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    High Tech / High Touch

    Your senses are digitally overloaded. Screens, dashboards and speakers compete for attention. Speedometers project onto windshields. Rearview mirrors warn of passing cars. Backup cameras, navigation, and sound systems jam the center console. Video vines sprout leaves to reward your gas efficiency. Phones call, alarms beep, maps speak, and robots read texts. “OK, Waze…OK! WAZE!” you scream.

    And that’s just your car. At home, you command, “OK, Google, talk to Siri and Alexa. Somebody order heating oil. OK, Google. OK, GOOGLE!” “Sorry,” says Alexa, “Google’s out to lunch again.”

    Your TV tells you that your phone is calling with a video from your front door camera: the dog wants to come in. Facebook sends an alert: everyone is outraged about everything. “I knew that,” you think. Your accountant has texted the password for the taxes he emailed. Your bank wants tax returns from every entity you’ve ever known, but you can’t find all the passwords.

    You’re probably thinking, “How can I cram more information into my life?”

    The most underutilized sense in computing is touch, which is also the sense that generates the most confidence. If you doubt what you see or hear, you touch it. People can live without sight and sound, but we shrivel and die if we are untouched. Touch is so important that we call quintessential examples “touchstones.” Now, touch has come to computing.

    Touch features are called “haptic.” Your car drifts across a lane, and your steering wheel shakes. Your car thinks you’re falling asleep, and your seat shakes. Your joystick pushes back harder as your flight simulator banks steeply into a turn. Your seat rumbles with explosions, and a strap gently thumps your head when you’ve been virtually punched.

    You’re walking, and your phone vibrates when it’s time to turn. You’re playing a shooting game, and your phone shakes when you shoot. Haptic feedback is an important way to convey information to people at a gut level: it makes what you see and hear more real. It’s fairly simple now, but haptic feedback will accelerate quickly with advances in material science and computing.

    Ultimately, haptic feedback will help replace expensive control rooms. You’ll don sensory input devices – haptic gloves and visual reality googles– and step into an empty closet that monitors your movements. Reach out for that computer-generated control device, and the gloves tighten on your fingertips. You’re seeing readouts that don’t physically exist and feeling touch sensations that are computer generated. You could operate this nuclear power plant or conduct this surgery from almost anywhere.

    Scientists call a haptic-enhanced experience “immersive.” The name of  the leading haptic development company is Immersion Corporation (symbol: IMMR, Immersion licenses its 3500 patents to manufacturers of cars, cell phones, game machines, manufacturing systems, and other devices that could benefit from haptic feedback. 

    Immersion Corp. reminds me of Universal Display (OLED) a few years ago. I did not do as well as I could have with OLED because the company had chunky earnings in the early days. They would sign a licensing deal, have a big quarter, and very low sales the next quarter. Not understanding the earnings, I bought and sold OLED several times before it took off. My original position purchased at $8 would have increased 2000% to $168 today.

    IMMR has the same chunky financials of a young licensing company. In the last three years, sales have swung from $57 million to $35 million to $111 million while the company lost $39 million and $45 million before earning $54 million in 2018. Most of the profit probably accrued from a settlement with Apple, the terms of which were confidential. After Apple introduced the force-sensitive display and the Taptic Engine linear vibratory motor for iPhones, Apple announced a global settlement with Immersion. IMMR is also litigating against Samsung, which could produce a nice earnings surprise, and a pop in the stock price.

    IMMR has a market cap of only $283 million, no long-term debt, and cash of $125 million, so you are buying IMMR for only $158 million. Only four analysts from small firms follow Immersion.

    I had looked at IMMR in 2015, but was put off by insider sales, which have continued. A 10% owner has liquidated holdings, and the CEO and CFO have recently left the company. The new CEO, Ramzi Haidamus, built large patent licensing businesses at Nokia and Dolby Labs, and founded Via Licensing, a patent pool licensor responsible for over a $1 billion in royalties. Haidamus has the experience necessary to turn patents into cash.

    Even better, one of the Princeton area’s shrewdest investors is now the largest shareholder in IMMR. Raging Capital Management ( and founder Bill Martin have purchased 4.8 million shares or about 15.5% of the company.

    Whatever you think about a company, it is often helpful to call their investor relations department to see how they represent themselves. Years ago, if you called Berkshire Hathaway, they would mail a batch of Warren Buffet’s annual reports. In uncommonly straightforward language, Buffet explained his strategies and confessed his mistakes. His annual reports helped create a rabid following among shareholders and employees by positioning the company’s founder as a thoughtful, purposeful leader.

    Some companies say nothing because management is working with a private equity firm to take the company private. The last thing they want is a higher stock price.

    Immersion has outsourced its investor relations to the Blueshirt Group, perhaps a cousin of the Blue Man Group, the mute, blue-headed bald guys who play paint-splattering drums in Las Vegas. The Blueshirts’ telephone system has no operator, no functioning general mail box, and no access to information about the companies they represent. 

    The fact that Immersion’s Investment Relations department is AWOL is also an opportunity to create value. Think of the valuable companies that have been led by awesome storytellers: Amazon, Apple, Tesla, Disney – even Walmart founder Sam Walton focused on one simple message, "There is only one boss – the customer. And he can fire everybody in the company from the chairman on down, simply by spending his money somewhere else."

    Technology and finance are building blocks of value, but a company must tell a cogent story to inspire customers and shareholders. John Naisbitt, the author of the phrase, “high tech / high touch” forecasted a time of tech overload when people would grow weary of technology and seek greater human contact. For marketers, this means emphasizing authenticity and – gasp – picking up the phone, an expensive, but useful exercise because talk is the most effective way to solve problems and learn about your customers.

    NICE (symbol: NICE) is another company I have mentioned here that makes call routing and back-office automation software. NICE stock is up from $96 to $138 in the last year, a 43% gain to a market cap of $8.3 billion. Companies like AAA, LL Bean, and Wyndham Hotels use NICE to manage their call centers.

    Haptics and talk help people connect – especially in an age of screen-centered alienation. High tech / high touch. Buy IMMR at about $9.18. If Immersion’s haptics do as well as NICE’s talk, you’ll have a gain of about 2800%.


    Should you invest in marijuana? Part II

    “It’s the wild west” is the phrase I often heard from investors in cannabis. Many stocks now sell below $5 a share, financial reporting is spotty, virtually every company loses money, and insiders are dumping their shares – typical behavior for the first phase of a new industry.

    Last week, I attended the Cannabis Science Conference in Baltimore. It was like having astronomers and astrologers in the same meeting. One group speculates about the nature of dark matter while the other predicts that, when the moon is in the seventh house, love will steer the stars.

    The state of cannabis science is, at best, primitive. For instance, Maryland’s lead regulator expressed a need to start testing against placebos. In other words, “Now that we’re selling this stuff, let’s find out if it works.” No one knows how CBD, the non-psychoactive molecule in marijuana, might reduce pain, but one scientist said that CBD seems to reduce inflammation, which is often the cause of pain. Promoters speak of cannabinoids, flavonoids, terpenes, and the “entourage effect” of the interaction between marijuana’s many complex compounds.

    Products are unregulated or illegal, so cannabis dosages are not established: doctors start at a low level and increase strength as they see fit. To be fair, this is not so different from the way psychiatric drugs are prescribed today: we throw groups of psychotropic drugs at patients until the patient reports feeling better. Science!

    Many attendees were genuinely motivated – even desperate – to treat chronic pain or conditions that prevent them or their children from living normal lives. If you have ever suffered from sustained pain, you can understand why many people argue for legalizing cannabis – or any promising treatment. If you have not suffered chronic pain or witnessed it in a child, it is hard to imagine its detrimental effect on your life.

    Dr. Bonni Goldstein operates a pediatric practice in Los Angeles, grew up in Cherry Hill, NJ and attended Rutgers. She was the most persuasive speaker at the conference – and we heard a similar message from other doctors and pharmacists: cannabis products have significantly improved the lives of many patients – particularly those with seizures – who had been suffering with conventional medicine.

    The FDA has approved the first cannabis-based drug called Epidiolex from Greenwich Biosciences, a division of GW Pharmaceuticals (GWPH). A UK company with an Enterprise Value (EV) of $4.6 billion and losses in the last four quarters of about 6% of EV, GWPH has run from $101 to $177 this year, and is now $167 a share. In the last three months, insiders have sold 1.9 million shares with zero purchases. I don’t buy into money-losing companies when insiders are cashing out, but, if I believed GWPH would double, I would buy January ’21 call options, which would limit my downside risk and increase my return.

    At the other end of the medical spectrum, you’ll find Medical Marijuana (MJNA), which sells for about 6 cents a share. What’s in a name? The ability to raise money. In the last four quarters, MJNA has lost $312 million on an EV of $233 million for a return of -134%. This holding company holds everything but profits and a plan.

    MedMen has a two-page ad in Vanity Fair this month. MMNFF hit a high of $6.94 in 2018, sells for $2.78 today, and has a return on EV of -27%. As of November 1, 2018, MedMen had licenses for 69 retail stores, and 17 cultivation and production facilities across 12 states. You can visit a MedMen store in New York on Fifth Avenue. The good news: MedMen has access to alternative cash sources like Gotham Green Partners, which invested $250 million in March, and shows revenue increasing quarterly to $30 million in the quarter ending Dec ’18

    MedMen is establishing a high-end brand in a difficult environment: advertising is difficult because the product is federally illegal, so MedMen does not refer to cannabis. Distribution is difficult because all products must be made in the state they are sold – imagine doing that in any other industry! Getting dispensary licenses is difficult because each is expensive and you face local political adversaries. Essentially, MedMen is consolidating ahead of the market consolidation that is expected when cannabis is federally legal. If medical marijuana becomes federally legal, MedMen would have immediate ability to reduce costs, and would be a logical acquisition for any large company seeking distribution. MedMen is not a perfect company, but it’s an interesting bet.

    Gotham Green Partners also invested in iAnthus Capital Holdings (ITHUF), which owns 21 dispensaries, though sales are a puny $3.4 million for all of 2018. Buy MedMen instead because its 10X topline sales.

    Tilray (TLRY) sells its medical cannabis in 12 countries. The company has an EV of $5.4 billion and lost $68 million in the last four quarters. Insiders sold a net 759,440 shares in the last three months. Sell.

    Kush Holdings (KSHB) is a grab bag of packaging, products, and marketing services for cannabis companies. In the last four quarters, the company had a return of -3.9% on EV; insiders had net sales of 3.3 million shares in the last 12 months. The company is restating its 2018 and 2017 reports for accounting errors. Avoid.

    Aurora Cannabis (ACB) reported a profit for 2018, but its fiscal year ends on 6/30. In the fourth quarter, ACB lost $239 million on sales of $54 million. Its $9 billion EV is very expensive. Sell.

    The only profitable company I found is Innovative Industrial Properties Reit (IIPR), which earned about 1% on its $805 million EV. IIPR is a self-advised Maryland corporation focused on the acquisition, ownership and management of specialized industrial properties leased to state-licensed operators for regulated medical-use cannabis facilities. IIPR pays a 2% dividend, and probably expects to make money by charging higher rates for specialized facilities. This has potential, but the business model could fall apart if marijuana is federally legalized. Without the requirement to grow in-state, high-cost local facilities will close and marijuana will be farmed like corn in the cheapest available spot.

    Many other small money-losing companies vie for attention in the marijuana gold rush. Supply has recently exceeded demand in Canada, so prices will fall, and Barron’s reports that profits are suffering from poor quality weed. In distribution, MedMen is winning the branding game.

    The golden opportunity in marijuana will be in replacing opioids, which have killed 700,000 Americans in the last 20 years. Cannabis has comparatively marginal side effects. Once U.S. labs are free to study the plant’s DNA, scientists will adjust branching structures and heights, so plants can be efficiently farmed. Instead of optimizing for psychoactive THC, cannabis will be optimized for compounds that manage pain, seizures, anxiety, fibromyalgia, colitis, lupus, insomnia, PTSD, rheumatoid arthritis, and palliative care.

    Astrologers have heralded the marijuana market so far. The business will be more compelling when scientists take over.


    Should you buy marijuana? Part 1

    Everyone, it seems, wants it to happen. The Baby Boomers will have their revenge. The medical marijuana mystery tour will smooth the way for a safer chill that doesn’t kill. Politicians want the tax revenue. Police are tired of fighting it. Pharma needs a new blockbuster.

    The zeitgeist is prepared. In Aldous Huxley’s Brave New World, a drug called soma calms the people. “The soma had begun to work. Eyes shone, cheeks were flushed, the inner light of universal benevolence broke out on every face in happy, friendly smiles.” Today, Soma is a lingerie store, a ceramic mug, a video game, and an actual prescription drug. We are ready, but how do you make money on it?

    Not so fast. When I asked a recovering heroin addict from Recovery Advocates, a wonderful non-profit that stages free interventions, if legalizing marijuana was a good idea, he said, roughly, “This is not your father’s pot. It’s much stronger than it used to be, and the side effects can include anxiety, high blood pressure and schizophrenia. The body can’t metabolize these levels of THC.” He was against it.

    The main criticism of marijuana legalization is that there is not much formal research – in part because marijuana is still federally illegal and a DEA Schedule I controlled substance, so, even the only federally sanctioned growing program at the University of Mississippi is not producing. What would you expect of a federally operated weed monopoly? A commenter on R&D Magazine notes, “They have terrible quality pot, a 2-3 on a 10 scale, barely smokable.”

    Lacking research, I asked my bank teller. She said, “I know an older veteran who has been in chronic pain for years. His doctor suggested that he try medical marijuana, but he didn’t want to smoke it. When he found out about edibles, he reluctantly tried it, and now he says he couldn’t live without it.” The other bank tellers chimed in with similar stories. Anecdotal evidence abounds, and it seems to give legalizing marijuana a sense of inevitability.

    New Jersey’s legislative vote to legalize was canceled for lack of support on March 25, but Governor Murphy said, “History is rarely made at the first attempt. History is often a bumpy road of fits and starts, of progress and of setbacks but eventually barriers do fall to those who are committed to breaking them down.” He added, “History often ends at the local diner where you order one of every pie they make, and, like, you can’t believe how great every pie is.” I don’t know – I’m not sure he said that last part.

    Generally, I am interested in companies that make productive tools, but everyone is talking about investing in marijuana. One man said he bought into a machine that will make one of the active Cannabis molecules, allowing the company to cut out the whole growing operation. Another told me about the problem of securing a dispensary license in New Jersey, which cost $500,000 just to prepare the application, so dispensaries will probably go to large companies or those that own them in other states.

    On March 22, a Los Angeles-based company called MedMen (MMNFF) secured $250 million from Gotham Green Partners, which, according to its web site, owns a photo of Manhattan and a suite on 5th Avenue. CrunchBase reports that Gotham Green has invested in other industry leaders like The High Note, Grow Generation, Flow Kana, Chooze, and iAnthus Capital Holdings, which claims to own 21 dispensaries with licenses for a further 63 dispensaries and a combined 600,000 square feet of cultivation.

    Marijuana is hot, so I called Karen Paull (no relation), a producer and co-host of The Marijuana Show, which you can watch on Amazon Prime or at this link: The particular genius of Karen’s business model is that, since it’s illegal to advertise marijuana, people who want to get their message across can come on Karen’s show and ask for money. After season two, The Marijuana Show is Shark Tank meets Ganja.

