Investment Climate April 2021: The Challenge Ahead

Market activity in the first quarter of 2021 can be best described as “wild.” Volatility, now a staple of the modern market, has taken on a whole new meaning - and we would use the phrase “wild volatility” in order to describe what we have been witnessing on a day-to-day, hour-to-hour, and even second-to-second basis! While we have experienced outsized performance in recent years, quarters and months, we have been warning that a correction was due.  About mid-quarter, we began to see the correction take form. The excuse was a “rotation” from growth-type stocks to cyclical or “value” stocks, but the reason is irrelevant; it was simply time to “ring the bell” for a correction.  

That said, we have come off a period of very strong stock price performance for our portfolio companies, largely because of very strong business activity in those companies. Despite the aforementioned correction in recent weeks, strong performance overall resulted in outperformance for our growth portfolios versus most major stock market averages again in the first quarter of 2021. 

Recall that our strategy stays fully invested through market and economic cycles.  We don't try to predict the market or economy; we try to predict businesses and let the stock prices take care of themselves.  We believe that if we predict the businesses properly, prices will follow over time. 

Nonetheless, we are very early in the lifecycles for many of the businesses we currently own. We have spent the last few years exiting some very successful companies that had grown to be quite large and had matured enough to where they no longer were meeting our criteria for future growth. As such, we have spent those years positioning the portfolio in many younger, high-potential companies that we believe have exceptional growth still in front of them. We believe these innovative companies are the best defense against what is shaping up to be a less-than-favorable economic environment.   

While the economy is currently rebounding from the “self-induced” recession created by governments around the world forcing draconian “lockdowns” on citizens and businesses in their crusade against the COVID-19 virus, we believe that the attempts to offset the COVID-19 fiasco by those same governments the world over will ultimately result in a slowing of economic growth. Private industry capital will be “crowded out” by massive government spending, and the likely tax increases that will be government’s response to “pay” for its own largesse will result in much lower production from businesses. Generally, those two factors together have historically resulted in inflation. In years past, what appeared to be “inflating” by the world’s central banks turned out to be meeting an insatiable desire on the part of the world for cash, exacerbated by the ‘08-’09 financial crisis.  Technological innovations, and the ensuing productivity enhancements that resulted, served to limit price increases as productivity boomed.   

It will be harder for that to be the case in the face of higher tax rates.  However, it is precisely in times like those, which we appear to be entering, that real innovators succeed and even thrive -- thus, the importance of maintaining focus on finding and owning the best up-and-coming companies in the world.  That is our charge, and we are ready for the challenge! 

Disclosures: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Taylor Frigon Capital Management LLC (“Taylor Frigon”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Taylor Frigon. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Taylor Frigon is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Taylor Frigon’s current written disclosure Brochure discussing our advisory services and fees is available upon request. If you are a Taylor Frigon client, please remember to contact Taylor Frigon, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.

Have you heard of this company? Nano-X (NNOX)

 

Nano-X Imaging is an innovative company based in Jerusalem which is developing a revolutionary "cold cathode" X-ray technology with the intention of making X-ray diagnosis less expensive and more available for the world's population -- two-thirds of whom still have limited or no access to medical imaging (and which is often characterized by long wait times for both the imaging and for the analysis of the results, even for those who do have access).

The company's name is pronounced like "Nannox" and the stock is listed on Nasdaq, trading under the ticker symbol NNOX.*

The traditional X-ray uses electrical energy to heat a cathode filament (often to temperatures in excess of 2000 degrees Celsius) and cause it to release electrons towards a "target" anode (often a metal disc composed of tungsten or molybdenum) which then produces X-ray radiation. This "analog" method of generating X-rays requires the machine to be large and bulky because the process involves tremendous heat and therefore requires a motor to turn the anode to keep it from melting, as well as filling the device with a liquid coolant around the X-ray generation core in order to absorb the heat. 

All of this makes X-ray machines expensive, which reduces their availability -- and yet X-rays remain the single most important type of medical imaging for diagnosing a huge variety of health issues.

Nano-X Imaging is pioneering the digital production of X-rays using field emission technology developed by engineers at Sony, in which the cathode does not produce electrons because it is heated but rather because it interacts with an electric field (hence it is called a "field emitter"). This process can be done at room temperature and is thus also referred to as "cold cathode" technology -- and it enables numerous transformational advantages over the hot cathode process described above, one of the most important of these advantages being the fact that the cathode can be turned into thousands of tiny electric "gates" on a silicon microchip, enabling very precise and efficient emission of electrons in a much smaller tube than would be possible using the conventional analog X-ray generation technology.

