Investment Climate January 2021



As the pages on the calendar turn from a tumultuou2020 and into 2021, most are hoping for a return to normalcy and some restitution of life as we once knew it, all the way back in February 2020.  With all that has transpired in 2020, that seems a lifetime ago.  We will not spend time musing about the COVID debacle, except to refer readers to our blog post on March 23, 2020 (coincidentally the day the market bottomed) and say that we think we have been vindicated in our warning that we needed to be careful that the COVID “cure” was not worse than the disease.  Millions of small businesses and the lives of those who owned and are employed by those businesses have been decimated.  And while the actual disease is clearly deadly for some, statistics show that most are able to fend it off; not so much for the millions of small businesses who will never return. 

It is in this vein that we reference the unbelievable performance we experienced in our growth strategies this past year with a tone of humility.  We do not revel in thriving while others suffer.  That said, it was the diligent effort put into finding businesses in which to invest our own and our clients’ hard-earned capital that came through in spades this past year.  Our focus has always been to invest in businesses that will be resilient in all economic environments.  This approach is clearly the reason we were able to have an extraordinary 2020.  Our Core Growth Strategy was up roughly 80% in 2020, the Aspire Small Cap was up about 43% and the Israeli Innovation Strategy was up over 111%!  These were all record numbers for our firm and the careers of our firm’s professionals, a time that spans almost four decades. 


We are being asked every day what to expect going forward.  While we thoroughly expect corrections to happen, and as we have written before, corrections in the modern era are violent and swift, we have no idea when those corrections will occur.  And we don’t worry about them.  Our growth portfolios are full of companies that are very early in their growth trajectory.  As our clients know, we have transitioned out of a number of more mature businesses over the last few years, realizing significant capital gains, and while taxable accounts have had to withstand the nasty capital-gains tax that comes with that, the proceeds of those sales have been invested in “up-and-coming" businesses that are the reason for the performance we have experienced.  And being still relatively young companies, we expect many years of positive performance from those businesses. 

We believe our narrative-based investment approach, which seeks to identify the trends that will drive economic growth in the coming years, has proven resilient. Those narratives are centered around technological innovation in areas such as business efficiency software, mobile communications and connectivity, home-based healthcare services, medical technology and financial technology that allows people and institutions to transact business more safely and effectively, just to name a few. 


All is not rosy, however.  The rhetoric from the policymaking class suggests higher taxes and more regulations are coming.  All the more reason we say that it is crucial to focus on businesses rather than markets, as always.  And most importantly, we continue to trust that savvy entrepreneurs will drive forward in spite of what the politicians and policy-makers do.  This is the approach that works, and we’re sticking to it.  Happy New Year! 





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? Boot Barn (BOOT)


 









In line with our motto which declares that "We own companies, not markets" and which advises investors to concentrate on businesses rather than the behavior of stock markets where shares of those businesses are bought and sold, we have over the years highlighted a number of the kinds of companies we own in our portfolio strategies. 

Those interested can go back into the archive and find previous introductions to companies such as Carvana (CVNA), Kornit (KRNT), Glaukos (GKOS), IDEXX Laboratories (IDXX) and Vuzix (VUZI), all of which we believe to be classic Taylor Frigon companies and all of which we continue to own to this day on behalf of our clients.*

As we close the books on 2020 and begin the year 2021, we'd like to highlight another company we believe fits our definition of a well-run business positioned in front of fertile fields for future growth: specialty retailer Boot Barn (BOOT).

Boot Barn is a specialty retailer of western wear and workwear, selling footwear, apparel and accessories, with by far the largest market share in a fragmented market (three times the number of stores versus their nearest competitor), and constitutes the only nationwide retailer in the space.

The company has a little over 260 stores in thirty-six U.S. states which we believe can easily double over the next several years, even by very conservative estimates, with abundant new regions to target in addition to continuing to add stores in states where they have already been operating for years, such as California and Texas. We have always felt that the company's predictions of its potential total store count have been conservative in the past, and have noted that another company we own, Tractor Supply (TSCO), presently has over 2,000 stores.

Boots are the company's "signature category" and are placed in the center in order to "anchor the store." Boot Barn is an important distribution channel for major "western" and "country" brands, which often don't have a large variety of other retail outlets through which to move their products, with Boot Barn being the largest in many cases. Boot Barn has also been very successful at launching "exclusive brands," often partnering with major country music artists to do so.

The categories Boot Barn serves benefit from attractive growth drivers, including the population flows to the south and the west of the U.S., the increasing popularity of country music and associated lifestyles, and the paradigm shift in oil and gas production in North America (although this last factor also introduces some volatility as energy production goes through its own cycles, and as investors and algorithms trade their positions in Boot Barn based on their attempts to predict moves in those markets).

The company's stock price was (not surprisingly) absolutely hammered during the first weeks of the COVID lockdown, in which not only were many retail stores closed down but also nightlife, concerts, rodeos, and other venues associated with the lifestyle served by Boot Barn products -- in addition to the volatility in oil prices just mentioned.