    The legal markets for weed today are a weird confederation of Canada, Colorado and Jamaica, so one strategy is to ask, “Where else can I find bobsleds?” and invest there ahead of the curve.

    Karen notes many ways to invest in marijuana. Since the plant itself is still federally illegal, much of the action is around technology that supports growth or extraction. Companies like Helix TCS (HLIX, $2.87) track seed-to-sale with RFID tags.

    Most of the research is coming out of Israel, but BDS Analytics is in Colorado and New Frontier Financial in Washington, DC aims “to elevate the discussion around the legal cannabis industry globally by providing unbiased vetted information and educating stakeholders to make informed decisions.”

    A casino-circus atmosphere clouds the industry. One Marijuana Show contestant says that “Anything you can make from plastic, you can make from hemp.” Naturally, he has made a car from hemp, and seeks a $10 million valuation for his company. Hemp may be a great source of construction material, but it’s a terrible source of THC – the psychoactive molecule that people like to smoke. The maximum government-allowed THC content in hemp is 0.3%. Hemp is often mentioned, but it’s a marginal contender in the rush to money.

    THC is one of two molecules found in both hemp and marijuana. The molecule that serious people promote is CBD, which has no psychoactive properties, but, many say, has powerful medical effects. Acreage Cannabis’ medical marijuana commercial rejected by the Super Bowl is quite touching. For years, scientists have studied the body’s cannabinoid receptors involved in appetite, pain-sensation, mood, and memory.

    It’s almost as if the government had outlawed all alcohol during prohibition, and proponents said, “Alcohol is really helpful for wounds,” and prohibitors said, “Maybe, but people might also drink it,” and proponents said, “Well, yeah….”

    Karen points out that, as in many new industries, the narrative is, “This industry will have phenomenal growth; companies that scale up fast will be acquired for rich sums by industry leaders.” For instance, Altria invested $1.8 billion in Canadian cannabis company Cronos Group (CRON $18.92) and $12.8 billion for 35% of privately-held e-cigarette maker Juul – valuing it at more than $38 billion or more than two times Ulta, the leading make-up chain. Fun fact: the CEO of Juul is named Kevin Burns. A website called Hail Mary Jane already promotes ways to get THC into Juul pods. Altria execs might even be aware of this trend.

    A surprising number of marijuana companies are already public. In the next Perfect Company column, we’ll see if we can find a comfortable marijuana investment: that is, a company that makes money, is growing sales, and whose insiders are buying their own stock.


    Ulta or Nvidia?

    I am surprised at the faith intelligent people put in charts and numbers. Last week, the Chief U.S. Strategist for a big investment company said on CNBC: “$2800 (for the S&P 500) seems to be a pretty important inflection point. Even if you take it back further – really for the last few months – we’ve been in that trading range. Usually, you get some kind of pull back from a big bottom like that so…” yada yada yada. He might as well have said, “We’ve flipped a coin ten times, and we’ve had six heads in a row, so, you know, we’re due for some tails.”

    People see patterns in everything, which is why there are constellations, tea leaves, and stock charts. We enjoy talking about the patterns we see. My intelligent friends have patiently explained to me the meaning of financial charts. I have some experience with this because my father was a chartist before desktop computers. He paid me to dig weekly closing prices out of stacks of Barron’s, so that he could chart moving averages. Dad showed me the familiar patterns like double top, triple bottom, and head-and-shoulders.

    Dad once had the top two best-performing stocks for the year, which is a real feat. Later in his life, I took his theories to Commodities Corporation in Princeton and tested them against historical data. The results?  Entirely neutral. Dad used the price data as we might use tea leaves: to verify what he already believed. Fortunately, he had a strong understanding of value and potential.

    A price is one piece of data, but, like coin flips, last week’s price does not dictate this week’s price. Underlying price data are earnings data, which are also full surprises. Recently, well-paid financial analysts were surprised by earnings at iRobot (IRBT 64%), Skechers (SKX 34%), Universal Display (OLED 18%), Trex (TREX 16%), nLight (LASR 100%), Twitter (TWTR 44%) and many others.

    Even within a company, earnings are hard to forecast. They depend on how many products you can deliver (Tesla), the impact of new technology (department stores versus the Internet), the disappearance of a trend (Nvidia sales dropped when Bitcoin miners stopped buying servers), the emergence of a trend (Ulta sales increased because Kylie Jenner said so), and whether or not management is actually involved in the business.

    This last one mystifies me. Like picking stocks, people think they can run companies “by the numbers” – and without any real interest in the products or the customer experience. I have watched rooms of people pore over spreadsheets without ever asking a meaningful question like, “Do customers recommend our products?” Had he shopped in his own stores, the hedge fund manager who is now burying Sears and K-Mart might have discovered their frustrating check-out process.

    Retail is hard, but, if you think like a customer, you might succeed. Ulta (ULTA) is a chain of stores that offers makeup in every price range. I know that you can check out at Ulta because I have seen my wife and daughter do it. Since Ulta sells makeup, you might think their margins are a Zillion%, but they are only 36%. By comparison, Macy’s has 41% margins.

    Macy’s (M) also has sales of $26 billion and profits of $1.1 billion versus Ulta sales of $5.9 billion and profits of $555 million. After considering cash and debt, you could buy Macy’s for $11 billion, but you would pay $18.4 billion for Ulta, which has been the greatest stock of the last ten years. Ulta climbed from $6 in 2009 to $340 today.

    Is Ulta a perfect company? It earns 3% on its enterprise value, which is OK for a growth company. More insiders are selling than buying. The influential Jenner/Kardashian family of California lends its brand to Ulta. However, when Kylie Jenner announced that she no longer used Snapchat (SNAP), the stock dropped by 6%. What the Jenners give, they can take away. At 21, Kylie Jenner is the youngest self-made billionaire ever. Perhaps you should be reading her column.

    I would not buy Ulta for two reasons. First, I don’t know anything about makeup. Second, it seems rich. For the price of Ulta, you could buy Universal Display (OLED), the licenser of OLED technology, Trex (TREX), the maker of plastic lumber, NICE (NICE), the leader in contact center and back office software, and still have $500 million left over. Is Ulta going to double to $36 billion? I give Universal Display a better shot of doubling first.

    I prefer companies that make core technologies that may provide a better quality of life. The more complex the tool, the greater the potential value, and the less likely that the business will be copied. One of these is Nvidia (NVDA), a company that is best known for its computer graphics accelerators. It turns out that managing graphics – lighting up 8 million pixels in a high-resolution screen in real time – is more demanding than central processing – chunking ever faster through one instruction at a time. When IBM built its Watson Artificial Intelligence computer, it turned for processors not to Intel, but to Nvidia.

    If we humans are pattern-seekers, artificial intelligence (AI) is the perfection of that desire. Our memories are short and we tend to have a poor handle on probability; AI, though, can learn from human experience, and, when sufficiently trained, learn competitively by playing against another AI. It catalogs outcomes and tests new strategies faster than humanly possible. AI has applications for cars, health, defense, photography, shopping, design, and virtually anything you can imagine. We are living in the age of automating everything.

    You can get a sense for Nvidia’s breadth by visiting its developer site at where you’ll find platforms for self-driving cars (Drive), virtual design (Designworks), embedded AI computing (Jetpack), photo-realistic gaming (Gameworks), and the Nvidia Deep Learning Institute (Computeworks). Even more important than its chips is the ecosystem that Nvidia has created, which includes 500,000 developers and 19,000 organizations. While other companies’ chips struggle to leapfrog Nvidia’s technology, Nvidia provides a complete solution in which developers have invested and which they will probably continue to support.

    I first recommended Nvidia to friends four years ago at $22, and they have often asked if they should sell it. The stock reached $281 in September 2018 and is at $169 today – up from $131 on December 1. In the last year, NVDA earned $4.1 billion or 4.3% on its Enterprise Value of $94.9 billion. Nvidia has $7.4 billion in cash. In the last quarter, insiders have purchased 91,000 more shares than they sold.

    In 2018, IBM delivered Summit, the world’s fastest super computer, to the U.S. Oak Ridge National Laboratory. Summit uses 28,000 Nvidia chips. In a test of Summit, a genomics team solved a problem in one hour that would take 30 years on a personal computer. Is the growth in AI over? It’s just getting started.

    Patterns are full of noise – up and down spikes that, from a distance, fade like mountains and valleys into the horizon. Nvidia benefited from the hysteria over Bitcoin, which has subsided, and the stock has been penalized for the loss of sales to that ephemeral activity. Many more substantial opportunities loom before Nvidia that will make the Bitcoin fall-off look like a pothole.

    If you like patterns, these two charts show the growth of the U.S. money supply and the S&P 500 between 1960 and 2016. They have a similar curve, but, in the S&P chart, you can see the hysterias of the Internet boom of the late 1990s and the real estate boom of the 2000s. To compensate for these shocks and to cover our deficits, the government increased the money supply, which tends to increase asset prices. Those assets have established the greatest fortunes in our country: Jeff Bezos (Amazon: AMZN), Bill Gates (Microsoft: MSFT), Warren Buffet (Berkshire-Hathaway: BRK-A, BRK-B), Mark Zuckerberg (Facebook: FB), and Larry Page and Sergey Brin (Alphabet: GOOG).

    The good news is that we have an opportunity to participate in the growth of future fortunes.


    PERFECT COMPANY: Should you buy TerraCycle?

    Tom Szaky, the founder and CEO of Trenton-based TerraCycle, is a charismatic leader. I first heard Tom speak at the Trenton Rotary Club in 2005 when he fascinated the audience with the novel idea of “negative costs.” Because other companies paid TerraCycle to re-use their waste products, TerraCycle had a better than 100% margin. His first product – a fertilizer spray – was distributed by Home Depot and Lowe’s, and seemed like a run-away hit.

    These days, Tom speaks to the World Economic Forum. In January in Davos, Switzerland, Tom announced TerraCycle’s Loop Alliance Initiative, which will ship leading brands in recyclable packages. Brands like Tide, Dove, Gillette, Hellman’s, Clorox, Pantene, Haagen-Dazs, and eighteen others have already signed to ship in the Loop box. Empty containers will return to a Loop processing plant for cleaning and shipping.

    The public has an appetite for TerraCycle and its mission. Globally, 14 articles are written about TerraCycle every day. The fastest growing part of TerraCycle is its Zero Waste boxes, which you can buy to ship back various problematic waste: for instance, fluorescent tubes. Instead of schlepping to the Mercer County Recycling Center once a year to idle in a lengthy line of cars, you can send the tubes back to TerraCycle where they will recycle the components into raw resources for new products.

    If you ask almost anyone about recycling, they will usually mention the plastic islands of the Pacific and earnestly assert that something must be done. They might also be aware that China has stopped taking our trash, that landfills in the northeast are filling up fast, and that the U.S. generates about ¾ ton per person in solid waste per year.

    Waste is a big problem, and Tom Szaky has created a company dedicated to the proposition of recycling items that are not normally recycled – in fact, dedicated to zero waste, which is a challenging idea that requires someone with charisma to sell it.

    We live in a time when story-telling may be the most important quality of a leader. You can make anything and you can finance almost anything, but only if you can tell a great story. At some point, the business falters and must adjust (this is so common that it is more fashionably called “pivoting”), and the leader must spin a new story. For Tom Szaky, this meant leaving behind his original product – the fertilizer spray – and re-focusing the company on creating new ways to turn waste into source materials.

    Companies sell their story to new employees, new customers and new partners. It’s very hard to enlist major companies in new systems, but Szaky has lined up great brands and retail partners for its Loop Initiative. The largest retailer in France – $79 billion “hypermarket” Carrefour – has signed on as has the largest retailer in the UK – $56 billion Tesco PLC.

    When I asked TerraCycle employees about competition, they could not think of any, which is sometimes a sign of naivete, but may be true for TerraCycle. Dumping waste – “tipping” in the industry parlance – is an easy, thoughtless way to make money. Why would anyone already in waste want to invest in innovation?

    Let’s say you had a nice career at Waste Management, a company with sales of almost $15 billion and a $43 billion market cap. Would you want to be the guy who begs for funding to start a new money-losing waste-mining initiative? No, you would want to be the hero in the finance department who makes the bold decision to buy TerraCycle after it’s done all the hard work and sales are taking off. Newsflash: “Genius financier makes smart move into innovative waste processing.”

    This kind of deal is already happening: in 2017, tire maker Michelin acquired Lehigh Technologies of Tucker, Georgia, which turns used tires into Micronized Rubber Powder feedstock for new tires.

    Of its 250 employees world-wide, TerraCycle has 10 scientists and engineers lead by former Dupont scientist Ernel Simpson. Ernel and his team have developed proprietary processes that turn waste usually thought to be non-recyclable into consistent feedstocks for other products. For instance, cigarette filters can be turned into plastic lumber, dirty diapers into roof shingles, and aluminized plastics (juice pouches) into sound deadening material. An important part of TerraCycle’s process is ensuring that the resources they extract conform to consistent specifications that enable reliable manufacturing.

    TerraCycle protects its processes as trade secrets rather than patents, which are expensive, require you to disclose your methods, and expire after 20 years. Other valuable trade secrets include Google’s search algorithm, Kentucky Fried Chicken, and The New York Times Bestseller List.

    TerraCycle is unlike any other Perfect Company because it is not a public company. It is conducting its own Reg A offering that began in January 2018, and is currently extended to mid-January 2020, but can close at any time. TerraCycle has never accepted venture capital and, by conducting a Reg A offering, is enabling anyone – not just accredited investors – to participate in the offering for as little as $100 per share, though you must buy at least seven shares for a total investment of $700.

    If the entire offering sells out, TerraCycle US will be valued at about $71 million depending on the selling expenses, which are estimated at the required maximum for the offering, but could be lower. The public is buying preferred shares, which can be converted to common; there will be a total of 750,000 preferred and common shares if the entire offering is subscribed.

    This is a private offering, so you will not have liquidity – that is, you will not be able to call your broker and say, “Sell!” if you need the money, but you can always ask the company if it would like to buy you out. The company says it would like to have a liquidity event in four to six years – that is, an event that enables shareholders to cash out. This is usually a purchase of the company or a public offering that would enable you to sell your stock into the public market, which, one hopes, has risen to a much higher price as a result of a fevered interest in TerraCycle and recycling.

    At this point, I would like to say, “Wow! Charismatic leader, profits, dividend, Loop, proprietary processes, world-wide operations, planetary crisis … what’s not to like? TerraCycle is a profitable, growing, innovative company that addresses an important global program.” However, it’s not that simple. The Reg A offering is for TerraCycle US – not the world-wide company. Loop is a spin-off with separate shareholders, so you would not participate in Loop – even in the U.S.

    TerraCycle U.S. has about 65 employees and is raising money to buy other companies with recycling technologies. Its first acquisition, Air Cycle of Lisle, Illinois, makes the Bulb Eater 3, which ingests a fluorescent tube in a second and has helped recycle 285 thousand grams of mercury.

    Here are a few things you’ll learn in the Offering Circular:

    You have no voting rights. Voting is over-rated. For all practical purposes, small shareholders’ votes don’t count anyway, and you never had any voting rights in great companies like Google either, which is controlled by its founders; if you had bought Google early on, you would be thrilled with your non-voting status.

