Introducing the STI “Special Situations” Portfolio
Long time readers of Smart Tech Investor may recall that when we first launched STI in December of 2013 we had two portfolios: Investments and Equity Trades. The idea was that the Investments portfolio would be populated with large-cap tech stocks that we believed would outperform the overall stock market as the global economy transitioned out of quantitative easing, which we felt would be harmful to most of the momentum stocks that had become market leaders. We were a little early in our timing, but we are now seeing that scenario play out with many of those overpriced companies paying a very steep price.
The Equity Trades portfolio was meant to be more short-term in nature, based on factors outside of those measured by our Smart Tech Rating system. Although that portfolio performed quite well, the feedback from our subscribers was that they preferred investment opportunities that were longer term in nature. For that reason we folded the Equity Trades portfolio, and replaced it with Next Wave (managed by Rob DeFrancesco) which consists of mid-cap stocks that are on the verge of joining the next generation of market leaders.
And about a year ago we added our Medical Profits portfolio to take advantage of the expertise of the newest member of the STI editorial team, managed by Dr. Joe Duarte. Its been a crazy year for biotech stocks, but Dr. Duarte has done a wonderful job of keeping us all level-headed so that we can make informed buy and sell decisions. I asked Joe to take a break this week from his usual update so I could communicate this important development to you.
To complement those strategies we are now adding a new portfolio that will focus on stocks that offer tremendous long-term upside potential in fast-growing sectors, which will be called “Special Situations” to denote the unusual nature of the companies we select for it. For example, last year we identified a trio of companies engaged in exoskeleton technology that we have been housing the Medical Profits portfolio. However, going forward they will be reflected in the Special Situations portfolio.
We are also adding to this portfolio a group of three companies working to find a cure to cancer using a revolutionary form of treatment that could prove to be a game changer. We released a special report on this subject earlier this year, which I am including below for the benefit of those subscribers who have not yet had a chance to consider it. And for those of you who joined us after the exoskeleton report was published, you can find it (along with all other Special Reports) under the ‘Resources’ tab at the top of the STI website.
To be clear, these stocks carry with them above-average risk which is why we recommend three of them instead of only one. That way, if you buy all three the odds are greater that you will participate in the overall financial benefit these cutting edge technologies will eventually generate. In situations such as these there simply is no way of knowing which company will turn out to be the ultimate winner so betting on only one horse is a dangerous game.
One Little Shot to Kill Cancer Dead
Sound investment opportunities can often be found at lower prices during uncertain times. And history has shown that this is a very common development in the biotech sector. For example, investors who bought Amgen (AMGN) in 2010 at $57 nearly tripled their money in five years. And investors who bought Gilead (GILD) in 2007, before the 2008 market crash paid less than $20 per share, yet saw the stock split and still reach a price above $100 in early 2015. That’s because biotech is the last frontier on Wall Street.
Cancer of the kidneys is rising in incidence. It affects some 60,000 patients per year with some 14,000 of the affected likely to die on an annual basis. Those with advanced disease will have a 53% percent chance of surviving five years. Those with very advanced disease face only an 8% chance of survival.
Early Success Against Human Immunodeficiency Virus (HIV)
AGS-004 will be used in addition to the traditional treatment for HIV and has a clever method of action. The traditional therapy for HIV consists of antiretroviral agents, usually in pill form. Many patients take large numbers of these pills on a daily basis. And although these medications have an excellent record of arresting the disease, they don’t cure it. In fact, what HIV does is hide inside the cells of the immune system and waits for an opportunity to resurface. So when the virus becomes undetectable in the blood of patients, it’s actually hiding, and waiting to attack again.
AGS-004 is designed to work together with traditional treatments by targeting the immune system cells where the virus is hiding. When AGS-004 attacks the cells, the traditional anti-viral medications can then kill the virus. Early results suggest that AGS-004 is effective at creating an immune response in HIV positive patients, but there is more to do with this therapy in the treatment of HIV.