While Boot Barn closed their stores in California and Louisiana during the first part of the lockdown, most other stores remained open. Remember that Boot Barn sells workwear, including work boots, and that these are considered essential because they actually are essential for workers who still have to perform necessary jobs in construction and logging and mining and a host of other vital parts of the economy. 

And while Boot Barn has an online sales channel (actually three different online sites: Boot Barn, Shepler's, and Country Outfitter), the events of the past year have proven that the Boot Barn customer still likes to come into the store in person -- and in some cases needs to come into the store in person (if you need boots for work as a safety factor, and you experience a boot blow-out with your old boots, you can't wait around for an online order: you need to get some new boots right away).

Our analysis confirms that Boot Barn is led by a competent and experienced management team which has delivered very impressive results over the past ten-year period and which continues to make good business decisions and which continues to grow in a responsible and sustainable manner, and should have the ability to continue to do so for many years to come. 

The company is a prime example of the kind of companies we look to own.


* At the time of publication, the principals of Taylor Frigon Capital owned securities issued by companies mentioned in this article, including CVNA, KRNT, GKOS, IDXX, VUZI, TSCO, and BOOT.

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? Vuzix (VUZI)


Vuzix (ticker symbol VUZI, headquartered in West Henrietta, New York)* designs and markets smart glasses for augmented reality applications, as seen in the above video highlighting their recently-introduced M4000 smart glasses.

At Taylor Frigon, our narrative-based investment philosophy involves trying to understand the "storyline" or "narrative" that will unfold in a particular industry or technology over the next several years, and finding well-managed companies that are positioned to benefit from the changes that will take place, or that are in fact making those changes possible.

When we think about all the ways that mobile connected technology such as the smartphone have changed our lives, by bringing the capabilities of the network to virtually every aspect of our day, it seems very clear to us that moving the visual element (presently a screen that we hold in our hand) up to the organ of our body that we actually use for seeing (in other words, our eyes) will enable another exponential increase in possibilities which is likely to change our lives in ways that are difficult to predict today (just as the changes that the smartphone has brought were difficult to predict back in 2006, prior to the release of the first iPhone in 2007).

Vuzix manufactures a variety of smart glasses, mostly targeting "non-consumer" applications at this time, including the use of smart glasses for warehouse picking, for medical and healthcare applications, and for military and first-responder applications. These glasses feature the ability to see digital projections in a hands-free manner, which can be projected across a lens using a technology known as a waveguide, or alternatively can be mounted in a tiny LED screen held on an arm in front of the user's eye. 

Having the visual element in front of the eyes enables "augmented reality," through which digital information can be presented right on top of whatever you are looking at, thus "augmenting" it with added information which can enhance the performance of a variety of tasks, from conducting a surgery to fixing an air conditioner unit to maneuvering a drone. 

Additionally, Vuzix smart glasses feature a video camera which enables someone in a remote location to see exactly what the wearer of the smart glasses is looking at, creating a very powerful dynamic for collaboration without the necessity of physical proximity. A technician on a job site looking at a piece of machinery can get instruction from a more experienced engineer who is sitting in an office thousands of miles away. Conversely, the chief engineer of a company can put on a pair of Vuzix glasses and show the operation of a complex piece of equipment to someone in another part of the world, and point out very specific details, and those watching remotely can see exactly what that chief engineer is looking at, as if they are looking through those glasses themselves.

The Vuzix glasses also come with speakers or earpieces which enable hands-free conversation, thus eliminating two of the problems with the current smartphone form factor (as transformative as it has already been), which is the fact that we hold our smartphones in our hands but our eyes and our ears are not located in our hand. 

Vuzix is still a small company and has been the subject of short-seller attack pieces in recent years, alleging that their product does not even truly exist or that the entire story is somehow fraudulent, but those arguments have proven to be unfounded and the company is now demonstrating that it can land significant contracts, including with major defense contractors for the incorporation of Vuzix waveguides into wearable devices such as night vision goggles for the military. Vuzix smart glasses are also being used in a variety of healthcare applications, including for real-time assistance during surgeries and other medical procedures, as well as for a variety of patient interaction and medical training applications. 

In fact, the company has been selected by Verizon as a partner for a new initiative which is scheduled to launch in the first quarter of 2021, in which Verizon plans to offer mobile 5G capability to first-responders including ambulance companies and EMT units, which will enable the two-way sharing of tremendous amounts of real-time video and digital data with the personnel out in the field, including over smart glasses designed by Vuzix. A first-responder wearing a pair of smart glasses could then get timely advice from specialist medical personnel back at the hospital, for example, potentially saving precious time in extreme situations.

By no means is Vuzix the only company to perceive that augmented reality will have tremendous and transformative applications in all aspects of our lives in the near future, or the only company to be working on smart glasses -- but they have been one of the first, and their waveguide technology has capabilities that so far others lack. We certainly expect other major players to enter this field, but we believe that the opportunity is extremely large and there is room for multiple participants going forward.

Vuzix right now has a market capitalization of about $200 million, on annual revenues of just $11.5 million. However, we believe that some of the business deals described above have the potential for significant increases in revenues as they enter into volume production over the next few years. 