    TerraCycle US can buy back your stock after 18 months. At first, I thought this limited the upside, but the management explained that they don’t want difficult small shareholders, and that, anyway, they would have to buy stock back at a fair price or face legal problems. I recall a shareholder who once left a rambling, expletive-laden message on my home answering machine because I took off on Friday for my fifth wedding anniversary. Some people think they are the next Carl Icahn; building a business is hard enough, so having an option to take them out is prudent.

    The offering is a liquidity event for JH Terra, an investing vehicle that has owned the parent company stock since 2008. JH Terra has traded its stock in the parent company for a chance to sell stock in this offering. You’re buying stock, and JH Terra is selling its stock for cash. The founders are further securing their control in the parent company (or at least reducing their dilution) by removing a shareholder while providing an exit strategy for JH Terra, an early investor. Financing a small, growing company is a creative process and a tug of war between losing control and enabling shareholders to earn excellent returns, so allowing JH Terra to trade parent stock and then sell into this offering seems like a reasonable treatment for an early shareholder who has held on for 11 years.

    The company is committed to paying half of after-tax profits in dividends. That’s nice, but hard to forecast.

    You may laugh out loud. I fully agree, but you rarely see this kind of statement in print: “Our Founder/CEO is inspired, brilliant and tireless.” That is the charm and possibility of TerraCycle: these are true believers on a mission, and some wildly successful institutions have been built on fervent beliefs. The United States, for instance.

    It’s hard to gauge whether or not you will make a great deal of money by investing in TerraCycle US because returns will depend on the interactions between the companies and on future financings. TerraCycle US will certainly benefit from the hype surrounding Loop, and it may also sell services to Loop. And the parent company may at some point acquire all the shares of TerraCycle US or exchange shares in preparation for a public offering, which would probably go out at a much higher price than the shares at offer today.

    The Offering Circular dutifully lists Risk Factors – many things that can go wrong. Let’s consider what could go right: (1) Governments could mandate zero-waste or more intensive waste reclamation programs to save the planet and respond to engorged landfills. (2) Loop could take off, and cause TerraCycle to roll-up its subsidiaries into a single entity for a public offering. (3) An enormous waste management company could buy TerraCycle as a prudent bet on a possible future. (4) TerraCycle could develop more proprietary processes that make mining trash more profitable than manufacturing new feedstocks. This is all fantasy, but fantasy meant to put into context the $71 million post-valuation of TerraCycle US.

    The question for an investor is: might TerraCycle US someday be worth a great deal more than $71 million? Stericycle (SRCL) is a medical waste company with a market cap of $4.5 billion. Clean Harbors (CLH) is an environmental and waste management company that, through its Safety-Kleen division, is North America’s largest recycler of waste oil; CLH has a market cap of $3.8 billion. Republic Services (RSG) is the second largest U.S. waste management company with a $25 billion market cap. There is money in trash.

    I believe in good intentions. I think the folks at TerraCycle will treat their investors better than most other companies because they are on a mission to enlist small investors and everyone else in a waste-free future. TerraCycle US may be a good investment for people who want to support that vision, earn a dividend, and have a shot at a ground-floor opportunity. TerraCycle US stock would also be a wonderful gift for a child who could learn about the TerraCycle vision and follow the company’s colorful marketing.

    Web Links for this Article:

    Investment Site:

    The Loop Initiative:

    Zero Waste Boxes:

    TerraCycle’s first acquisition:

    Offering Circular:


    Buy Skechers (SKX)

    The financial news was bleak on February 7 with the exception of one company: “Skechers stock rocketed 15.2 percent higher on Friday after the shoemaker gave strong profit guidance for the quarter ahead while reporting better-than-expected fourth-quarter earnings Thursday evening.”


    I first recommended Skechers (SKX) in this column at $23.51 before Christmas as part of a child’s portfolio of five stocks. I recommended it again in the February 6 column at $27.56 as one of eight companies that I think will continue to grow.

    Surprises can happen with perfect companies. Most of us are better at predicting what can go wrong than right, so we are surprised when a company with excellent attributes suddenly leaps up in value.

    Why is Skechers a “perfect company”?

    The hardest thing to do in business is to grow profitably. Just ask IBM, whose sales peaked at $106 billion in 2011 and sank to $79 billion in 2018. IBM is the model of a professionally managed company: it still gets grand ideas, but fails to exploit them. Instead of growing sales, IBM buys back its own shares so that it can point to higher sales per share while entrepreneurs create trillions of dollars in new value in cloud computing, mobile computing, data base software, e-commerce, communications equipment, and other markets that IBM might have supplied. Apple, which once lived in fear of IBM’s monopolistic power, could now buy IBM for less than Apple’s long-term investments.

    Growing sales is hard because it requires continued risk and investment, but, when a company is in its profitable growth phase, those risks seem to work out. People are energized and creative. I happened to meet a woman last week with an odd but remarkable pair of gray tennis shoes with floppy bows. “People always ask me about these,” she said. “I didn’t make them – they’re Skechers!” In a professionally managed company, managers kill new ideas by asking, “Are customers asking for this new product?” No one asks for shoes with floppy bows, but Skechers made them, and people bought them. Skechers managers signed off on millions of dollars for floppy-bowed tennis shoes and other shoe designs that I cannot comprehend. My cousin says they make a decent golf shoe, too.

    Skechers grew sales by $478 million in 2018 to $4.64 billion for the full year, while increasing earnings from $179 million to $301 million.

    It’s fun to work in a growing, profitable company that takes innovative risks, but there are other attributes of a promising company that are also important for investors.

    In the last four quarters, SKX has earned about 7% on its Enterprise Value. That’s after the recent run-up in price, and before the increases in sales and profits that the company projects for 2019. In other words, if you owned the whole company, you’d be paid for your risk.

    Can Skechers continue to grow? SKX has a market cap of $5 billion; Nike’s market cap is $131 billion. SKX has room to grow, and would make a nice acquisition for a clothing company or even Amazon, which already has a large shoe retailing business in Zappos.

    Skechers managers are buying, too: in the last year, they have bought more shares than they sold, and, in the last three months, 11 Skechers insiders have purchased 512,500 shares and sold none.

    Skechers has $890 million in cash, cash equivalents, and short-term investments, and $71 million in long-term debt. It opened its 1000th store in 2014; today, it has almost 3000 company and third-party owned stores. It owns its products and it controls its distribution, so there is less risk that Skechers will be displaced by a competitive manufacturer or suffer from a bad retailing relationship.

    Finally, Skechers shares an interesting attribute of many successful companies: its founder was forced out of another company that he started. Robert Greenberg founded L.A. Gear in 1983, and sales increased to $900 million by 1990. The company expanded too quickly, sales fell, and shareholder suits followed. Trefoil, an investment fund, took control of the company for $100 million, and forced out Greenberg in 1992. Five years later, Trefoil sold its position for $228,000.

    The poster boy for replaced founders is Steve Jobs who was fired by a CEO from Pepsi. Famously, Jobs later turned around Apple, but founders more typically start new companies. I have studied and worked with founders the second time around, and they share certain traits: they are more circumspect about their public pronouncements; they amass cash because it ensures control; they are adept at handling legal problems; and they want to prove their detractors wrong. Greenberg is Skechers’ CEO and his son, Michael, is President and the public face of the company. The Greenbergs have become billionaires.

    Skechers has been as high as $51 in 2015 before problems with its walking shoes led to suits and missed sales targets.

    Most people reading this will think, “I wish I had bought at a lower price,” which keeps many investors from enjoying a long ride. The first spurt is often an indicator that the company is growing again. On February 12, Skechers announced that Skechers India will become a wholly-owned subsidiary with 200 existing stores and another 80 to 100 planned for 2019. Skechers may be hitting its stride.


    What is a GOOD price? Buy TREX

    After the last column about Universal Display, a friend wrote to ask if OLED was “a good price.” On the day the article was published, OLED opened at $94.71; it closed on Friday at $104.56, a 10% gain in about two weeks. In hindsight, it was an excellent price: any price that is less than the future price is “a good price,” but price moves independently of value.

    “Price” is the amount of the last recorded sale. Price has at least three components: utility, confidence in the future, and safety.

    Utility is the easiest to measure: what does this investment actually produce? Let’s say you want to buy a used car, and that you plan to keep it for 10,000 miles. And let’s say you have your choice of three cars that are each priced at $1000, but one car requires you to pay down an additional $500 loan and one car, you have discovered, has $500 stashed in the trunk. The real cost to you of these three cars is $1500 for the one with the loan, $1000 and $500 for the one with the cash in the trunk. Your cost per mile would be 15 cents, 10 cents and 5 cents, so the utility of the third car is clearly superior.

    Similarly, some companies are loaded with debt and some have lots of cash. The net cost of the company is called the Enterprise Value (EV), which is roughly what you would pay to buy the whole company – the market cap plus the debt minus the cash. If you sum up the net profits from the most recent four quarters and divide them by the EV, you get a quick idea of the utility of a company: that is, if you owned the whole company, what kind of pay back would you have?

    Let’s say the best bank rates are 2% and you can buy a company that has a 10% return on EV. That would be an easy decision. Owning the company is measurably superior to parking cash in the bank, and you are well compensated for your risk.

    Returning to Universal Display, it is terrific company because it generates lots of cash, has no debt, and is profitable, but, if you owned all the stock, the current payback would be about 2%. Still, OLED is far superior to many public companies that have no measurable utility at all because they lose fantastic amounts of money. For instance, NOW, BOX and SPLK have in the last four quarters lost $61 million, $147 million and $302 million. They are priced at $33 billion, $3 billion and $17 billion.

    Companies that lose money have – in my way of thinking – no utility; they rely on the second component of price: a high confidence in the future. For instance, people who believe that most of the world’s conveyances will be operated by Uber robots, have suggested that Uber go public at a price of $120 billion. The future, though, is open to considerable interpretation: much could go wrong for Uber.

    On the other hand, much is already going right for Universal Display. OLED has a clearly charted, profitable, growth path that is generating cash. My main reservation about unprofitable companies is that, when confidence in the future ebbs, they have no leg to stand on, and their prices decline precipitously.

    In the worst markets, the lack of confidence in the future overrides every rational valuation. For instance, in April 2009, prices were so depressed that you could even buy cash at a discount. A Newark, NJ company called IDT had $1.80 a share in cash and sold for $1 a share. The company lost money, but the price said, “This management will lose ALL of this money.”

    The entrepreneur behind IDT had had several successes, so I bought IDT, which divested assets and raised cash. The price climbed to $23, and IDT spun out CTM Media (now IDWM), which rose from $4 a share to $400 before splitting 10-to-1. In hindsight, IDT was a tremendous bargain, but, at the bottom of the Great Recession, the price of virtually every company was heavily discounted.

    The third component of value is safety – that is, physical safety and the rule of law. Despite the U.S.’ deficit spending – what some have called our country’s “rolling default” – people from all over the world want dollars to buy assets in the U.S. where they can operate relatively freely without worrying that the local strongman is going to take their possessions, their freedom or their life. The value of the U.S. dollar and of U.S. companies are, to some degree, pegged to actual values like freedom, innovation, transparency and meritocracy.

    Not all countries share these values: there are places where companies report excellent growth and earnings for years, and then abruptly stop reporting – the companies evaporate, and the American shareholders write angry blogs about their experience, and receive no satisfaction.

    Whatever cynicism we may have about the bad actors in western countries, our shared values hold our companies and our society together, and that helps create value that affects price.

    Price and value are somewhat tenuously connected. Our confidence in the future is affected by automated trading, politics, and what economists call “animal spirits.” Real value, though, is built up over time in complex systems, branding impressions, relationships, protective patents, software, and the vast system that companies create to produce profits. Only after years of creating corporate value does the price trend appear steady and pleasing.

    So what is a good price?

    For a “perfect company,” a good price means that much of the risk has been removed: the company is profitable, has a pattern of growth, has a competitive advantage, is being acquired by insiders, is not too big to triple, and has enough cash to weather the worst market. It may be a higher price than you could have paid last year, but you have less risk because the company has further entrenched its position or developed its products. When you own a “perfect company,” you can sleep at night. Even when the market is getting destroyed, you know your company has cash and customers.

    Here is another “perfect company” nomination: TREX is the world's largest manufacturer of high-performance wood-alternative decking and railing. Their products last longer than wood and need less maintenance. People seem to like TREX’ decks, and are willing to pay a premium for TREX products. Sales and profits have been rising every year. Some insiders are cashing out, but others are still buying.

    TREX had sales of $565 million last year. If each deck has an average materials cost of, say, $5000, that’s only 113,000 decks world-wide. TREX has plenty of room to grow.

    TREX’ price is down to $70 from a recent peak of $84. In the last four quarters, TREX has earned 3.2% on its enterprise value of $4 billion.

    I think these companies will continue to grow: TREX, OLED, AUUMF, NICE, NDCVF, SKX, LASR, and NVDA. They have a good return on EV, trending growth, positive prospects, and they operate in countries that are committed to reliable reporting.


    Buy OLED

    It was a slow night at the Franklin Institute. Three of us watched astronomer Derrick Pitts explain the importance of Galileo’s telescopes to George Takei who played Mr. Sulu on the original Star Trek. When we learned that Sulu would be speaking, I said to my wife, “Let’s see  what an actor who played a space man has to say,” but the room was sold out.

    How strange, I thought, that you can hear an intimate lecture on the end of the geocentric theory, but you can’t get near a talk on a fictional space program. People like simple, futuristic ideas more than fact-based fare. It’s one reason that Tesla, a company that in the last four quarters lost $1.8 billion on $17.5 billion in sales, is worth almost twice as much as Ford, a company that earned $6.2 billion on $118 billion in sales. Another reason is that Tesla is run by a visionary entrepreneur and Ford is run by suits. More on that later.

    At the 2016 Philadelphia Legacies Awards, Derrick Pitts said, "If there is anyone who was born in Philadelphia who has both the imagination and the intelligence of Albert Einstein, it is Sherwin Seligsohn." Seligsohn founded Universal Display Corporation in 1994, and took it public two years later with three employees. It lost money for 17 years. Today, UDC has no debt, $496 million in cash and 220 employees. Headquartered in Ewing, New Jersey, UDC has a market cap of $4.6 billion.

    I first ran into UDC when I met a physicist who worked there. He loved the challenges of organic light emitting diodes (OLEDs) and was incredulous at their low power consumption. OLEDs are the singular theme of UDC: they say their mission is to enable an entire industry. Their web address and their stock symbol are and OLED.

    OLED has three sources of revenue: (1) licensing their 4800 patents (2) selling organic materials to panel makers and (3) conducting contract research through a company they bought in Delaware. Getting paid to do research in your core competency is good, but that was only 4% of sales in the most recent quarter. Licensing was 30% of sales; material sales were 66%.

    The materials ship to manufacturers of “panels” used for smart phones, TVs, lighting, watches and virtual reality devices like Facebook’s Oculus. Two of three iPhone models now use OLEDs, and the stunning screens of Samsung’s Galaxy S9+ and Google’s Pixel use OLEDs.

