35.00. The risk level is “Medium.”

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Opko Health, Inc. (NYSE: OPK)

Snapshot:

OPKO Health is a mid-stage biotechnology development and medical diagnostics company. OPK has a deep drug candidate pipeline spanning from kidney disease to cancer treatments. It also provides a revolutionary diagnostic test known as the 4Kscore, used in prostate cancer screening. The company’s proprietary diagnostic technologies allow doctors to keep blood-based tests in house rather than outsourcing to outside laboratories.

Updates:

OPK posted second-quarter results early this month, beating on both top and bottom lines.

EPS came in at $0.02 per share, while analysts were expecting the firm to break even. Revenue came in at $357.1 million, flying past Wall Street estimates of $324.3 million.

Some comments from Dr. Frost (who continues his long spree of insider buying) on the call (emphasis mine):

Our improved financial performance this quarter was fueled by continued growth in our diagnostics business through increases in patient volume at BioReference Laboratories and its GeneDx unit, as well as continued growth in the utilization of our innovative 4Kscore test for predicting the probability of aggressive prostate cancer.

As for the 4Kscore (doctor on a chip), the diagnostic tool is currently being marketed by approximately 200 sales reps to both urologists and primary care physicians. OPK continues to see double-digit volume growth every month after since expanding its sales force from an original staff of 20.

Judging by comments from Dr. Frost during the call, it seems the firm may be hoping for an eventual reduction in that force as the medical community becomes more educated on 4K.

We’re hoping that the urology community will take the lead in making it clear that there’s a great role for PSA testing. And as more gets done, naturally because there will be more positive or elevated PSAs, that will lead to more 4kscore being done. But this is an educational process, it will take time and we’re hoping that others such as the urology community and support groups will pick up the mantle and carry the ball.

Management spent a fair amount of the call recapping the recent approval and expected launch of RAYALDEE, but we’re not going to get into that too much because we covered it last issue.

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The only additional information we were able to pick out of the call is that at the time of launch, OPK expects to have approximately 10 internal and 35 regionally based sales representatives. Six months later, the company plans to mature to a size of around 70 to 80 reps.

With regard to forecast, OPK is not providing guidance for RAYALDEE yet, but will do so on an ongoing basis after launch.

Opko Health, Inc. (NYSE: OPK) is a “Buy” under $11.00. The risk level is “Medium.”

Parker-Hannifin Corp (NYSE: PH)

Snapshot:

Parker-Hannifin is an American manufacturer specializing in motion and control technologies, which allow customers to move and position materials, machines, and equipment during manufacturing. In brief, the company serves customers by helping them maximize their automation processes — from manufacturing to waste disposal.

Parker is well diversified on the global front, with slightly more than half of its revenue coming from 45 countries overseas. Approximately 73% of sales come from Parker’s Industrials segment, 18% from Aerospace, and 8% from Climate and Industrial Control.

Updates:

PH reported fourth-quarter earnings earlier this month of $241.8 million, or $1.90 a share. The bottom line crushed expectations, which were at $1.77 per share.

The robotics company also beat on the top line, posting revenue of $2.96 billion in the period, slightly above average consensus of $2.94 billion. Below are some highlights by segment:

• Aerospace Systems segment grew 2.4% year over year to $602.4 million.

• Diversified Industrials (International) fell 4.2% to $1.1 billion.

• Diversified Industrials (North American) fell 10.8% to $1.26 billion.

For the full year, Rockwell reported profit of $806.8 million and revenue of $11.36 billion.

The midrange of its guidance for full-year fiscal 2017 ($6.40 per share to $7.10 per share) is in line with consensus of $6.71 per share. Here’s a brief excerpt from CEO Tom William’s

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comments on the call:

This is going to be a year of sales leveling off, which, after the sharp reduction that we had last year, is going to be a very refreshing change for all of our people around the world.

But, the way we forecasted this is first quarter is going to be soft, moving to essentially flat in second quarter, with 1% to 2% sales growth in the second half.

So, our thoughts behind the numbers: The natural resource-related end markets -- so, construction, ag, mining and oil and gas, are moderating and they are going to continue to be, year over year, when we finish 2017, negative; but they’re going to get to be less and less of a drag, especially in the second half.

Cash and equivalents were last reported at $1.2 billion with long-term debt at $2.7 billion (down from $2.6 billion last year).

Lastly, PH is expecting $30 million in savings in 2017 as a result of continued corporate restructuring. This initiative will help improve margins going forward and drive the firm’s financial health.

PH has climbed ~11% since our initial recommendation last month, breaching our Buy Under price. We will not be adjusting this price, so if you didn’t get in, don’t chase it.

Parker-Hannifin Corp (NYSE: PH) is a “Buy” under $120.00. The risk level is “Low.”

Photronics Inc. (NASDAQ: PLAB)

Snapshot:

Photronics is a small technology firm that provides a unique fabrication tool for creating advanced chip circuit designs — something called a photomask. Photomasks are essentially high-precision plates made of quartz that contain images to be printed microscopically on electronic circuits. In short, photomasks use light to transfer complex, geometric patterns onto computer chips.

Updates:

Photronics posted tepid third quarter results on August 18, 2016, with revenue at $123.2 million. Top top line represents a slight increase sequentially and a 6% decline overall, with rising plat

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panel display sales (capacity was sold out) being offset by a decline in integrated circuits. Net income for the quarter was $8.1 million.