And, more importantly, we believe that the general narrative of continued increased "augmentation" of all kinds of different daily tasks through the juxtaposition of digital and video technology will only grow, creating a paradigm shift similar to what we have seen since the advent of the smartphone, and offering potential growth for Vuzix, if the company can continue to execute as it has been doing up until now (and especially as it has been doing in the past year).


* Disclosure: At the time of publication, the principals of Taylor Frigon Capital owned securities issued by Vuzix (VUZI).

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 October 2020

 



Stocks continued the march toward recovery in the third quarter and turned positive for the year - a feat that just a few months earlier would have been thought to be nearly impossible.  Clearly, markets overreacted to the COVID panic, given the severity of the downturn, and have now largely corrected that overreaction.  The outperformance in our growth strategies continued in the quarter, and the performance continued to be very broad-based.

While we have always believed the path to investment success involves constant evaluation of the businesses in which we are invested, rather than the general market (including the individual market prices of the companies we own), the current environment of hyper-volatility and excessive fear makes it even more crucial to take that approach.  Simply put, in times of extreme uncertainty, value migrates towards real, sustainable business models, and we believe the fact that we take extreme care in seeking out and investing in such companies is the reason for our considerable outperformance over time, especially more recently.

The upcoming election has many investors concerned.  We believe there are important issues being addressed and the choices offer some stark differences, at least in rhetoric.  We believe that the importance of maintaining a thriving, healthy, free-enterprise system is necessary in order for the economy to continue its recovery from the COVID 19 fiasco, and investors would be wise to pay close attention to any policies that serve to thwart that system.  However, it is also important for investors to consider that in the system of representative government in which the U.S. economy operates, significant change is incremental and difficult to inflict any other way but marginally.  In our view, barring a government takeover of a significant portion of private business (obviously an extreme and unlikely action regardless of the election outcome), it is likely to be business as usual post-election.

The modern stock market, which is so driven by algorithmic trading, is marked by bouts of extreme volatility.  This is simply a fact of life in the public markets and is here to stay.  For those who have a business-based focus on public company investing, this should not be a deterrent, because such investors can take advantage of extreme valuations, in either direction, to appropriately rebalance portfolios.  This is an approach we take and will continue to do so.  We are encouraged by our recent performance and while corrections are to be expected, we believe the portfolio is very well positioned in the most important companies driving innovation in the world today.






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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Market Sell-Offs and Business







The broad markets are experiencing a sharp sell-off which started yesterday (September 3, 2020) and has continued today, prompting many market observers and pundits to declare that the long-anticipated “bubble bursting” from the market’s “fevered rally” had finally arrived (to use quotations we have seen in actual market commentaries this week). One comment we saw a few days ago applied a quotation from Ludwig von Mises to the current situation, who said: “there is no means of avoiding the final collapse of a boom brought about by credit expansion.”  

 

Those commentators who have been saying for months that the positive price action of the past several months is nothing more than a “boom brought about by credit expansion” (or, as the pundits at Zero Hedge have lately been calling it, a “gamma melt-up”) are now understandably saying that their views are being vindicated and taking a victory lap. Meanwhile, the many investors who have been hearing those same views (that this is all a “melt-up”) for several months and have been growing increasingly more nervous are suddenly thinking that those voices must have been right and the day of reckoning must have finally arrived. 

 

We ourselves are asset managers, not market commentators, and we don’t try to predict markets and we never have. We concern ourselves with predicting businesses. We have certainly formed some opinions over the past thirty-plus years of being professional asset managers running portfolios for investors, and we don’t disagree that many names as well as the market in general have probably been due for a pullback for some time, but we don’t try to predict when those will hit or how long they will last. But we are sure of one thing: well-run businesses with truly necessary technology or other innovative products and services such as the companies we own for our investors are not the result of any “gamma melt-up” or “excessive credit expansion.” 

 

For example, just this week we were reviewing the technology of one of our microcap holdings, Transphorm, Inc. (TGAN), a pioneer in the design and manufacture of Gallium Nitride (GaN) power conversion products and the only company right now capable of producing 900V GaN transistors for commercialization. That technology is real technology: it is not the product of financial engineers on Wall Street or at the Fed, but rather of real engineers in Goleta, California led by some of the most respected names in semiconductor materials science. 

 

Another company we own for clients is Compugen (CGEN), which uses scientific modeling and computing power to predict and discover new target pathways for the development of oncology treatments. Results of clinical trials thus far suggest that some of their discoveries are showing promise for patients with recalcitrant forms of cancer which have resisted all previous forms of treatment.  

 

These kinds of real innovation and real industry are not the product of “credit expansion” or “market melt-ups.” We don’t deny the possibility that melt-ups have taken place and that those melt-ups will eventually have to come out of the market, and we know from experience that there will sometimes be extreme volatility (including to the negative side) when that takes place – and that this volatility will impact our companies along with the rest of the market. But our approach is to put our money into companies where we have a good idea that in five years the world will be using more of their product, not less. And we sometimes use sell-off situations to buy more of those kinds of companies, adding to existing positions or adding new positions in companies we have already researched and whose story we already like. We think too many investment professionals and market pundits have lost sight of that perspective on investing. 




 

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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