    Two flat screen technologies are produced in quantity today: LED LCDs that back-light LCDs with LEDs, and OLEDs that light up each pixel. Designers might say that OLED is a more elegant solution: one layer of pixels can discretely turn on and off instead of requiring several layers of lights, dots and filters that interact to produce a picture. This also makes OLEDs thinner, blacker, and flexible.

    Competitors to OLED have introduced variants of older technologies like QLED and MicroLED, but have so far failed to produce a better system. Reviewer Digital Trends notes, “OLED is the clear winner, even though QLED represents a significant advancement over the LED TVs of old. OLED offers the best viewing angle, the best black levels, better contrast, and is also lighter, thinner, and uses less energy.”

    OLED lighting is also superior. When Wegman’s recently installed OLED lights, the press release noted, “OLED lighting is a uniquely naturally diffused light source with unparalleled light quality.  OLED lighting creates an atmosphere that promotes well-being from healthy light without glare.”

    Universal Display says that its 4800 patents ensure that “Essentially, every commercial OLED product uses UDC.” So…if UDC has a more elegant solution, and costs will decline as volumes grow, and OLED lighting and screens will consume less power in a greener world, then UDC may benefit from a vast global market.

    One more thing: while UDC believes its licensees are all decent people, I like that they collect revenue by selling materials. Developing countries often play fast and loose with intellectual property. This was true even in the U.S.: Mark Twain’s books were sometimes pirated before his own publisher could print the first edition. Charles Dickens was lionized on his American tour until he began lecturing audiences about copyright law. If Twain and Dickens had controlled the ink necessary to print their books, they would have been well rewarded.

    Is UDC a good value? From January 2017 to January 2018, the price climbed from $65 to $203; today, it stands at $97. In the last four quarters, OLED earned about 2% on enterprise value; by comparison, Aumann AG earned 4% and Apple earned 8%. On the other hand, OLED is a bet on the worldwide growth of a fundamental technology, and it is still run by the entrepreneurial team that established it. OLED is extraordinary because, if it had been financed by venture capital, it would have been shut down and sold for parts 15 years ago. However, UDC had a vision that, despite 17 years of losses, led to today’s enviable perch for future growth.

    Virtually every great American company has continued to be led by its founding entrepreneurs: Google, Facebook, Amazon, Netflix. Apple failed under professional managers, and, when the founder returned, became the world’s most valuable company. Berkshire-Hathaway is a collection of entrepreneur-led companies financed by an entrepreneur with a strong cash flow from insurance. Elon Musk is peculiar, but his intensity seems to drive results and inspire confidence in investors. Rapid growth is led by entrepreneurial teams and a vision. Stephen Satell was a fascinated young neighbor of Sherwin’s in Philadelphia. He remembers, "People could not see the future as clearly as Sherwin." Investors in OLED are betting that Sherwin’s vision is still growing, and will double, double, and double again, which would be $37 billion – still a modest valuation for a core technology company.

    While Universal Display is enabling the OLED industry, it does not get much credit. The Wegman’s press release celebrated OLEDWorks, a lighting manufacturer and UDC customer. There is no “Intel inside” for Universal Display, and it is hard to gather as an outsider how thoroughly UDC apparently controls OLED technology.

    This lack of a public persona is also an opportunity for investors. As the OLED market grows and Universal Display becomes more widely known as the industry driver, it may transform from a competent Derrick Pitts to an idolized Mr. Sulu.


    The Market May Not be What You Think + A Gift Portfolio

    This edition features thoughts about "The Market" conversation, plus a recent column suggesting a sub-$100 portfolio of five companies that you could give to a child. Some of those companies are interesting investment candidates for more than 1 share, though I originally reported positive insider buying on CASA, which is actually very negative: 13 sales of 16.8 million shares in the last 12 months. My screen-scraping software recorded a positive number, so I believe that the data source was wrong at the time. In any case, you might want to avoid CASA because of heavy insider sales:

    The Market May Not Be What You Think

    If you attended a holiday party recently, you could not escape the market conversation. On Christmas Day, a wealth manager from a reputable firm told me, “There was so much selling yesterday that I expect the market to drop as much as 2000 points tomorrow.” I was alarmed. The next day, the market rose by 1086 points – the largest single-day point gain in history.

    Most people call the Dow Jones Industrial Average “the market,” but that is only the 30 largest publicly traded stocks. Then there is the S&P 500 and the Wilshire 5000, a market-cap weighted index of all U.S. stocks with readily available price data – that is, an investment you might actually trade. The last time the Wilshire 5000 had over 5000 equities was in 2005; it grew to a high of 7562 in 1998, and today counts only 3600.

    After you remove trusts, REITS, and other investment vehicles, there are relatively few operating companies to choose from – perhaps 2800. In 2017, there were 9,356 U.S. mutual funds; domestic equity funds represented 43% of those, or about 4023 funds. Add to that the 1756 U.S.-based Exchange Traded Funds (ETFs) and you’ve got 5779 packages for 2800 candidates.

    We delight in packaging up financial assets, which makes the risks inscrutable and shields us from recrimination, guilt and analysis. We have convinced ourselves that we can rationally select from 5779 bundles, but not from 2800 more discrete risks. Bundling financial assets is sold as a way to distribute your risk, but it can also ensure that your basket has some garbage in it. Sometimes, the sellers stuff your basket with junk because the commissions are just too enticing, which happened in the mortgage crisis of 2008. Who knew that no one was paying for all those houses? 

    Perhaps you follow “the market” on financial TV channels, which offer two stories: “Investors today are concerned about X, and so the market dropped” and “Investors have priced in their concern about X, and so the market rose.” Who are these investors? No investors speak because of the real risk of appearing foolish. 

    In fact, 75% (or more) of trades are made by algorithms (“algos”). You and I may use simple instructions like “Sell if the price increases by 100%,” while more complex automated algos are matching patterns against historical and recent price movements to game you and their equally sophisticated competitors.

    Algos also measure terabytes of words in tweets, articles and news streams for market sentiment. Add the ability to throw huge pools of incremental investment at any situation, and the machines can create price swings that frighten humans into selling or entice them into buying at all the wrong moments. As in a casino, we tell ourselves that we have “a feeling about the market,” and we are wrong. We end up giving away our money to the best machines. 

    Some of those machines are operated by Renaissance Technologies, whose founder James Simmons topped the hedge fund money list for the last three years, earning $1.7 billion in 2017 alone. Renaissance’s Medallion Fund, which caters mostly to its predominantly scientific and mathematical employees, earned 71% annually from 1994 to 2014. Your gut is up against the best technology in history that is designed to suck money out of the market.

    Even weirder, artificial intelligence has what is known as the Black Box problem. Because machines can recognize multivariable patterns beyond our comprehension – and more quickly – we really don’t know what they’re thinking. We can’t see inside that box while the market is moving, and the boxes are all competing against and allying with each other to maximize their trades, so many, if not most, of the swings in the market could now be driven by intelligent devices whose logic we don’t truly understand.

    In the realm of understanding, only one person has contributed much wisdom lately, and he has been widely quoted. He may know the global economy better than government statisticians because his company monitors world-wide shipments in real time. FedEx Chairman and CEO Fred Smith said, “Most of the issues that we're dealing with today are induced by bad political choices…making a bad decision about a new tax, creating a tremendously difficult situation with Brexit, the immigration crisis in Germany, the mercantilism and state-owned enterprise initiatives in China, the tariffs that the United States put in unilaterally. So you just go down the list, and they're all things that have created macroeconomic slowdowns."

    Politicians can destroy wealth as happened in Venezuela where the country squandered its oil riches, and the economy became so dysfunctional that the average citizen lost 24 pounds. But politicians can also, if inadvertently, create wealth. Jack Ma, the founder of Alibaba and the richest man in China, likes to say that the U.S. spends too much on defense. He may be right, but he seems to forget that his fortune is based on one of the U.S. Defense Department’s most successful creations – the distributed communications system that became the Internet.

    These are things that influence the market that we cannot know: the future of most financial bundles with hundreds of moving parts, what’s going on with high-speed algos, and what problems politicians will create.

    These things we know: human beings are tool users, and we place a high value on new, better tools. There is a relatively small universe of companies that have low debt, enough cash to weather a downturn, and increasing, profitable sales of new technologies. Over the long-term, some of these will outperform the market. 

    Benjamin Graham said, “In the short run, the market is a voting machine but in the long run, it is a weighing machine.” Since we cannot know “the market,” let us endure the slings and arrows of short-term losses in solid companies in the hope that they grow, are properly weighed, and reward us for our analysis and patience.

    What should I gift thee?
    December 19, 2018

    It’s no longer enough to give a present. We must “gift” something. Giving is so low brow. Important people gift. “Hello, my subject…I gift you mine blessing. Now, go!”

    Could other words be similarly improved? Instead of driving, we could go drifting. Mere living is not enough – we should be lifting. For what you have done to me, I magnanimously forgift you.

    The best gifting phrase lately was handed down by Judge Judy who turned her governing talents into a $47 million a year private job. (The reality TV door swings both ways.) Judge Judy says that she and her husband like to give “with a warm hand.” If their children need help with a house or college costs, Judy and Jerry are happy to give while they’re still alive. I’ve seen many people stringing along their children, and those children reacting with some delight when their stingy parents died. “Giving with a warm hand” seems like a better way to manage the love of one’s family. 

    You can gift framed stock certificates from I once gifted my wife a share of Tiffany & Company, which annoys her with dividend checks in amounts like 11 cents. In the last five years, TIF has gone from $83.19 to $85.94, but has held its value better than most jewelry pieces, which despite the ardent guarantees of salespeople, are rarely purchased at a higher price than their initial sale.

    Like many children, my son once owned a share of Walt Disney Company (DIS), which was the most decorated and popular stock certificate on GiveAShare. The many minor shareholders must have irritated Disney because they discontinued stock certificates in 2013. Still, my son and I enjoyed the 2004 Disney shareholder meeting in Philadelphia in which DIS rejected Comcast’s $54 billion takeover proposal. DIS is now worth $167 billion; Comcast, $168 billion. Since 2004, one share of DIS has climbed from $22 to $112.

    GiveAShare sells a genuine registered share of Medical Marijuana Inc (MNJA) in a premium frame for just $114. The share is valued at 9 cents. [Insert your own marijuana valuation joke here.] MNJA recently climbed 28% from 7 cents. The company has a market cap of $302 million. Shareholders are hoping for 100-to-1 reverse spliff. I mean split.

    Suppose you wanted to give a child a small portfolio that might encourage an interest in business. Until recently, even discounted commissions would wipe out small trades., however, charges only regulatory fees per trade, and makes its money on ancillary services. You can build a tiny portfolio for less than $100. It takes three business days to fund the account, but I found that I could buy stocks the next day. ATTENTION: your Robinhood account is linked to your bank, so DO NOT give away your password and login. You could give the account with a letter agreement, and set up a small portfolio on Yahoo Finance that mirrors the Robinhood portfolio to prevent the kind of panicky, childish sell-off common to adults.

    Let’s pick a gift portfolio of five companies for a young child. First, let’s find low prices so we can buy whole shares. Second, it would be fun to have some moonshot opportunities for drama. This is a buy-and-hold for a decade portfolio, so we’re looking for companies that might stay around. And it wouldn’t hurt to have some brand names. Here are my five:
    • nLight Inc (LASR) makes lasers and sells for $19.20. It’s profitable, has a ton of cash and a cool web site ( LASR has that beautiful chart where it went public, shot up, and came straight down. The excitement is over, and they can start working their plan. Also, did I mention that they make lasers?
    • Skechers (SKX) makes shoes and fashion items, and sells for $23.50. Sales in the last five years have grown profitably from $1.8 billion to $4.1 billion.
    • Casa Systems (CASA) makes 5G solutions for broadband networks and is one of the leading purveyors of acronyms. Sales in the last four years have grown from $211 million to $351 million, and it sells for $14.70.
    • Kimball Electronics (KE) was originally the electronic organ division of Kimball pianos. Since spun out, KE produces electronics for the automotive, medical, industrial and public safety markets. Selling at $16.40, KE has grown steadily and profitably to $1 billion in sales, and also shows net insider purchases.
    • Cato Corp (CATO) is a specialty fashion retailer with declining sales, declining share price ($13.70), a 9% dividend, and 200,000 shares purchased by insiders in the last 12 months. CATO also owns the Cedar Hill National Bank, which exists solely to service the CATO credit card. The last good thing that Sears ever did was Discover Card, which is now worth $22 billion. CATO doesn’t have the distribution of Sears, but it does have 1300 stores and is headquartered in Charlotte, which is a banking town. CATO has $210 million in cash and short-term investments and no long-term debt. Retailing is hard, but CATO makes money, and it could be one of those interesting situations that looks like one thing, but is hiding value in another. 
    There you have it: a five-stock portfolio for about $90. And you’ll have the pleasure of whispering, “Hey, kid – your biggest expense in all of life is taxes. If you make money on these and hold them for at least a year, you’ll pay zero taxes on your gains up to $38,600.”


    Buy Business Forms?

    In that famous investment tome, “Gone with the Wind,” Rhett Butler remarks, “I told you once before that there were two times for making big money, one in the up-building of a country and the other in its destruction. Slow money on the up-building, fast money in the crack-up.”

    So it may be with the crack-up of industries. There were once independent storage companies in every town that belonged to the association of storage companies. They convinced each other that billions of records would be digitized and that their customers would no longer pay rich fees to stack boxes in dark warehouses and pay forever to store them. In their fear of the digital apocalypse, the storage companies sold out cheaply to Iron Mountain (IRM), which is still milking the cash flow from many of the same boxes. IRM has a market cap of $9.7 billion. The digital wave did not break as quickly as people thought it would.

    The same may be true for printers – particularly for business forms and checks. A prominent Philadelphia check printer called Safeguard Business Systems had a healthy cash flow, and spun out Safeguard Scientifics (SFE), which famously backed Novell and many other tech leaders of the 80s and 90s. In 2004, another check printer, Deluxe (DLX), acquired Safeguard Business Systems. DLX continues to print checks, acquire companies, increase sales by about $100 million every year, earn about $200 million, and pay a 2.5% dividend. DLX has a market cap of $2.3 billion. However, its debt has swelled to $891 million and insiders had net sales of 253,000 shares in the last 12 months.

    I prefer Ennis, Inc., which used to be called Ennis Business Forms, so the stock symbol is EBF. Ennis pays a 4.6% dividend, has only $30 million in debt, and insiders have in the last 12 months bought the stock 12-to-3, though the net purchases have been only slightly positive. Still, since insiders have many good reasons to sell their stock – buy a car, pay for college, pay taxes, get divorced – and only one good reason to buy – they think the price will increase – any net insider buying is very positive.

    By the way, insider purchases are not well documented on discount broker platforms. I find the “Insiders” tab at to be the best free source of insider trading information.

    Ennis has underperformed the market, which seems like a bad thing until you consider what happened recently to companies that have outperformed the market: they fell between 20 to 50%. Owning a traditional company with a nice dividend and room to grow might be a decent addition to your portfolio.

    There are two positions on dividends: one is that dividends demonstrate a lack of ideas for deploying capital (wouldn’t it be better if the dividends continued to compound growth within the company so that you could sell later and pay only a 15% tax?); the other is that dividends account in some studies for about 30% of gains in the market. Also, maybe managers aren’t really that smart, and they should enforce the discipline of distributing some money to shareholders.

