Investment Climate July 2021: Return of New Public Companies




We have long believed in the power of free enterprise.  Now in our fourth decade of managing money, we have never ceased to be amazed at the creativity of brilliant people who have an idea, invention, or process and turn that into a solid business that serves what other people want and need.  It is what has defined Western Civilization and is a very good thing.  That idea of being focused on what others want and need, when accompanied by “rules of the road” that adhere to Natural Law, is purely inspired.  Often, in history, the rules of the road have become overly cumbersome, notwithstanding all the best intentions of those who define them -- most often government -- and have stultified those who would be creators and innovators. 

We have lived through such a time in the last couple of decades.  We have called it “the 8,000 to 4,000 problem”. Readers of this commentary, and certainly our clients, know what that means.  It is the trajectory of public companies in the U.S. from the late 1990s/2000 era to roughly 2020, during which the number of public companies declined from over 8,000 to a low near 4,000.  There have been many different reasons offered for why this has happened, but we have spoken to enough small, entrepreneurial private companies over the last 15 years to squarely put the blame on government regulations that have made it too cumbersome and expensive to become a public company.  From Sarbanes/Oxley to Regulation Fair Disclosure to even the NASDAQ trading settlement of the late 1990s, and more – all these have had a role.  We won’t take the space here to describe each one because it would require volumes.  We suggest readers inform themselves about the nature of those rules on their own.  Suffice it to say, these onerous burdens on entrepreneurs have kept larger companies in control, forced more acquisitions of promising private companies by existing public companies, and perhaps have even kept some entrepreneurs from getting off the ground due to lack of capital.  This is not conjecture:  we have seen it.  We have lived it. 


This negative landscape has been changing for the better more recently.  Entrepreneurs have found their way back through the use of an old, obscure and little understood vehicle known as the special purpose acquisition corporation (SPAC).  They are also known as “blank check companies”.  Originally used in the oil and gas industry years ago, a SPAC is essentially a shell corporation that is formed for the purpose of acquiring a functioning, operating company, and thereby allowing that company to become a public company.  We won’t get into detail about the reason investors put money into a special-purpose vehicle when they have no idea what it is in which they will ultimately be investing, but there are incentives built into the structure that can make it very attractive.  While the SPAC is not always less expensive than going public through the traditional route, the regulatory burden and requirements that tax a small company trying to go through the traditional initial public offering (IPO) process make the SPAC route extremely attractive for many small companies, particularly in the technology space.  A great way of simply describing the point is that much of the paperwork is already done!  The acquired company slips into the existing corporate structure of the SPAC. 


We are not suggesting that the rise of SPAC popularity is a panacea for every small company out there.  Companies must still be well prepared to be public and they must still be deserving of being a public company.  And certainly, the IPO process is still the best option for some companies.  Even the “direct listing” route where a company simply lists on the public exchange without raising funds is best for a few companies.  But due to the realities of the marketplace, and all the reasons given above, those options tend to be suited for larger, more established companies. 


But the SPAC has been a welcome breath of fresh air to public markets sorely needing more publicly-traded, small companies that can be an investment opportunity for everyday people trying to get a return on their hard-earned money before these companies become huge.  And, of course, these companies going public through the SPAC process are often the innovative young guns that will challenge the oligarchic mega-companies that have thrived in the preceding period of drought for small companies coming public, allowing those oligarchic titans to dominate all levels of our culture, politics and everyday life in ways that are not always desirable.  Look out Amazon, Apple, Google, Microsoft, Facebook, et al: here comes your competition!






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.

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Have you heard of this company? ClearPoint Neuro (CLPT)













image: Company investor materials.

Today we're highlighting another innovative company of which many of our readers have probably never previously heard -- ClearPoint Neuro, Inc. (ticker CLPT)*. 


ClearPoint is a medical device company providing real-time visibility for brain surgery procedures. 


If you think about it, minimally-invasive surgery has transformed many procedures throughout the body (such as heart-valve replacement which can now be performed by surgeons working through a small incision to access an artery rather than by cutting open the chest as was previously necessary for open-heart surgery) -- but in order to enable minimally-invasive procedures, real-time visibility is necessary so that the surgeon can guide the instruments to the targeted part of the body. 


For a variety of reasons, real-time imagery of the brain has been unavailable for brain surgeons, creating an obstacle to the development of true minimally-invasive procedures in brain surgery. The primary obstacle has been the fact that real-time brain imagery uses an MRI (magnetic-resonance imaging) machine, but because an MRI uses a powerful magnet, surgeons could not use any metal instruments on a patient at the same time that they are looking at the patient's brain under the MRI. 


Therefore, an MRI would be taken prior to the procedure, and then the surgeons would use that MRI to guide them during a procedure -- knowing that the imagery itself was not real-time (it was taken in the past) and that the brain might have shifted slightly in the interim, thus preventing the levels of precision and sub-millimeter accuracy that could be possible with real-time imagery, and which could make all the difference in such delicate procedures.