Pick #2: Ziopharm Oncology Inc.: A Well-Financed Long-Term Play for the Patient
The world of stocks priced below $10 is a minefield, but those who step lightly can sometimes find diamonds in the face of danger. This is the case for Ziopharm Oncology, Inc. (ZIOP), whose goal is to deliver personalized, patient-specific treatment of cancer by directing the patient’s individual immune system to attack tumors, and improve outcomes against difficult-to-treat cancers, such as different types of leukemia that are not responsive to other types of therapies.
Ziopharm is a leader in a rapidly rising form of cancer treatments known as chimeric antigen receptor therapy (CAR-T). CAR-T therapy takes a patient’s immune system cells and trains them to go look for the tumor once they are reintroduced into the patient. Once in the patient, they not only target the cancer cells but also reactivate the patient’s immune cells that have been rendered less active or inactive by the tumor, thus increasing the body’s ability to fight the cancer by two different pathways.
Ziopharm is partnering with Intrexon Corporation and the University of Texas MD Anderson Cancer Center, and has a diverse pipeline of potential products that feature three different pathways to aid the patient’s own immune system to fight cancer. The company’s proprietary technology – the RheoSwitch Therapeutic System platform – also aims to guide the therapy in a way that can reduce side effects from the treatment. This is especially useful because reducing side effects is likely to increase the potential number of patients that may be eligible for treatment.
Perhaps the most interesting aspect of Ziopharm’s partnership with Intrexon is the Actobiotics platform which allows the use of the body’s own gut bacteria to fight disease. Actobiotics are compounds which engineer specific gut bacteria to produce specific proteins, hormones, enzymes, and antibodies which can be used to fight cancer.
Ziopharm currently has two Phase II clinical trials ongoing: one directed at recurrent breast cancer and the other directed at metastatic malignant melanoma. It also has a Phase I clinical trial focused on difficult-to-treat brain cancer.
Rising revenues from its development deals and an excellent balance sheet where current assets and cash overwhelm the company’s liabilities by a two to one margin suggest that Ziopharm is an excellent speculative long-term play.
Pick #3: Juno Therapeutics Puts its Money and Smarts to Work
It’s uncommon to see a company that has been public for a short time become an active buyer of other companies. But that’s what makes Seattle-based Juno Therapeutics (JUNO) an interesting situation from a business standpoint. When you add the stout science and the heavy backing through a ten-year agreement by biotech giant Celgene to the picture then you’ve got something to think about and look at seriously.
Its science is groundbreaking, focusing on CAR-T and T-cell technology, which are complementary. Juno is a leader in the field of developing personalized therapies for cancers, especially those that are in very advanced stages and are not responsive to conventional treatments. The therapeutic model is based on a simple concept: If you can help the body fight the disease by engineering genes in the defense system’s own cells, then the treatment is more effective and has the potential for fewer side effects.
Juno went public in 2014 in a blockbuster IPO that raised $264 million and became a multibillion dollar market-cap company in a month as its CAR-T therapy platform dazzled investors. But it wasn’t all glitz. Juno has a solid balance sheet with enough cash on hand to cover 1.5 times its total liabilities. This, as well as its partnership with Celgene, gives the company a scale that some of its rivals lack, which is how it is able to finance asset purchases like its January 2016 purchase of Harvard spinoff Ab-vitro for $125 million in cash and stock. This was Juno’s third buyout in the last twelve months. What makes this recent purchase so unique is that Ab-vitro’s technology allows Juno to run an experiment on millions of cells in two hours, a feat that twenty years ago might have taken several weeks or months. To put that in further perspective, what used to take a year can now be done in just two weeks.
This company’s pipeline is extensive with multiple drug candidate molecules at some stage of development with ten ongoing clinical trials. The most advanced and pivotal trial is a Phase II trial featuring the CD-19 molecule in difficult to treat B-cell leukemia.
As with all biotech stocks, there is always risk. But investors with a long-term time frame can easily consider adding this stock to their portfolio especially during periods when the overall stock market falls.