    In some ways, owning stock is like being a retailer: you buy the stock and put it on the shelf in the hope that someone will pay more for it later. If your stock is out of fashion, which is a good way to buy low, you may have to wait a while for it to appreciate, so I like stocks that pay a decent dividend. They pay you while they sit on the shelf.

    In the last four quarters, EBF has earned about 7.4% on its Enterprise Value – that is, the price that you would pay to buy the entire company net of cash and debt. By comparison, DLX has earned 5.8%. Like Iron Mountain, EBF is acquiring other companies in its industry, and investing in some new ones. Ennis’ press releases are filled with subsidiaries like Ardmore Folders, Wright Business Graphics and Allen-Bailey Tag & Label.  And if you have bought a car, taken a loan, or been to a doctor lately, you know that business forms show no sign of disappearing.

    Ennis is selling at $18.16 today, and has traded between $18 in May and $22 in August. EBF does not have the tech appeal of Nordic Semiconductor or Aumann AG, but it makes money, pays a dividend, could grow steadily, or, at only $437 million in Enterprise Value, would be a nice acquisition for a larger company – even Iron Mountain that could encourage its customers to print more forms to store in its warehouses.

    Of course, there is much we cannot know about any company and the future economy, but Ennis Inc has demonstrated an ability to turn a profit and pay a dividend, and it could provide positive returns for your portfolio.

    To comment, suggest a perfect company, or ask a question, please email me at




    US 1 Article #2 November 21, 2018 Buy NDCVF

    A stock is like a model rocket. Inside the engine is propellant that makes it fly and a delay charge that lets it coast higher – often for a ridiculously long time – before reaching the ejection charge that pushes out the parachute. An investor’s challenge is to guess which rockets in a field of rockets are likely to take off. Some are obviously too heavy for their engines; some lie on their sides or are pointed straight down. A few of those sleek rockets will attract the horde of people required to press their ignition buttons.

    Once your rockets are flying, you have another problem. How long will the delay charge burn? The delay charge is made of speculators and momentum investors who pile in while the rocket climbs past all reasonable heights. Value investors begin to scream that this rocket is impossible, and they leave the field altogether. They endure years when they refuse to play with rockets because they cannot accept the delay charge.

    We are living through a period of delay charges and speculation fueled by trillions of dollars that our government pumped into re-starting our economy since 2009. You can see it in the feverish trading of marijuana stocks, cryptocurrencies, and tech companies. Most of the press is devoted to events of well-known rockets that have already traveled past 4000 feet; let’s look for payloads that are about to take off or whose delay charges expired in the recent downdraft.

    Perhaps you have noticed that, of late, Bluetooth devices actually work. Connecting printers and phones through Bluetooth was annoying for years, but Bluetooth and other low-powered nearby wireless technologies are increasingly deploying as part of the “the Internet of Things” or IoT. For instance, I grew tired of paying opaque electric bills, so I installed a device from (a private company) in my home’s electric panel that recognizes the electrical signatures of appliances, and sends usage reports to my phone. It gathers information from other Sense users who collectively identify devices, and the service becomes smarter with more users. Sense is just the tip of the IoT iceberg, though.

    A Princeton company (also private) called is distributing beacons that broadcast short promotional messages to phones up to 300 meters and for up to 10 years on a single battery. If you’re within 300 meters of Pizza Palace, you might get a message that says, “15% off pizza in the next 15 minutes at Pizza Palace – just show us this message!” When a phone is near a beacon, the beacon becomes part of a mesh network that enables NectarKast to update the messages in the beacons. NectarKast beacons use chips from Nordic Semiconductor, a company that is powering wireless devices around the world.

    Nordic Semiconductor (NDCVF, is listed on the Oslo exchange and makes Bluetooth and proprietary wireless chips for cars, phones, PC peripherals, gaming controllers, mobile phone accessories, consumer electronics, wearables, buildings, sports and fitness, multi-media controllers, toys, healthcare, automation, and other applications. Nordic is a market leader in short-range wireless technology with ultralow power consumption.

    Nordic’s sales for the last three years are increasing: $193M, $197M, $236M. Margins are better than 50%. The company has $95M in cash and short-term investment, no debt and has netted $11.1M in the last four quarters. They had a problem with a major Chinese customer in the last year, but, despite that, management anticipates growth of 20% this year. The stock is down from $7.22 on June 4 to about $4.50 today, and has a market cap of $787M. It pays no dividend.

    I like Nordic because it is already growing and making money in IoT, a market that will see a lot of investment. It has no debt, plenty of cash, and a staid, entrepreneur-led management team that understands the business. Nordic is large enough to defend its position, but small enough to double and triple as IoT grows, or be acquired by a larger company.

    Of course, there is much we cannot know about any company and the future economy, but Nordic Semiconductor looks like a company that has demonstrated an ability to make money, has the potential to participate in a powerful trend, and could provide out-sized returns for your portfolio.


    US 1 Article #1 Nov 7, 2018 Buy Aumann (AUUMF)

    If you ask someone what would make them happy, most people will say something like, “a lack of worry” or “more money” – either pain avoidance or a generalized faith in wealth. We rarely think hard about the qualities of life that we really value.

    We have similar thoughts about our investments. For instance, we want “good management,” though Warren Buffet has said that, “When a manager with a reputation for brilliance tackles a business with a reputation for bad economics, the reputation of the business remains intact.” For instance, the VP of Apple stores became CEO of JCPenney and nearly destroyed it.

    Or we say, “The first rule is to never lose money,” which is why your wealth adviser is careful to keep you out of unfamiliar companies that could earn you lots of money – because, at the first modest decline, you will burn up the phone lines in panic. The main rule of wealth advising is to keep your account, which means reducing your sense of panic.

    Here’s why you might consider individual companies. Let’s say you have a portfolio of ten stocks. One is down 80%, seven are about average, one is up 50% and one is up 200%. You are way ahead of the market. You will probably beat yourself up about your loser, but your loss is contained: you cannot lose more than 100%. Your gains, though, can be extraordinary – what investing legend Peter Lynch called a ten bagger: not just a home run, but a chance to keep running the bases and running up the score – and those enormous gains dwarf the losses.

    It may seem strange to consider individual companies when the market has been cratering, but someone is always working to improve the world, and dark times can create good opportunities. Though my favorite stock was recently down from $289 to $206, I bought Nvidia at $22 when most people thought of it as a graphics company, so I’m happy with the return and even with its prospects in artificial intelligence, esports, and self-driving cars. You may be happy that you bought Amazon at $10 in 2001 when Internet stocks crashed and most people thought Amazon was a bookseller. The stock was down 23% last month, but your $10,000 investment is still worth $161,000.

    In this column, I will suggest potential attributes of “perfect companies” and individual stocks that might be worthy investments.

    One desirable attribute is the ability to triple or quadruple quickly without excessive additional investment, which is really three attributes. Some companies are too large to triple: Apple, for instance, would have to go from a $1 trillion to $3 trillion market cap, which, despite its devoted following, seems unlikely. Some companies require heavy fixed investments to grow: retailers, for instance, have to build hundreds of stores, which is a slow and expensive process with low margins, but tech companies can often grow quickly by licensing their products or spinning up more cheap servers. Make it once; sell it a million times at a high margin; refine and repeat.

    To kick off this column, I attended the Great Investors Best Ideas Conference in Dallas in late October. Lisa Hess, President of SkyTop Capital Management, presented a company called Aumann AG (AUUMF |

    Here’s the idea: the world is turning to electric vehicles. Old manufacturers are transitioning, and new ones are entering the market. By 2019, Volvo will add electric motors to every vehicle, and, by 2025, Volvo will be fully electric. Tesla is a cult. New Chinese EV maker Nio raised $1 billion in September. Even electric vacuum maker, Dyson, announced an EV factory in Singapore. Essentially, humanity will replace pistons with coiled cables, and Aumann is the German engineering company that makes the best coil winding machines. Aumann says, “Our goal is to be the world market leader for special machinery and production lines for electric powertrains.”

    Aumann’s quarterly sales and profits are growing. The last four quarterly profits are: $1.7M, $2.8M, $4.8M, and $5.0M Euros. The company pays about a half percent dividend. Aumann is selling shovels in a gold rush, and one possible exit strategy for shareholders is an acquisition by a major manufacturer. Just as Amazon purchased its warehouse robot supplier and immediately stopped selling to competitors, a large car manufacturer could buy Aumann to establish a competitive advantage.

    Aumann went public at 42 Euros in March 2017, and quickly rose to 91 Euros before declining to 39.80 on October 21, 2018. This is standard behavior for a tech offering. Facebook and Alibaba did the same: big excitement, then a sell-off, and then a steady climb upward as the company develops its business. Since, October 21, Aumann is up 15% to 45.80 Euros. Note that, if you’re in the U.S., you will buy AUUMF in dollars, which, as I write this, is $51.50.

    Of course, there is much we cannot know about any company and the future economy, but Aumann looks like a company that has demonstrated an ability to make money, has the potential to participate in a powerful trend, and could provide out-sized returns for your portfolio.

    To comment, suggest a perfect company, or ask a question, please email me at gpaul


    Tesla’s Theranos moment arrived -- should you sell your puts?

    Sent to subscribers 9/13/18

    RE:  Is Tesla about to have a Theranos moment?

    A month ago, when Elon Musk vowed to take Tesla private at $420, I suggested that, if he didn’t, the downside could be spectacular. I recommended buying puts at a strike price of $290. If you bought the Oct 19 $290, your position would have increased from $9.35 to $21; last week, you could have sold at $38 or 306%. If you have already sold your Tesla puts, you can ignore this.

    Is now the time to sell? There are three things I don’t understand: casino gambling, Donald Trump, and Tesla at $300 – yet, somehow, they all persist. Before the meltdown last week, I was astonished that someone was buying Tesla at $300.

    Goldman Sachs has suggested that TSLA could drop 30% from $300; as I write this, TSLA is at $289, so $210 is still a way off. At a $49 billion market cap, TSLA is valued at $12 billion more than Ford Motor – a company that profitably produces 125,000 cars a week to Tesla’s cash-incinerating 5,000.

    Friday’s meltdown was caused by executive departures and a video of Musk smoking weed. I had suggested that shorts holding a $12 billion position would fiercely pursue Tesla and that there could already be 100 lawyers working on the case. My estimate of lawyers was low. Much more could go wrong for Tesla: it is proving to be not only just another car company, but possibly a below-average car company. The departing Chief Accounting Officer walked away from a $10 million new hire grant that would have vested over four years; presumably, he felt that TSLA was just too much trouble, a potential legal nightmare, or a reward that would never materialize.   

    A month ago, a 100-point drop in TSLA was not assured; it is still in doubt as the price floats up from last week. The magical thinking that made $420 a share seem plausible makes $300 seem like a bargain to many adoring Tony Stark fans. In pricing strategy, this is called anchoring. Slap a $1000 price on one pocketbook so that the $300 pocketbook seems like a bargain. The first one never sells and the second is all margin.

    There are two worlds in which the current price for TSLA is a bargain: (1) in the future, Tesla learns how to build cars and crushes all the other competition – just as Amazon has crushed so many retailers. (2) in the future, Tesla has a battery breakthrough and becomes the company that powers the planet. I think the second is more likely, but neither is in view today.

    If you own TSLA short-term puts, lock in a profit. My mentor, Bob, said, “You never go broke cashing show tickets.” 100+% in a month is even better than not going broke. If you bought puts a year out, you might want to hold onto them. “In the short run, the market is a voting machine but in the long run, it is a weighing machine.” – Benjamin Graham  Outside of a battery breakthrough, TSLA could take a heavy dive.


    Is Tesla about to have a Theranos moment?

    Sent to subscribers August 9 2018 12:25 a.m.

    A few years ago, I was reading a magazine article in bed, and I said to my wife, “Look at this crazy board of directors. This company has a pretty young woman who dropped out of Stanford, and now she’s got all these famous older men on her board who know nothing about medicine. George Shultz (former Secretary of State), William Perry (former Secretary of Defense), Henry Kissinger (former Secretary of State), Sam Nunn (former U.S. Senator), Gary Roughead (Admiral, USN, retired), James Mattis (General, USMC), Richard Kovacevich (former Wells Fargo Chairman and CEO) and Riley Bechtel (chairman of the board and former CEO at Bechtel Group.) The young woman, Elizabeth Holmes, had the nifty idea to use just a drop of blood for medical tests, and now she’s worth over a billion dollars.

    It doesn’t smell right. Only one senator, Bill Frist, has been involved in medicine (he was a former heart surgeon), and you can almost see these guys getting invited to the board. ‘Look, she’s really photogenic and smart, and we’re all going to make a ton of money.’”

    In 2016, the company blew up. The technology didn’t work – or they were working on it, but pretending that it already worked. Oddly, George Shultz’ own grandson blew the whistle, indictments were handed down, and private investors lost $700 million.

    New technology is difficult and messy. It’s hard to create and ramp-up, but investors expect magic. I remember the criticism heaped upon Steve Jobs for taking an extra year to finish the first laser printer. That was truly a game-changing product, but Jobs was derided for the delay. It’s no wonder that Jobs became super-secretive in later years. No one wants to see the sausage made: they only want the good news: “Here is the awesome Apple iWow that will change the world!  And one more thing –.”  Ahhhhhh…..  Buy, buy, buy!

    Like the fair Elizabeth Holmes, Elon Musk has become accustomed to being lionized. He launches cars into space. He makes flame throwers. When traffic frustrates him, he bores tunnels. He sends subs to caves. He gives away the hyperloop, then decides to make one, too. He is the Iron Man of physics whether flying to Mars or outfitting solar roofs. He doesn’t want to hear from doubting investors. His Tesla problem, though, is how to make a lot of cars profitably.

    Has Elon Musk set up an equation that even he himself cannot solve?

    Maybe. Tesla is producing perhaps 5000 cars a week now. By comparison, Ford produces about 125,000 cars a week. Ford has a market cap of $40 billion. If Tesla completes its buyout, it would be the largest in history at $72 billion.

    A lot of smarter people have already done the analysis and they’re betting 34.5 million shares against Tesla. At the current value, Tesla has about $12.7 billion in short interest, and that’s a big marker – one that, if wrong, will ruin a lot of lives and careers.

    That’s why Musk’s tweets don’t smell right to me: “Am considering taking Tesla private at $420. Funding secured. Investor support is confirmed. Only reason why this is not certain is that it’s contingent on a shareholder vote.”

    First, there is the price of 420, which is code for “time to light up a joint.” It could be coincidence, a playful joke, or Musk’s mind sending out a subconscious message.

    Second, there is Musk’s apparent desire to squeeze the shorts, which might be illegal. In any case, people with $12.7 billion on the line are not going to take that lying down. How many lawyers are working on that problem now? 50? 100?

    Like Theranos, there is a germ of truth to what Tesla is doing: electric cars are cool. But there is a lot that doesn’t smell right about Tesla, and its CEO’s recent outbursts seem increasingly unhinged. Also, other car companies aren’t standing still. We bought our second Ford plug-in, and it’s a fine car.

    Then there is China, which sold 579,000 electric cars in 2017 versus 198,000 in the U.S. When the Chinese commit to making something, they make it until they destroy the market. Have you seen the piles of discarded Chinese rental bikes?  The worst stock I ever bought was NMM – a great ship leasing company – until the Chinese destroyed the market for ships. Last year, the Chinese delivered over 11,000 electric cars a week; they will bury us in electric cars when they ramp up – and they know how to ramp up. Even Apple goes to China to make its phone.