ClearPoint has developed the ClearPoint Neuro Navigation System, which is a platform that consists of both hardware and software which enables MRI-guided, minimally-invasive brain neurosurgery procedures, including deep-brain stimulation (used for Parkinson's patients), laser ablation procedures (including laser interstitial thermal therapy, or LITT, used for some epilepsy and tumor-related treatments), and for drug delivery to parts of the brain using inserted cannulas (there are presently a number of bio-pharma and gene-based treatments moving through trials). ClearPoint markets a SmartFlow cannula which enables real-time imagery for more accurate placement and delivery of therapeutics to treat serious neurological disorders).


The ClearPoint's neurosurgery navigation business (approved for use in the US and the EU and in countries that follow the lead of those two)  follows the well-known "razor and blade" business model, in which healthcare sites purchase capital equipment (the system itself) and then disposable components which are used for each procedure (the "blades" that must be replaced, in the razor-and-blade analogy).


ClearPoint has their capital equipment in use at about sixty hospitals or functional neurosurgery centers in the US, Canada, and the EU at present, although they estimate that the total number of hospitals with MRIs which perform the types of procedures for which ClearPoint's neurosurgery navigation products would be appropriate may be around 400 to 500.


ClearPoint presently has commercial relationships with approximately 25 biologics and drug delivery companies who are either evaluating or using ClearPoint products for the delivery of their therapies. These therapies are in varying stages of development, from preclinical research all the way to late-stage regulatory trials. 


It is important to note that developing therapies to treat the brain is especially challenging due to the "blood-brain barrier," which limits the ability to deliver compounds through the bloodstream and have it reach the brain. Therefore, new biotech or even gene-therapy treatments which are being designed to treat serious neurological disease in the brain must be delivered directly to the brain (such as through a cannula), and that's why ClearPoint's real-time guidance capabilities are so critical to the new therapies being tested today. We believe that ClearPoint's capabilities may well prove to be essential for the delivery of new therapies based on revolutionary discoveries such as gene therapy, which are already beginning to transform treatment in other areas of healthcare outside of the brain.


ClearPoint generally has arrangements which involve "milestone payments" as treatments progress pass various milestones during the research and clinical testing process. Also, the ClearPoint products are used during the testing process and would likely be used in the delivery of any therapies which make it past clinical trials into commercial use (and in fact, the clearance of such therapies may mandate the use of the same delivery methodology after approval that was used during the trial period).


We believe that ClearPoint is an important company enabling the application of new and promising therapeutic developments to an extremely difficult part of the body -- the brain -- with the potential to help people suffering from some of the most debilitating neurological diseases.



* Disclosure: At the time of publication, the principals of Taylor Frigon Capital owned shares of ClearPoint Neuro (CLPT).

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.

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And the Correction Continues!

image: Wikimedia commons (link).

Over the last few months, we have seen a continuation of significant volatility in our portfolios, in both directions, up and down.  In our recent Investment Climate quarterly commentary, we described it as wild.  Well, in the first couple weeks of May the correction in growth companies' stock prices has returned to the downside, again mostly based on the "rotation" by traders (speculators, and sometimes outright gamblers) out of "growth" stocks and into "cyclical" stocks.  

In what we view as an oxymoronic type of "conventional wisdom," the idea is that higher inflation will cause an "outperformance" of cyclical companies which might fare better, albeit on a short-term basis, due to an over-heating economy driven by plentiful money being supplied by the US Federal Reserve.  

While more cyclical industries may well demonstrate higher earnings growth for a short period in an overheating economy (think for example of a company which produces commodities)  -- as opposed to businesses which grow over longer periods lasting through many economic cycles --  the very cyclical nature of those companies means that their fortunes will be short-lived.  Ultimately, the investor is forced to become a trader, picking the bottoms and tops of economic cycles: a very difficult task to say the least.

Taking this a step further, inflation will eventually lead to a steep and aggressive tightening of the money supply by the Fed.  This ultimately results in slower economic growth, thereby forcing the cyclical trade in the opposite direction.  

And let's go one step further than that.  We are hearing the geniuses that run the U.S. Government politicians saying they want to increase tax rates significantly.  Combine the effects of massive tax increases with higher interest rates and you are looking at a serious hit to economic growth. Good luck with trading that!

Regardless, as we have said before regarding corrections in the values of our companies, the reasons for cyclical market swings are almost irrelevant to us.  They are bound to occur, especially after periods of strong performance.  Yes, the values of our companies can get ahead of themselves.  And, as we counseled previously: when values become stretched, it is wise to raise cash if there are needs for that cash in the shorter-term outlook (1-3 years).  

However, these corrections are definitely opportunities to buy with long-term investment capital.  We have no idea if we are at the end of the current corrective phase or not.  What we do know is that the vast majority of our portfolio just came off of very positive earnings reports and, in general, those businesses are doing what we ask of them.  

We believe the values of our companies will reflect those positive prospects over time, as they always have in the past.  Time to start stepping up the buying!


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.

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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.

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