While the Coronavirus situation continues to unfold we have some better clarity on some issues and impacts but also have a number of ongoing questions that remained unanswered, in particular actual infection rates and their multipliers, transmission mechanisms, risk of re-infection or asymptomatic patient spreading, and especially the timing and availability and effectiveness of therapeutics and vaccines. What is known so far is that fatalities are concentrated in elderly patients only, especially those with comorbidities. US labs have ramped up their testing but seem to be behind others already in process, including China. There are over 200 COVID-19 clinical trials taking place which leads us to remain optimistic that natural resistance and science may soon solve these problems. Additionally, the market seems to be assuming another rate cut; however, that may not be as impactful as seen in the past due to supply and demand effects of the virus.
We seek to own companies whose growth destiny is in the direct control of the management teams that run them and avoid companies that may be overly dependent on external factors from cyclical forces, commodities or interest rate moves. We understand that external factors influence and affect business models and therefore seek to analyze events and circumstances to determine optimal holdings and portfolio positioning. As such, we have not liquidated any holdings despite the recent headlines.
As it relates to Small Cap Growth Focused, the companies in our portfolios have generally been less impacted year-to-date as they are more domestically-oriented than the overall market and large caps. We are pleased to end the month of February up 0.16% net YTD against the Russell 2000 Growth benchmarks drop of 8.24%. Our underweights in energy, materials and exposed areas of consumer discretionary have helped us, while industrials and communications were detractors. Broad market multiples have contracted and consensus earnings are starting to reduce, however, as we emerge from “earnings season,” the majority of our holdings showed positive results relative to expectations and increased forward guidance. While we are cognizant of the recent market highs and potential for increased volatility, we evaluate each holding’s valuation on a stand-alone, forward-looking basis. We continue to feel there will be positive future developments and that the growth of our “Sustainable Future Compounders” are yet to be fully appreciated or reflected.
There are still issues to monitor, such as developing supply chain disruptions in health care, technology, and industrials, in addition to impacts on consumer spending as travel and other global activities are restrained. As we examine our holdings, we remain confident in the near and long-term prospects for the portfolio. In fact, we have a number of holdings that are direct beneficiaries of the spread of the virus:
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Everbridge (EVBG) offers a Critical Event Monitoring platform that allows companies, towns, cities, states and countries to communicate with and monitor real time populations. They have won five of the 50 states (such as California), seven of the top 195 countries in the world (like Singapore and Australia) and 25% of the Fortune 500 and have handled six million virus-related messages. Their systems allow hospitals across the US to communicate risk management practices in the face of the virus spread, highlighting the network effect aspects of their model. They estimate the global impact of the virus at $400 billion to $1 trillion, highlighting the need for every company to have a system to mitigate and manage critical event risks.
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Teladoc (TDOC) provides the largest US telemedicine platform to employers, health Insurers (like Aetna and United) and employers as well as Medicare Advantage program members. Patients access a healthcare professional via video conference or telephone, which helps to avoid the risk of spreading infection while enhancing the value of their data to the payors and provides a cost savings for all constituents.
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Ligand (LGND) raised guidance last week as their Captisol product that allows drugs to be more soluble in the blood has seen strong demand from Gilead, developers of Remdesivir, the leading therapeutic for use in coronavirus. While the demand for Ligand is only a 1,000-patient trial, if it is successful (results to be released in the coming weeks), demand could be significant.
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Gold sentiment as being a financial haven might also help further our Kirkland Lake (KL) and Wesdome (WDOFF) holdings, though we do not own these with the view of-near term gold prices.
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We believe that Chegg (CHGG) and Aspen as on-line learning plays should be fine and that some of our healthcare moves have tangential benefits such as Repligen’s (RGEN) supplying vaccine and antibody producers.
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Other holdings have more limited but positive tailwinds. Kornit Digitals (KRNT) printers can take the load from China textile and apparel supply chains, Omnicell’s (OMCL) automation solutions for hospitals can expect to see more demand from loads on the healthcare system.
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Conversely, there are negative effects. For example, Staar Surgical (STAA) does a lot of business in China, Korea and Japan and has guided down; however, the company believes implant volumes will rebound with pent-up demand. Atlas Air (AAWW) saw pressure due to airfreight market uncertainty while Altair Engineering (ALTR) saw demand impacted by the weakness in their automotive and industrial customers. We’ve reduced positions in both.
Analyzing direct exposure to the overall portfolio from risks associated with coronavirus, we believe we are better positioned than most, including the index, by not having exposure to airlines, hotels, nursing homes, cruise ships, gambling (thanks ESG) or entertainment venues, among others. We do have some retail exposure (Five Below (FIVE), Ollies (OLLI), Noodles (NDLS), Boot Barn (BOOT) and Floor and Décor (FND)) and are closely monitoring these for slowing and will react accordingly.
We remain vigilant in understanding the risks and opportunities in our holdings and research pipeline and are pleased with the continued and potential appreciation of our companies.
Please contact us with any questions. We appreciate your continued support.
Disclosure:
The statements contained herein are based upon the opinions of Spouting Rock Asset Management, LLC (Spouting Rock) and the data available at the time of publication. The securities discussed herein are subject to change at any time without notice. This communication does not constitute investment advice and is for informational purposes only, is not intended to meet the objectives or suitability requirements of any specific individual or account. An investor should assess his/her own investment needs based on his/her own financial circumstances and investment objectives. Neither the information nor any opinions expressed herein should be construed as a solicitation or a recommendation by Spouting Rock or its affiliates to buy or sell any securities or investments or hire any specific manager. Spouting Rock Asset Management, LLC is registered investment adviser.