    If Musk’s short-squeeze fails, it will fail spectacularly, which is why I’m buying some short-term puts on TSLA at a strike-price of $290. This might be a good hedge for anyone who owns Tesla because, while Tesla has paid well so far, the downside could be painful without a little insurance.

    If you’re thinking about buying Tesla, don’t. It’s a bag of risk, and the CEO just announced a $420 cap on the price, so you might make $50 or 13% for your risk.


    Our favorite pick, NVDA, was named the best stock of the last five years by Boston Consulting Group. Also, NVDA and IBM created the fastest supercomputer on the planet recently – bringing that title back to the U.S. from China for the first time in years.  NVDA continues to extend its technological lead.

    NICE was at $103.56 on May 16; in after hours trading today, it hit $112.99. The call center / customer response market is big, and NICE is operating on every field: AI, chatbots, cross platform automation, and traditional call center operations. As everything automates, NICE will own a good chunk of that business process.

    SalesForce, despite my disrespect, climbed from $123 to $145. I saw their new building in New York and their “#1” billboards everywhere, but it looks like more lavish spending to me. I wish I could invest in private SugarCRM because I think they will eat SalesForce’s lunch – or force a buyout. See:

    The mariceutical company, GWPH, fell from $150 to $134. I still would not buy this company, but, if you like marijuana medicine, consider buying long-term calls to limit the considerable downside.


    A former Presbyterian who became an astrologer explained to me yesterday that anything with a birth date can have a chart, so companies and stock markets can have charts, too. This person also explained that astrological services are in high demand by investors and that certain astrologers had quit their full-time jobs to provide investment advice. OK, so that explains the success of

    And then she told me that Uranus is in Taurus and the consensus among astrologers is that there will be a pull-back. I asked my medium to connect me to Nancy Reagan, and she confirmed the coming market decline, so I am sticking with my two-month, 20% out-of-the-market S&P puts for portfolio insurance. Also, we’re having a trade war.


    Salesforce stinks, GW is high. Play NICE.

    My mentor liked to say, “Nothing happens until somebody sells something,” and that is increasingly the business problem. You can make anything, but can you sell it?

    Now come the cohorts of Internet tools to make your dreams come true. Tired of installing software? has made the cloud even harder. I’m calling “the emperor’s clothes” on Salesforce. It’s bloatware made sexy – an overpriced, under-powered cloud service that satisfies only the most free-spending, careless mega-corporations that once used even worse sales tracking systems.

    Salesforce the company is run by salesmen who answer every question with a conference call to “engineers” who have been instructed that the answer to the simplest requests – like, “How about a report on the number of sales calls?” – is to say that no one ever asked for that before, but, for only a ridiculous fee, they can “engineer” something or sell you an app.

    In short, Salesforce has become so big that it can only grow by consuming its own customers. e.e. cummings could have written, “salesforce is an it that stinks Excuse”.

    Meanwhile, the rest of the market isn’t sitting still. Companies like SugarCRM, Freshworks, and every major software company have figured out how to follow up leads and generate reports. And operates a free, open-source model that claims 3 million users.

    Salesforce (CRM) won’t die soon, but it’s not likely to make you rich. With a market cap of $94 billion, doubling would make CRM one of the most valuable companies on the planet. Cisco, Pfizer and Verizon are each worth about $200 billion. CRM would need to double to get there; you can probably do better elsewhere.

    Show me the money! Here’s what Salesforce insiders think of their stock: 

    In the last four quarters, Salesforce has earned $127.5 million. With an enterprise value of $93 billion, that’s a 0.14% return. Savings account anyone? Why pay for this risk?

    Medical marijuana and GWPH

    You know you’re near a market top when the man-in-the-street confidently bets on trendy trends. I enjoy hearing their tips, which are usually about price momentum and the certainty that an unknown company will benefit from the trend of which only especially shrewd people are aware. For instance, the legalization of marijuana. 

    I heard one such tip today for GW Pharmaceuticals, a U.K.-based company developing marijuana pills for epilepsy. In the most recent quarter, GWPH had sales of $3.3 million, a loss of $88 million, and a market cap of $4.2 billion. Sounds terrible.

    On the other hand… 3 million people with epilepsy in the U.S. consume about $15 billion of medical care. Because GWPH has so much cash, the real cost to buy the company is $2.6 billion, and the company is not in immediate danger of liquidation. People hate to be in pain, marijuana is popularly thought to relieve pain, and “On the 19th the Peripheral & Central Nervous System Drugs Advisory Committee of the FDA duly gave its unanimous recommendation on the basis of the briefing document. The vote was 19-0.” Final FDA approval is expected on June 27.

    Let’s do a back-of-the-envelope calculation for this opportunity. I am absolutely unqualified, but here goes. Let’s say GWPH can extract an average of $300 per person annually with the condition – and that some other people without the condition will also find access to the pills, which seems to happen with marijuana products. Prices could be much higher and adoption much lower. That puts sales at about $900 million. We know that they are burning $88 million a quarter now, so let’s bump that to $100 million a quarter, and bring $500 million to the bottom line. After 30% taxes, they’ve got $350 million at 30 times earnings (the multiple could be much higher) giving GWPH a value of $10.5 billion. If the general mood remains speculative, GWPH’s value would climb higher and faster before sales even took off.

    Having said that, why would you want to risk principle on GWPH? Much could go wrong. Evangelicals could lobby their president, and they could conflate GW’s drug, Epidiolex, with opioids to stop it. If anything goes wrong, GWPH reverts to a company with $11 million in annual sales. Do you feel lucky? Do you want to bet on marijuana? GWPH is going to swing wildly up or wildly down. You could buy the Jan ’19 $170 calls for about $11 and prepare to take a small loss or celebrate an outsized gain.

    AI and the Contact Center: Buy NICE

    My main theme for the next decade is AI or machine intelligence, which is happening in an interesting corner of business. The dusty call center has become the data center for customer interaction. Voice recognition is now so precise that, instead of authenticating you with the last four numbers of your social security and your mother’s maiden name, computers can listen for your voice print.

    As you speak, computers in contact centers listen in and suggest responses to the agents who can also reference every transcribed voice interaction, text, email, web form, and Facebook post or Tweet that you have ever sent. Increasingly, call centers know who you are, what you like, and how you feel about the company. The industry no longer calls them call centers – they prefer “contact centers” because there are so many ways to contact them. Contact centers are becoming better than face-to-face retailers at managing customer experiences. They can even find agents who match your personality traits for a more pleasant experience.

    You may have noticed that long-distance business interactions are now more pleasant than local ones. I tried to buy a phone case at Best Buy last week. All the cash registers were closed, so I asked the greeter, “You DO sell things at Best Buy, don’t you?” He pointed straight up, and said, “The sign says go to Customer Service.” I stood in line for a few minutes while two customers emptied out their boxes to solve problems. Finally, I took the case off my phone and went home to order online.  At a contact center, they call that WFM or Work Force Management. The software can plan for periods of high traffic and can even send overflow calls to highly rated agents at home. As remote interactions improve and local destinations deteriorate (WHY did I bother to come here?), contact centers will become the focus of customer interactions.

    Artificial Intelligence is increasingly taking over contact center functions. The industry refers to robotic software or process automation, but, like Uber with self-driving cars, contact center executives look forward to a day when they can own cloud software that hums along with very few human costs. Every financial company, manufacturer, government, service company – virtually every organization – will require an automated contact center to understand and fulfill the needs of its customers. Customers, too, are taking on artificial agents to do their bidding, so your Amazon Echo, Apple Siri, Google Assistant, and Microsoft Cortana will work with contact centers to solve problems, order products, and procure services. Contact centers are going to be big business and a fundamental business process.

    Two companies dominate contact center software: NICE Systems (NICE) and Verint (VRNT). Both companies are building software and acquiring competitors in a race to become the leader, but NICE appears to winning. NICE, an Israeli company, has world-wide sales of $1.3 billion and a market cap of $6.2 billion; VRNT has sales of $1.1 billion and a market cap of $2.7 billion.

    NICE has two software solutions: Enterprise that it sells directly to larger organizations, and InContact, a company that it acquired last year and that it sells through dealer partners. The company has a vision for the customer experience that is unmatched by larger companies that would like to be in the space.

    NICE earned $118 million in the last four quarters, and even pays a half percent dividend. If you like Splunk – the $16 billion market cap, money-losing, Big Data company – or –  the vampire squid of sales software – you’ll love NICE, a company that made almost as much money as Salesforce, has more growth potential, and can still be bought for just $6 billion.

    Should I buy at an all-time high? 

    Is now a good time to buy anything? Everything mentioned above is at an all-time high.

    Now is the weirdest time I can remember: politically motivated hyper spending, deficits that may not be financeable, pension plans are unfunded, dictators claim lifetime employment, trade wars, tribalism, uncivility, but also low unemployment, plentiful money supply and a prevailing belief in the coming tech nirvana.

    To be clear: I would not buy Salesforce at half the price. GWPH is pure speculation that, if you really like marijuana medicine, is best played as an option. I looked at NICE a year ago and waited for the pull-back; it’s up 38% since then. No one can read the future, but NICE has the potential to be the real deal: a growth company that captures a primary business process.

    I continue my program of short-term S&P 500 Puts so that I can sleep at night.


    The Greatest Trade Ever and the Money Bubble

    Two trends compete today: a bubble of money powering everything and the overvaluation of nearly everything.

    Consider this: after World War II, the U.S. invested – in today’s dollars – about $100 billion to re-build Europe. After 2008, the U.S. “invested” – as a start – $700 billion to save our own country. For several years, we added another $100 billion each month. We held interest rates to near zero. We cut taxes and the cost of repatriating foreign earnings. We have pumped so many trillions into the economy that I can find no reliable number for it, though you can see its effect in the accelerating growth of the national debt and the price of financial assets.

    Enjoy the ride, but prepare for a torpedo.

    While happy with the performance, I have been searching for insurance. Oddly, it is hard to discover a true hedging strategy that could offset a large portfolio loss. In the last year, I have asked hedge fund managers and wealth managers about their hedging strategies. Most of them say, “We think buying good companies and diversifying is the best protection.” If you remember 2008-9, virtually every asset class got destroyed. When the torpedo hits, all boats sink. I did, however, come across one story, which I have come to think of as …

    The Greatest Trade Ever

    Over breakfast, a friend described his best trade ever. Here, at last, was a hedge I could love.

    My friend felt that the market would drop in 1987, so he bought short-term puts on the S&P 500. Whenever I have bought options, I have trusted my reasoning, but thought that I could not predict the date at which the market would come to agree with me. My predictions are usually early, so I have purchased options a year out, which have sometimes provided excellent returns, but not enough to offset the loss incurred on an entire long portfolio. My friend, though, bought two-month puts while the market was going up.

    If you watched the movie, The Big Short, you remember the bankers selling short positions to the fools asking to buy them. When the market is accelerating upward, betting against it is cheap, and betting against it short term is even cheaper. That cheapness created the Greatest Trade Ever.

    In August, 1987 my friend bought $1500 in two-month S&P 500 Puts, and they expired worthless. In September, he bought another $1000. He believed the market would drop in October, but, knowing the perversity of the market, it would drop in the second half of the month – after his puts expired, so he bought the November puts. Having studied the intra-day drop of historically bad days, he expected a 42% swing when the bottom dropped out. When a knife falls, no one wants to catch it.

    I remember October 19, 1987. My company, Clancy-Paul Computers, was prepared to go public. It was my first wedding anniversary, and we were at the Victoria Jungfrau in Switzerland as guests of NEC, the monitor maker. I was literally and figuratively on a mountain top when the news arrived that the market had dropped 500 points from 2500. The public offering would be off the table.

    Meanwhile, the Greatest Trade Ever unfolded as planned. That day, my friend watched for the point of maximum distress and closed out his puts with an 800x return. That is, his $1000 investment had yielded $800,000.

    The Greatest Trade 2018 and my hedge today

    I applied my friend’s idea recently by buying February 2018 puts in December. When the S&P sank on Monday, February 5, that position was up 3715% for the day. To be fair, the puts had already declined because the expiration date was nearing and the S&P had continued to increase. Still, the position was up 700% over the purchase price. While that portfolio took hits like NVDA dropping $20 a share, the overall portfolio was up for the day. It was a gratifying.

    Mainly, the hedge kept me from selling long positions. One friend asked if I was going to sell the puts. No, because I could not tell what would happen the next day. If the market continued to melt down, the puts would have protected me. The market came back, and those puts expired worthless. When the market powered up, I bought more puts because the only time to buy is when everyone else thinks you’re crazy. You would like to buy puts when the market is crashing, but, by then, it’s too late: in a panic, put prices rocket.

    The ability to keep the long positions without fear is not incidental. I know people who locked in their losses that day by selling into the panic.

    I had resolved to cover the year with six two-month puts, but I now intend to hold overlapping positions. If I had had overlapped puts in February, I would have sold the older one and pocketed enough to pay for the puts for the entire year. This hedge allows me to sleep. Given the uncertainty, I am happy to lose a little every month with the knowledge that, if there is a panic, I will not be a part of it.

    Are companies really over-valued? Splunk revisited

    At the beginning of 2018, there was much talk about the fear of missing out on the market “melt up” – that buying panic that pushes up every price. This is particularly true of tech companies with growing sales and big ideas. Though the companies may lose money hand over fist, investors seem to think that they will all become the next Amazon or Facebook: that is, tech companies will grow fast and profitlessly for many years until they dominate their space and become wildly profitable. Not every tech company will work out this way.

    My favorite example of this trend is Splunk, which I included in the Puts of Death column last year. Splunk is my favorite because, instead of buying puts, I mistakenly bought calls and made 250%, while my other Puts of Death expired worthless. As I said, my predictions are often early. (Also, I am often wrong; fortunately, the ten-baggers more than make up for the losses.)

    Last year, Splunk, saw its sales expand from $668 million to $950 million and its loss expand from $288 million to a loss of $344 million. This is not an aberration: Splunk has lost money for the last five years. The trend is in the right direction, though. Investors were overjoyed that Splunk only lost $50 million last quarter, and only $200 million in the last four quarters.

    How much would you pay for the privilege of owning a company with a billion dollars in sales and a loss of $200 million? $1 billion? $5 billion? If you said, “$14 billion,” – the enterprise value today – you would be right. That seems extreme to me, but let’s consider the opportunity.

    Splunk promotes Big Data technology – as in, “Organizations with big data are over 70 percent more likely than other organizations to have BI projects that are driven primarily by the business community.” BI is Business Intelligence, which is good, right?

    I have asked programmers about Splunk, and some have said, “I don’t know why anybody would pay for that.” Here is a positive Infoworld article that explains that “Splunk's continued relevance may come down to both product completeness and industry inertia,” which is thin support for a valuation of 14 times sales in a loss-making company.

    Splunk may have a future, but it’s no Amazon, and it’s expensive even as an acquisition candidate. Compared to a Perfect Company liked Nvidia, Splunk is a dog. When we bought Nvidia, it was profitable, paid a dividend, was being bought by insiders, and had an interesting opportunity in artificial intelligence. NVDA was a good value; Splunk is pure speculation, and there are many companies that have been bid up on hope and a mountain of cash.