By digitizing the X-ray tube, Nano-X can produce a much smaller, less expensive, and more energy-efficient X-ray device, and one that can produce high-quality results while exposing the patient to less radiation than would be necessary for an analog X-ray machine to produce the same images. The digital X-ray tube can generate quality imagery with less X-ray exposure because, unlike an analog machine which must be always on or off and which has limitations regarding how fast you can turn it on or off, the digital array can turn each individual emitter on or off according to complex algorithms in order to be equally effective while exposing the patient to much less radiation. 

Also, because the traditional machines are so large, they have to physically "circle around" the patient in order to take a full scan (such as when you are getting a dental X-ray, and the technician circles the X-ray projector around your jaw: this also exposes the patient to more X-ray radiation than will be necessary with machines using the new digital cold-cathode technology).

The Nano-X device pictured above has a motorized arc which will contain six individual X-ray tubes and which can track backwards and forwards over the patient, and which will also be able to tilt in order to change the angle of the X-ray. The patient will lie on the bed underneath the arc, with the bed itself functioning as the receiving element for the X-rays and generating the digital images. Such a design would be impossible with conventional analog X-ray machines. Nano-X is calling their machine, for self-evident reasons, the Nano-X ARC.

The production of X-rays using cold-cathode digital technology on silicon is so revolutionary that many who heard about it at first did not even believe it was possible -- including some medical professionals, a few of whom were interviewed by a short-seller firm calling themselves "Muddy Waters," who published an inflammatory "hit piece" on Nano-X in September of 2020, alleging that the company and its technology are completely fraudulent. But there is no reason that X-rays cannot be produced through field emission technology embedded in silicon: in fact, the process is very much parallel to the way that a digital LED (light-emitting diode) produces visible light using electrical energy in a semiconductor material, as opposed to the conventional analog light bulb which produces light by heating a metal filament until it glows.

The US Food and Drug Administration has now given 510(k) medical device pre-market approval to the Nano-X digital cold-cathode X-ray tube (see this press release from the company, published this past Friday, April 2). In order to obtain 510(k) approval, the medical device in question must demonstrate both safety and efficacy -- meaning that it must be as effective as the existing approved devices. This approval from the FDA, in addition to a live demonstration which Nano-X broadcast in early December of last year, should prove beyond doubt that their X-ray technology is not fraudulent, and that the allegations to that effect published by the short-seller calling themselves "Muddy Waters" are baseless.

Of course, just because the FDA has now stated that the Nano-X digital X-ray tubes are safe and effective does not mean that they will be a successful business. There are many hurdles which the company must successfully navigate in order to bring their device to market, including gaining approval for their intended "multi-source" design (the ARC with six tubes embedded in the arc above the patient, shown above), as well as all the manufacturing and distribution and software design and sales and customer service and maintenance of equipment that will be required to go to market.

However, the company already has contracts for thousands of devices with distributors wanting to place the Nano-X ARC in countries around the world, pending the necessary regulatory approval and the ability of the company to produce those devices -- as well as important partnerships including a partnership with manufacturing giant Foxconn to actually assemble the Nano-X ARC itself.

Additionally, Nano-X has stated that it intends to pursue a business model that is almost as revolutionary as the cold-cathode technology itself, in which Nano-X will place the device in healthcare facilities basically for free, instead charging on a "per-scan" basis and stipulating a minimum of seven scans per day at around $14 per scan. This model has the potential to radically increase the availability of medical imaging by X-ray around the world, to the point that Nano-X hopes that every person could one day be able to get a diagnostic X-ray once per year in order to provide detection of health issues that can be much more effectively treated if caught early enough.

We have been investors in Nano-X since the very first public trades of the stock, on August 20 of 2020. While there are still many execution issues which must take place before this technology can be widely deployed and begin helping people around the world, we believe that this digital X-ray innovation has the potential to be transformational.

Now that the FDA has approved the Nano-X device, we doubt that short-seller "Muddy Waters" will issue an apology to the company for calling the company a "piece of garbage," but if whoever wrote that short-selling hit piece was actually honestly mistaken (perhaps because they relied on medical professionals who themselves just could not believe that digital field emission of X-rays was possible, and who did not conduct the due diligence to research the possibility for themselves), then they should apologize.

We think they should also apologize to the memory of the great American blues musician McKinley Morganfield, known professionally as Muddy Waters (1913 - 1983), and change the name of their short-research writing company to something else.

* At the time of publication, the principals of Taylor Frigon Capital owned shares issued by NNOX.

Disclosures: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Taylor Frigon Capital Management LLC (“Taylor Frigon”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Taylor Frigon. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Taylor Frigon is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Taylor Frigon’s current written disclosure Brochure discussing our advisory services and fees is available upon request. If you are a Taylor Frigon client, please remember to contact Taylor Frigon, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.