Next Wave Portfolio Update—Splunk
By Rob DeFrancesco
The latest quarterly results issued last Thursday from Splunk (SPLK) should put to rest fears that the company is being hurt by any macroeconomic slowdown. In the fiscal fourth quarter (ended January), Splunk’s revenue advanced 49% to $220 million, easily beating the consensus estimate of $202.9 million. The company issued stronger-than-expected guidance for the fiscal first quarter (ending April) and raised its fiscal 2017 revenue guidance by 3.5%. Splunk shares last week rebounded 19%.
Earlier this month, the stock fell a whopping 23% in one session in sympathy with Tableau Software (DATA), a provider of data visualization analytics software, after that company said it saw a bit of a demand pause in the month of January. Splunk stock was trading around $47 before the Tableau-related stumble. It’s now back to $41.50 after dipping to a 52-week low of $29.85 on February 11.
While Tableau is going through some company-specific competitive issues, Splunk, a provider of software used to manage and analyze machine-generated data, continues to gain traction across all geographies. On the earnings conference call last week, Splunk CEO Doug Merritt told analysts that there have been no changes to the company’s sales cycles, saying reps “saw sustained and increasing demand” into the end of the January quarter. Win rates on competitive deals remained very solid at 85%.
Splunk’s fiscal fourth quarter metrics support the bullish case for the stock. The company is adding new customers at a rapid pace, selling more solutions into its installed base and closing larger deals. The main concern for management is getting enough qualified sales reps on the street to meet demand. In fiscal 2016 (ended January), Splunk added 127 quota-carrying reps; it now has 433 salespeople, up 41% from the year-ago level.
In the January quarter, Splunk brought on a record 621 new accounts, taking its total customer count up to more than 11,000. License revenue rose 44% to $141.4 million, with 70% of sales coming from existing customers. The average selling price advanced to $80,000 from historical levels of $40,000 to $50,000. Billings of $320.7 million rose 44% year over year and jumped 59% sequentially.
Splunk in the fiscal fourth quarter closed 523 deals worth more than $100,000, up 22% from the year-ago period. Many of those large deals included extended contract terms, meaning not all of the revenue was recognized up front. In fiscal 2016, fully 46% of license bookings were of the ratable variety. Splunk ended fiscal 2016 with deferred revenue of $449.5 million, up 48% year over year. Short-term deferred revenue rose 39% to $347.1 million. With more future revenue coming off of the balance sheet, Splunk has improved visibility, which reduces the chances of a top-line miss.
Expanded use cases are a significant positive dynamic driving upside for Splunk. The company’s software is already deployed extensively to provide analytical insights to support security use cases. The new User Behavior Analytics (UBA) product helps organizations discover known, unknown and hidden threats using data science, machine learning, peer group analytics and advanced correlation. When used in conjunction with the Splunk App for Enterprise Security, the UBA solution improves threat detection and targeted response.
With its new IT Service Intelligence offering, the company has now moved further into IT monitoring. Splunk’s software enables users to analyze machine data as a way to understand the operational health and key performance indicators of IT services and the underlying infrastructure.
IT Service Intelligence presents a real-time view into relevant service relationships across an organization, providing a visual presentation of the dependencies and potential performance impacts of changes to the infrastructure. The software presents important insights into service health against defined performance indicators, with the goal of driving better operational and business decisions. IT Service Intelligence is helping drive new customer wins for Splunk, and the solution is already a big hit among the installed customer base.
For the April quarter, Splunk sees revenue of $172 million to $174 million (growth of 37% to 39%), above the consensus estimate of $170.7 million. The pipeline of new business was solid headed into the current quarter, giving management confidence in the outlook. For fiscal 2017, top-line guidance was lifted to $880 million (growth of 31.6%) from the initial outlook of $850 million.
At the recent market cap of $5.4 billion, Splunk shares trade at 6.1 times the 2016 top-line guidance, down 60% from the peak revenue multiple of 15.4x last July. Given the current positive momentum in the business, the company over the coming quarters should be able to continue to boost its outlook. The current Street-high revenue estimate for fiscal 2017 stands at $913 million. Long-term investors should continue to build a position in Splunk, using any weakness to accumulate shares.
Splunk remains a ‘Buy’ in the Next Wave Portfolio.