    Here are some questions people ask lately:

    Should I buy Facebook?

    Disasters often go from bad to worse, and I think the abuse of personal data could be a real problem for Facebook and others. If it were public, I would invest in DuckDuckGo, a search engine that protects user data, and from where we have seen increased traffic at dotphoto. Besides, FB has 2 billion users and is unlikely to change your life by becoming a ten-bagger. If FB merely doubled, it would become the most valuable company in history.

    Should I sell Nvidia?

    I have consistently said that NVDA is one of the few companies that really is changing the world. NVDA announces a new technology or relationship virtually every quarter. Quarterly profits have move than doubled in the last year. I sold IBM to buy NVDA; at the time, NVDA had a fraction of IBM’s market cap. Today, NVDA is worth slightly more than IBM. Still, the great theme of our lifetime may well be machine intelligence, and NVDA is a very real presence in that effort.

    Should I buy Bitcoin?

    Bitcoin is pure speculation. Countries will shut it down when it threatens their currencies, and we have seen some of that. Banks will fabricate their own currencies when they are threatened, and we are seeing that, too. The value of Bitcoin and perhaps the whole cryptocurrency market is as a measure of the money bubble. When the cryptocurrency market declines, it will be one indication that the money bubble is deflating.

    The time to sell is when people are buying.

    We are beginning to see a wave of public offerings: DropBox, ConvergeOne, Aramco, and others. If you own a company, now is the time to sell it or accept investment. There is a dearth of investable companies: as of December 31, the Wilshire 5000 had only 3,492 companies. There are more funds than actual companies – how weird is that? Do we really need so many funds to buy so few companies?

    This will create some interesting opportunities and some dogs. Aramco will be the biggest offering in history – just in time for oil to become even less important. I don’t think Aramco will make anyone but the Saudis rich.

    On the other hand, I would love to buy into Afiniti, an AI-company launched by the founder of Align Technologies that has the most awesome roster of board members and employees I’ve ever seen. I’m told they will go public this year. Check this out:

    What can go wrong?

    Goldman Sachs warns of inflation. Interest rates will go up. China, China, China. The president’s next Tweet. I’m glad to have protection on the downside.

    On the other hand, there is a giant money bubble chasing interesting new ideas. Some of them could be a good value. I’ll be looking for them.



    “The seven lean, ugly cows that came up afterward are seven years, and so are the seven worthless heads of grain scorched by the east wind: They are seven years of famine.”

    -Joseph addressing the King of Egypt

    In exchange for interpreting his dream, the king put Joseph in charge of the economy. As a country, we continue to empower people who interpret our dreams.

    Though we have had seven fat years, I don’t know if we’re headed up or down. I don’t predict markets. There are too many moving parts, and entire markets respond to unknowable cash flows, butterflies, and unforeseen events. The best I can do is define value and possibilities for companies I somewhat understand, and hope that the material I buy floats on the sea of cash.

    That said, markets are a contest between the creator of money – the government – and the collectors of money – the powerful. The government was designed to provide the most good to the most people, to protect from despots, and to be overthrown by election when the people are dissatisfied.

    The people are dissatisfied. Two items:

    Two weeks ago, NBC sent a reporter to Erie, PA, a place that has not voted Republican since Reagan. The reporter displayed the termination letter that the locals received when GE shut down its locomotive factory there. Hilary Clinton didn’t bother going to Erie, but Trump went and promised to make Erie great again. Sitting in a diner, the reporter asked a woman, “Do you think the president-elect is a good man?” The woman looked up one wall, across the ceiling, and down the other wall. She finally said, “Well, he’s no worse than the politicians.” People who are losing $30 an hour jobs are desperate. GE laid off another 2000 on inauguration day.

    The owner of an excellent shop in New Hope, PA said last weekend, “Everything changed after 2008. I couldn’t sell expensive clothing, and that business has never come back.” New Hope is chock full of expensive houses and aspirational tourists. If you can’t sell expensive clothing in New Hope, the market for those items has seriously contracted. The store owner pointed out that, after 2008, many leading designers began hawking their brands through discount stores like K-Mart.

    We are so dissatisfied with the political class that we have put the collectors of money in charge of the creator of it. They will, I think, create more money. Suddenly, the Republican congress will see the need to buy infrastructure, provide incentives to companies, and ramp up debt.

    Most people cherish quaint ideas about government and the economic system: government should be small, we should reduce government spending, politicians and entrepreneurs create jobs, it is important to balance the debt, and the economic system works according to unforgiving rules akin to balancing your checkbook*. To me, the whole construction looks squishy. The government is about 40% of the economy. In fact, there is no economy as we know it without massive government spending at all levels – federal, state and local. When our economic principles break down, clever explainers invent new ones. “Now is the time for quantitative easing, by which I mean that we will pump $3.7 trillion into the economy.” “Of course – quantitative easing,” we say. “That’s a thing now.”

    The new president goes with his gut, which has served him well. He branded hot trends of the time – hotels, steaks, schools, mortgages, casinos, wine, water – and, if things didn’t work out, he bailed. Maybe his gut will serve us well, maybe not, but he has told us that he wants to be “unpredictable.” There is no rule book, and, like the healthcare system of which we may dispose, no articulated plan to keep us alive.

    This makes me nervous. I am hopeful that the Billionaire Cabinet will supercharge the economy, but nervous that there will be unintended consequences. While I continue to seek companies that will grow in good times, and survive and pay dividends in bad times, this letter is devoted to companies that lose more money every year, whose executives are selling their stock, and whose stock prices are rising. These companies are teed up for a slice, and could fall hard and fast if the lean times come.

    I am buying one-year puts on these five companies as insurance.  The best outcome: my long portfolio goes up, and these stocks fall. If the good times continue, I am prepared to lose the whole bet, but I think the most likely outcome is that one or more of the five will fall, which will cover the bet.


    One of the things I love about investment writing is the struggle to find positive news. In “Why you shouldn’t bet against Box, Inc. stock,” Zacks uses these phrases: “solid earnings estimate revision activity” and “current quarter estimates have narrowed from a loss of 31 cents per share to a loss of 30 cents per share while current year estimates have narrowed from a loss of $1.22 per share to a loss of $1.21 per share.” Key words: “estimates,” “loss,” “one cent.”

    This is not even news, but news about speculation, and not even particularly good news: it’s not that the estimates have swung from loss to gain – the estimated loss has been reduced by one cent per share per year. The truth is that BOX lost $201 million on $302 million in sales in the cloud industry dominated by company-killer, Amazon. One hedge fund manager assigns a prospective value of $1.5 trillion to Amazon’s cloud business. Amazon has lowered prices aggressively over the last five years, and is not leaving a price umbrella for competitors.


    ServiceNow is another cloud company floating on a big idea. With a $15 billion valuation, Oppenheimer says ServiceNow (NOW) has reached the "penthouse" of software-as-a-service valuations. On sales of almost $1.4 billion last year, the company lost $423 million. Here’s what insiders think (red bars indicate selling):


    Splunk is a “big data” company – another big idea that was hot two years ago. On sales of $688 million, the company lost $288 million, and is now worth $7.8 billion. Insiders aren’t buying either:


    Everyone is bullish on Exelixis. I hope they cure cancer, but, if they don’t and the market gets sick, EXEL will need an ambulance. With a $5.2 billion market, the company lost only $105 million on sales of $123 million in the last 4 quarters. Sales are up and the loss is down, but, in the most recent excellent quarter, there were 10 insider transactions – all sales for a total of over 621K shares.


    Despite hot headlines about computer security problems, Palo Alto Networks hasn’t figured out how to sell computer security profitably. Sales for the most recent quarter expanded from $297 million the previous year to $398 million. Instead of making money, the company lost $49.9 million versus a loss of $30.8 million. The company is valued at $13.3 billion. Insiders are profiting by selling their shares:

    What happened to Meridian Biosciences (VIVO)?

    On January 25, VIVO cut sales forecasts from the consensus $206 million to $193 to $199 million reduced the dividend from 80 cents to 50 cents, and reported sales for the quarter were down 1% and profits down 29%. Two law firms immediately announced investigations. The stock has fallen from$18 to $13, an erasure of about $200 million in value. Meridian, which is still profitable, is a telling example of how any company can be punished for bad news. It’s the reason to diversify: you never really know what’s going on inside a company.

    Is VIVO a buy now? I often think of the people in the Egyptian hot air balloon fire of 2013: as they neared the safety of the ground, the pilot and another passenger leapt out and saved themselves. The balloon, lightened, shot into the air and exploded, killing everyone else. In a disaster, things often go from bad to worse, and no one ever tells you the best time to jump. The leading indicator is the pilot: for VIVO in the last quarter, there have been 12 open market buys and 17 sells, but 80K more shares have been bought than sold, so insiders are betting (net) more than $1 million that this isn’t a disaster. It’s a tough call.

    A reduced profit is annoying, but the real problem with VIVO is that it’s not growing sales, which is the hardest thing to do. Five years ago, sales were $172 million; next year, they may be $193 million or less. It’s looking like VIVO is not going to make us rich, and it might make us poorer.  Where else to put the money?

    Buy OTEX

    OpenText was one of the first companies to catch my attention in the new PerfectCompany data this year, and it looks like everyone wants to ride. Zacks, Barrons, and others are touting OpenText because it has a reasonable valuation, makes money, has growth opportunities and even pays a 1.3% dividend. OTEX will get a bump in sales this year from buying Documentum for $1.6 billion. The company likes to call itself “the largest independent software provider of Enterprise Information Management (EIM).” It’s a content management company for corporations – think of it as Iron Mountain for live data – a good long-term business.

    The Privileges of Owning IDWM

    Sell Disney and buy a share for IDWM for your nephew.  He may get an ultra-rare collectible comic book like this one produced only for shareholders. Not only is IDWM up 800+%, but it sends you swag, too! 


    * Some further counter-thoughts to socially acceptable economic precepts:

    Government should be small; we should reduce government spending.

    We are all suspicious of bureaucracies, but we love their benefits. We want to live longer, we want safer bridges, we demand safe drinking water, we profess to love the military and everything that it does, and we crave government jobs and pensions. When the economy hits the fan, we look the other way while firemen hose trillions into the system. We love big government.

    Politicians and entrepreneurs create jobs.

    Politicians can provide incentives like tax rebates that we ignore as if they are cost-free, which can help companies pay for jobs. We are seeing now that politicians can threaten to tax companies, too, if they move jobs, but politicians cannot create jobs.

    Entrepreneurs are mostly job destroyers because their job is to find more efficient ways to do things. If companies were 100% efficient, there would never be new ones. When Mitt Romney claimed that he created thousands of jobs at Staples, he failed to mention the tens of thousands of higher paying jobs he helped destroy in office supply companies nationwide. It would have happened without Staples, but Romney is no job creator.

    Occasionally, an entrepreneur devises some new way of doing something that adds value to the world, but these are rarely the names we know. Steve Jobs was a brilliant packager who captured the lion’s share of the value in selling cell phones, but the technologies were invented and miniaturized by others so that Jobs could package them in the iPhone. Even inventors like Edison were racing toward the same goals with hundreds of nameless workers who enabled Edison to file patents sometimes hours ahead of the competition. We tune into a stream of ideas that we attempt to capture and package in our own names, which is how we create personal wealth.

    It is important to balance the debt, and the economic system works according to unforgiving rules that are akin to balancing your checkbook.

    The U.S. likes to tell other countries that austerity is important. The Greeks should pay more taxes and spend less, but, for ourselves, we have managed a slow-motion devaluation for decades. The fundamental value of any country’s currency is the personal safety and liberty it conveys. If you have enough dollars, you can live in relative safety and liberty in the U.S. However, even billions of yuan or rubles may not prevent party bosses from locking you up in Beijing or Moscow. Whenever possible, people dump unsafe currencies and acquire safer ones, so it is possible for the U.S. to print more currency than less safe places and hold its value. Conversely, China wants to steal jobs, so having 250% debt levels helps ensure that its valuation remains low, and that jobs stay in China. China values jobs and institutional control over individual liberty and safety so their currency is relatively less valuable.

    Where do jobs come from?

    Jobs appear when an entrepreneur concentrates expertise at reducing a particular cost. Suddenly, that enterprise is sucking in cash from around the country and the world. Cash fertilizes the whole area; new businesses spring up to sell sandwiches and temp workers to the cash collector. Think Seattle, Silicon Valley and Bentonville, Arkansas.

    On top of this practical economy, we build a new economy that satisfies our impulses: Candy Crush, Netflix, processed food, and expensive totems to prove our worth to each other. Serious people devote their lives to the next level of engagement: the attention economy. Will these jobs last? If they fulfill our dreams.


    PerfectCompany Update 12/26/16 and Why Random Walk is Wrong

    A few dear readers have asked about PerfectCompany this year. Some have even said they have enjoyed reading the newsletter, which has not been published in 2016. Here is an annual update.

    Some of our companies have continued to perform well. If you did nothing but hold last year’s portfolio through this year, you would be up 32% versus 11% for the S&P 500. 

    Below are charts from Etrade for my wife’s and my retirement portfolios. As of the close on December 23, one is up 46.5% and the other 49.6%; the S&P was up 10.8%. The difference between holding last year’s portfolio and our actual Etrade accounts is that, in practice, I sell losers, keep winners, and buy companies with better potential. For instance, I believed in IBM’s Watson initiative, but concluded that IBM was not the company to capitalize on Artificial Intelligence, so I sold IBM and bought NVDA, a company that has become the darling of that investment trend. Keeping winners is also counter to general portfolio practice since the winners come to dominate one’s portfolio. Does Jeff Bezos wonder, “Gee, Amazon is too big a piece of my portfolio – should I sell it?” I like winners that make sense.

    Note the difficulty at the beginning of 2016 when we were significantly under the S&P 500. This is when investors are manipulated into panicking, so that they rarely experience significant profits. Much has been written by psychologists and economists about people’s greater concern for loss than profit: as a group, we would far rather not lose than win, which is one reason why the “random walk” theory is wrong. The not-lose tendency exacerbates both ends of a stock’s run by driving down values in the extreme when prices decline and by driving up values in the extreme when people feel they are missing out. Investors who can tolerate frequent losses because they know the overall effect is a superior return call these periods opportunities to “buy low” and “sell high.”

    The other exaggerators of trends are index funds and programmed traders. Index funds are blind to value, and programmed traders, which make up a majority of trades, trade so quickly that they do not have time to reach out to the real world to see facts: they play a game against other programmed traders and weak investors, so they naturally exaggerate any real value trends by piling on or by temporarily pushing value in the opposite direction to flush out weak investors before further exaggerating the trend.

    Random walk is wrong because most trades are made by automatic trend exaggerators, and the only actors who can make value judgments (actual investors) are frightened by their own psychology, and have limited access to data that could provide them with comparative values.