Earnings were announced along with plans to expand integrated circuit manufacturing in China over a five-year period. The company intends to build a $160 million facility in Xiamen, China, with production expected to begin in 2018. Jointly, Photronics plans to invest $40 million to increase flat panel display production. Long term, the additional capacity is likely to add to shareholder value, but the market has reacted poorly to the initial investment, with Photronics down 10% on the day.

Photronics (NASDAQ: PLAB) is a “Buy” under $13.50. The risk level is “Medium.”

Rockwell Automation (NYSE: ROK)

Snapshot:

Rockwell is an American provider of industrial automation solutions and equipment. This includes various power, control, and information systems that fall under two segments: Architecture/Software and Control Products/Solution, which work out close to a 50/50 split.

Headquartered in Milwaukee, Wisconsin, Rockwell is a Fortune 500 company that employs over 22,000 people and serves customers in more than 80 countries. Its top brands include Allen-Bradley and Rockwell Software.

Updates:

Rockwell reported third-quarter earnings late last month, topping analyst estimates but missing slightly on the bottom line.

EPS consensus was $1.46 versus actual EPS of $1.55. Revenue consensus was $1.49 billion versus actual revenue of $1.47 billion.

Heavy industries, including oil and gas (down 30% in the quarter), accounted for almost all of the year-over-year decline, which bodes well moving forward, as the oil and gas industry is expected to turn around (though Rockwell CFO Ted Crandall mentioned he doesn’t feel comfortable calling a bottom).

In China, Rockwell saw another quarter of sequential revenue growth as consumer and auto markets continued to outperform heavy industries. Jointly, orders were up year over year in the region.

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Europe, the Middle East, and Africa were strong with 5% organic sales growth, attributed by Rockwell to machine builders in the region. In Latin America, sales were up 8%, led by Mexico.

Looking ahead, sales are expected to improve, but a broad decrease in orders in the third quarter has caused Rockwell to lower guidance for the fourth quarter.

Here was CEO Blake Moret on the call:

We still believe we will see modest sequential sales improvement in the second half of the fiscal year, but not as much as we anticipated in April. Globally, we expect heavy industries to remain weak and see a continued positive outlook for the consumer and automotive verticals.

Taking all these factors into consideration, we are lowering our full-year FY16 organic sales guidance to down about 4% at the midpoint, 1 point lower than our April guid-ance, and are revising our adjusted EPS guidance to a new range of $5.80 to $6.

All told, Rockwell has done well throughout the recent down cycle in industrials, keeping margins steady and offsetting sales declines through diversification on both geographic and product segment fronts.

Comments were made during the call regarding employee compensation, which has been cut in order to meet those margins. Moret suggested that there will be future headwinds on margins as a result of increasing compensation again. Ultimately, we’re fine with this because a company like Rockwell ultimately relies on its ability to attract and hold onto talent.

Rockwell Automation Inc. (NYSE: ROK) is a “Buy” under $125. The risk level is “Medium.”

***Synaptics Inc. (NASDAQ: SYNA)

Snapshot:

Synaptics designs and manufactures human interface solutions for mobile computing, communication, and entertainment devices. Most notably, the company creates chips used for processing touchscreen movements in mobile devices. The company’s clients include Google (NASDAQ: GOOG), Amazon (NASDAQ: AMZN), Blackberry (NASDAQ: BBRY), Nokia (NYSE: NOK), Samsung (KSE: 005930), HTC, LG, and Sony.

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Updates:

Synaptics reported fourth-quarter and full-year results late last month, surpassing Wall Street consensus on both top and bottom lines.

Revenue for fiscal 2016 was approximately $1.7 billion, a slight 2% decrease from last year, due to a global slowdown in the high-end smartphone market. For the quarter, Synaptics posted revenue of $323.9, above consensus of $319.1 million.

Net income for the year was $180.5 million, or $4.76 per diluted share. Adjusted earnings for the year were $0.46 per share, versus a consensus of $0.44.

Revenue mix from mobile and PC products was approximately 88/12, respectively. Revenue from mobile products was $285.4 million, while revenue from PC products totaled $38.5 million

Anyone invested in Synaptics should be aware the forecast heading into 2017 is nothing to write home about. The company anticipates revenue for the first quarter of fiscal 2017 to be in the range of $350 to $390 million, which is underwhelming and likely due to an expectedly tepid iPhone 7 release.

Here are some comments from CEO Rick Bergman regarding the full year:

We are preparing for a similar revenue scenario in fiscal 2017 and expect our strategies and investments in our key TDDI and fingerprint authentication growth engines to con-tinue to pay off in offsetting anticipated declines in our discrete display driver business.

Looking further out into the horizon, though, Synaptics looks solid post-2017.

As we look beyond fiscal 2017, our development activities position us for significant opportunities with new and expanding growth pillars, including OLED technology as well as automotive, which will help reignite our growth.

The iPhone 8 is heavily rumored to include an edge-to-edge OLED screen, so if you read between the lines here, Synaptics probably already has that deal secured. If you have the means to hold on through a year of headwinds, Synaptics remains a solid stock.

Synaptics Inc. (NASDAQ: SYNA) is a “Hold” at current prices. The risk level is “Medium.”

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Technology and Opportunity Copyright © 2016, 111 Market Place, Suite 720, Baltimore, MD 21202. All rights reserved. No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer or the solicitation of an offer to buy or sell the securities or financial instruments mentioned. While we believe the sources of information to be reliable, we in no way represent or guarantee the accuracy of the statements made herein. Technology and Opportunity does not provide individual investment

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Documents

Technology Opportunitymedia.angelnexus.com/pdf/tao/tao-august-2016-jm9.pdf · 2018-02-16 · August 2016 Issue 2 Technology Opportunity & History has shown us time and time again