    The other attribute of this market is that it is mostly run by professional investors who believe they can predict earnings. The data show that earnings predictions are wildly inaccurate after just three months, and anyone who has ever run even a small company knows that environmental factors, large sales, and animal spirits can easily inflate or devastate profits, which, after all, are only a small percentage of sales. Young MBAs who believe they can – from the outside and with persistent questioning – predict next year’s earnings of complex organizations are deluded at worst and ambitious at best. One of them told me that “everyone knows that stock values are correlated to earnings.” This is wonderful news if you have ever had an original thought: 15,000 hedge funds are operated by people who mainly think the same way and follow each other, so they are yet another group of value exaggerators. Buffet moved from New York back to Omaha to get away from this group think.

    To be fair to analysts, if each analyst handles 30 to 80 companies, first, they cannot possibly understand them and, second, they are overeager to find something good to write about in their tiny universe. If you are looking at the investable universe, you are throwing away 80 companies by the handful in an attempt to find truly excellent candidates.

    For the few people interested in doing the work and thinking at all originally, the opportunity to invest in a market with so few original actors is certainly easier than starting companies and selling products. You can ride other people’s successes, and, if you make a mistake, cut your losses quickly. What could be easier?

    Why I stopped writing this year

    I stopped writing for three reasons:

    1. Performance doesn’t matter.
      A friend summarized the PerfectCompany blogs in three pages of his Princeton newspaper at the end of 2015. I thought this might produce some interesting opportunity, but there was little feedback. It dawned on me that the real business of money management is aggregating money, not making money.
    2. My data sources dried up.
      My approach is top down: I seek to find the best values among thousands of companies, and then I wait for those companies to grow and be discovered. It appears to me that – even among professionals – the most prevalent selection method is whisper-down-the-lane. Consider an investment if you see it in Barron’s, or if you hear about it from multiple sources. Good data that you can load into your own spreadsheet is surprisingly hard or outrageously expensive to get. Data companies want you to work within their systems, or they omit simple data points like enterprise value and dividend rates. This is public data, and everyone but public employees is now responsible for managing his own retirement, so it seems to me that this data should be free. It is far from free. The very limited distribution of this data en masse so that it can be analyzed is another reason why random walk is wrong: all the information is not really in the market – in fact, few people have access to data that allows them to compare values or look beyond bogus indicators like PE ratios. To remedy this, I have hired a company to develop a web-scraping program that I hope will deliver the data in 2017.
    3. I have been busy this year.
      I dropped out of social activities, and worked this year on various projects. One of these – the BillionDollarArtGallery – is described below. It was a labor of love, but one that might appeal to readers of this blog.

    Trends in 2016

    One main trend is upending business and politics: the optimization of everything and the reduction of jobs. This has predictable consequences: 

    • The desperation of relatively unskilled workers whose jobs are going away not just to China, but forever: drivers, clerks, cashiers, warehouse workers, middle managers and many others
    • Unimaginable wealth for people who control the tools of optimization:  in a recent period, the most valuable 10 stocks were all tech stocks.
    • No pressure on wages because jobs are constantly being reduced
    • Continued low interest rates because governments want to encourage risk capital that might create jobs. If you think last week’s rate increase was important, look at the historical perspective:
    • The piling up of cash in hyper-efficient companies, which, by the way, are unconcerned about interest rates
    • The concentration of industries and the reduction of competition as cash-rich companies buy their competition, and further reduce jobs
    • The proliferation of entertainment options to fill time for people who work less or not at all
    • The election of previously unthinkable outsiders because so many people are seriously frightened about their prospects.


    I spoke about this at length in Philadelphia in July.  See How Technology is Upending Money, Politics, and Religion

    Perfect Companies in 2016

    PerfectCompany has benefited from the trend toward machine intelligence and ultimate optimization of business processes. We bought Nvidia (NVDA) when its chips were beginning to be used in artificial intelligence or pattern recognition devices like IBM’s Watson. It’s up 393% since we first bought it on 4/27/15, and now has a market cap of $59 billion. I have long thought that Intel (market cap $175 billion) should buy Nvidia because Intel is reaching the end of Moore’s law: it is getting harder to increase profits by jamming more transistors on a chip. We shall see. I was pleased to learn last week that one PerfectCompany reader bought 1000 shares in the the $20s, so he has made about $80,000 on that investment.

    I like WSTG, which pays a 3.7% dividend and continues to grow nicely. Insiders have been net buyers in the last 12 months. The company has no debt, plenty of cash, and steady, profitable growth. I would like to see a clear vision that might enable phenomenal growth. For instance, an expert system that would enable WSTG’s vendors to provide low-cost, high-value support for the technical products that it distributes. Though I’m not aware of anything that might enable explosive growth at WSTG (barring an acquisition by Amazon), it’s a good company with a decent dividend.

    LOAN continues to grow by making hard-money loans to developers in New York City. LOAN pays a 5.6% dividend. It seems to me that people with money all over the world want to establish a connection to New York. If the world goes to hell, people will still want to come to New York – maybe more.

    IDWM is a special situation. The stock is thinly traded, and is controlled by a handful of shareholders. One of the shareholders wrote a well-reasoned letter to sell the company in late 2015.  Read it here.  I suspect that that shareholder sold shares in early 2016, which depressed the price. However, almost every lull in IDWM has been a buying opportunity. This company is following Marvel’s playbook by developing stories in comic books, and rolling them out in TV shows and movies. Wynonna Earp is a good example of a comic book turned TV show that has earned IDWM credibility. The company also pays a 1.3% dividend, which is better than you get at your bank. IDWM has a $153 million market cap; Marvel sold to Disney for $4 billion.

    OLED is the Qualcomm of screen technology. They license their patents for low-energy, high color screens to LG, Samsung, Apple and others. OLED screens are coming, and the company is getting into lighting fixtures next. If you have seen the incredibly bright LED flashlights, you have some idea about how lighting is going to change. I would not be surprised if Qualcomm or another tech company bought OLED. The near term is murky, but the long-term is very promising.

    If anyone can survive at retail – and I’m not sure anyone can – it is likely to be FYE (a unit of TWMC), which has been rolling out its new store format over the last year. Store employees say that it’s going well, and insiders are buying heavily. If you’re reading this, you probably wouldn’t buy any of their chotskies, though they are the kind of movie and game-related merchandise that young people buy on impulse. You might buy used CDs and vinyl records on TWMC’s  TWMC paid $75 million for etailz in October, 2016. They expect results to be accretive in the first quarter of 2017.  This company had a lot of cash and insiders were buying. They have now used that cash to buy etailz, so the future rests on their new investment. I have not had a chance to fully evaluate etailz.

    My biggest mistake in the last two years was buying NMM. The numbers looked good, and the management has been excellent. It paid an extraordinary dividend and had long-term contracts. I did not know that the Chinese were dumping ships onto the market to keep people employed and to take over ship-building. In July, the seventh largest shipping line, Hanjin, went bankrupt, stranding $14 billion of goods at sea.  It appears to me that Navios is following a kitchen-sink approach to this period that will strengthen it for the future. As long as the news is bad, they are throwing every bit of bad financial data in that they can can. In Q3, depreciation and amortization jumped from $19 million to $38 million. The company makes the case that it is paying down bank loans, and shoring up its cash flow. PerfectCompanies make money, so I would not buy NMM now, but I am prepared to jump on it at their next profitable quarter.

    I like ATNI a lot. These guys are good at buying networked systems, improving them, and selling them. VIVO is a medical testing company that pays a 4.5% dividend. I think someone will buy them.

    Trends in 2017: rumors of wars

    • The war on jobs
      Uber is now making clear its plans to kill off drivers. Google wants to make automatic programmers. Like so many things that could never happen, these and other job-killers may come to pass. Disability is picking up clients dropped by welfare.  Universal Basic Income may be on its way.  
    • The war on fixed assets
      The sharing economy reduces, at least in the short term, asset purchases. Private plane manufacturers are finding that the greater utilization of private planes by sharing companies is driving down sales. Who wants to park money in assets?
    • The war on sugar
      We’re getting fat and going diabetic. Addictive industries are profitable and have powerful lobbies, but I detect an interest in reducing refined sugar in our food.
    • China’s economic war
      China’s debt is 250% of its GDP. If the U.S. had the same ratio, we would have $47 trillion in debt. China uses debt and state-owned companies to take over entire industries. It’s great for U.S. consumers: I bought a metal slingshot with three latex bands from Alibaba Express for $2.70 including shipping. China’s three state-controlled airlines are now setting up cheaper routes around the world, and reducing the profits of U.S. carriers. China is the world’s second-largest economy operated by a single political party. It feels like they’re building a death star over there. I stay away from Chinese companies because they operate by different rules.
    • The war on carbon
      Renewable energy is getting cheaper. (Solar, which essentially an inverse transistor, should benefit from Moore’s law.) Battery technology will improve. We will continue to offer cheaper carbon fuels than our enemies until we can’t give away carbon. I think ATNI will participate in this.

    It seems to me that Trump is setting up for a Reaganesque, capitalistic free for all. Infrastructure will be built, which will generate jobs and a feeling of can-do excitement. Technology will be further deployed in defense. Public debt will increase, so interest rates will stay low. The rich will get richer, and coal jobs will not come back to West Virginia.

    I will look into more companies in the new year with my new data source.

    One of my projects: The BillionDollarArtGallery

    About a year ago, I was wondering about what kind of images we would want to see if we had cheap screens everywhere, so, to the dismay of my wife, I bought a 50” UHD TV and mounted it in the living room. We tried family photos and Internet feeds, but they weren’t very compelling. Then I started to notice the Economist’s articles about museum exhibits around the world, and began adding images of paintings. My wife, who loves art, took an interest, and added more. I found that I wanted to know more about the paintings, so we changed the file name to the name of the painting, the name of the painter, the year it was painted, and the museum where you could see it. I began to learn about art, and, to my wife’s delight, we began going to museums.

    Now we have assembled 500 paintings on a memory stick in an etched wooden gift box called The BillionDollarArtGallery for $25 or five for $100. As a gift, it’s about 1000 times better than a wine bottle. People are mesmerized by the paintings. You can buy it here.

    All the best,



    Perfect Company FINAL SCORE 12/9/14 close – 12/9/15 close

    The final score is S&P 500 -0.6%, Perfect Company 37.3%. If you balanced out the 10 liquidated positions by their annualized returns, the Perfect Company blended score would be 26%. The S&P pays a 1 to 2% dividend; Perfect Company stocks paid 3 to 4% on average.

    My biggest lesson this year was learned from ignoring the threat of over-competition. To the extent that companies can cast themselves as purveyors of intellectual property (Designed in the U.S. by Apple) rather than producers (manufactured in Korea by Samsung), companies have somewhat protected margins and are perceived as more valuable. Comics, patents for organic LEDs, and super computer chips have design cred. Energy, shipping and airline operations are unlovely money-crunching machines. When enthusiastically pursued by companies and countries to the point that supply overwhelms demand, entire industries suffer. Spirit Airlines (SAVE) and Navios Maritime Partners (NMM) were my two biggest losers. At least I stayed away from energy, which was no mean feat since the business press announced a new nadir every two months.

    Here are the final portfolio positions exactly one year later:







































     $ 4.40
































     $ 3.50








     $ 3.07








    S&P 500

     CLOSE 12/9/14















    Perfect Company Report 12/5/15

    As we come down the home stretch to December 10 – a year since the inception of this experiment, the stocks remaining in the portfolio are up an average of 38.46%. Liquidated positions have returned an annualized 15.9%. Dividends are a matter of timing – I have never bought or sold to collect a dividend – but the portfolio has probably collected dividends of 3 to 5%. In the same period, the S&P is up 1.55%.

    The main strategy has been to invest in companies that are as close to “perfect” as possible: companies that earn a good return on their cost basis net of cash and debt, that insiders are buying (or at least not selling), that are growing sales profitably, that have a business that can grow quickly, and several other factors. We have been rewarded for our patience when holding good companies, which have often gone down before they went up – or went up, down, and then back up. I was reminded of this last week when a friend wrote to lament that he had sold OLED for a small profit; OLED is now up 98% for the year.

    On the other hand, disasters usually go from bad to worse – sometimes for mysterious reasons. Spirit Airlines continues to churn out impressive growth and profits, and has a business model that is stealing customers from the majors, but the stock cratered. KIN was more bet than investment, and the mistake proved the rule of sticking to what one knows: not only was KIN unprofitable, but it had no sales – and continued that tradition. The outcome of NMM remains to be seen, but the market may be saying that the supply of ships will long outpace demand.

    Most of these companies were not giants, but they were not all tiny. OLED (up 98%) has a market cap of $2.5 billion; NVDA (up 51%) $17.4 billion; ATNI (up 17%) $1.2 billion. Some were very small. The best – IDWM – has a market cap of only $110 million after a 197% gain. However, when I think of Marvel selling to Disney for $4 billion, I like to think about Universal buying IDWM, which is in comic books, movies, and all the paraphernalia surrounding story development that feed an entertainment colossus. LOAN has only a $30.8 million market cap, but pays a 7% dividend, is up 32% since we bought it, and scores 11.2 in our Perfect Company calculation.

    I like smaller companies because, if they are focused on a manageable idea, they are more likely to grow quickly. I would rather own shares in a good small company than a good large company. The small company is more likely to do one thing well, and is more likely to be acquired (as was BZC); the large company, while regarded as “safe” by many people, is subject to scandals, systemic errors, and selling shareholders that can keep the stock from appreciating for years. You’re also more likely to find a value in smaller stocks because most analysts follow only very large companies – their selection makes sense because they are following the flow of funds, but those companies – really collections of companies – have so many possible outcomes that they are virtually unknowable.

    This exercise has been helpful to me because it forced me every week to look for new opportunities and to ask, “Would I buy these companies again today?” That question helped limit my losses, which is critical, but it is also not easy in a flat year to find stocks that have grown 30, 50, 90 and 190%.

    I am not aware of anything quite like this public experiment. When fund managers want to impress you with their record, they pick an optimal point some years ago from which their portfolios would have delivered the maximum performance. The Perfect Company scoring system broke into two categories: (1) the average return on stocks in the remaining portfolio and (2) the annualized return on liquidated positions. One can argue that having some cash on the side would bring down the averages of both. However, the way some portfolios have performed, cash could also bring UP the performance.  Also, it would be possible to sell the losers to pump up the remaining stocks, but our annualized return on liquidated positions also outperformed the S&P by 10 times.

    The most interesting thing I learned this year is that no one cares about this kind of analysis, or about any results in particular. People tend to believe whatever they already believe. (They also tend to buy beds similar to the one they already own.) There are the earnings predictors who want to predict the future, and the vast majority of financial advisers who like to say that they deliver minimal return because know how to reduce risk. It seems to me that experiencing minimal return over time is a serious risk.

    I am also surprised at how difficult it is for small investors to get accurate data. In a time when most workers have been ejected from paternal pension plans into self-directed mobile retirement accounts, one might expect that someone would offer a data service that enables investors to tick off any corporate variables they choose to download into a spreadsheet that helps them make sense of the universe of stocks. I have yet to meet a system that offers the data I require – standard data, by the way, that can be had by piecemeal delivery, but never as a whole meal.

    I hope that you have only bought the winners that I recommended this year, and that you will buy dinner the next time we meet. I have had one dinner invitation already.

    All the best,








































     $ 4.30
































     $ 3.74








     $ 3.03








    S&P 500

     CLOSE 12/9/14





















     $ 4.03










































     $ 169.78




























     $ 6.20














     $ 5.97










































     $ 4.38










    Avg Div:



    Avg Annualized: