Hello Fall!

What a difference a week makes. Last Saturday I was writing about an epic (for Tailwinds) stretch of performance and salivating over all the positive catalysts that were on deck for September. This week I’m shellshocked by the sudden reversal in the market. It’s amazing how quickly the tide can turn.

The markets have certainly started September on the wrong foot, with indexes down several percent right out of the gate. The selling started with large cap tech but, as is usually the case, smaller companies that have outperformed lately also received a much bigger beatdown than the overall market. That description really hits home with Tailwinds’ universe of micro-cap stocks, which had been performing great. They are down 9% as a group 4 trading days into September.

Anyone who has been reading this newsletter for a while is well aware that I’m far from bullish. I have found it tough to believe the rally would last this long much less continue unabated. The constant comparisons of today’s rally with the tech bubble of 1999-2000 seem rather apt to me. Stocks can’t move in one direction forever.

Yet, I’m not a big bear either. The Fed continues to be accommodative and there is a lot of money on the sidelines. While we are due for a pullback and letting the speculative excess (TSLA anyone?) out of the market, it’s very tough to feel we are entering another crazy selloff like we saw during the beginning of the pandemic.

Importantly for the stocks in my universe, and Tailwinds is certainly focused on stock selection not market timing, things look dramatically better than they did in Q1. This is due not only to turnover in the companies under coverage but very smart fund-raising that took place at a number of companies.

Think about the early stage or pre-revenue companies we cover that raised money recently. In the last two quarters this list is quite extensive, including ANIX, ATOM, FBIO, INMB, QRHC, SQNS, TFFP and WISA. When the market weakens, it’s challenging to raise capital; this group is comfortably financed for the time being, which is a big relief. For the vast majority of our holdings, the concern about major dilution occurring during a market pullback is really non-existent.

Thus, I remain fully invested in the market while being very concerned about its valuation and what the next few months might bring. The companies in our universe are the strongest group I’ve ever had. So many good things are happening within our portfolio that I am more than willing to ride out the storm. As I’ve proven over the course of 2020, I don’t have a great handle on where the market is going. I do know that in 6 months, one-year or two, stocks with strong fundamentals and low current valuations will be just fine.

Speaking of riding out the storm, I feel compelled to give an example of why you need to keep the big picture in mind in these micro-cap stocks. Having very vocally, and with real money, backed up the truck in CATS (now OnTrak (OTRK)) around $4, there were a number of times it was tough to keep a large position.

CATS went over $12 in September of 2018, only to give up 40% in a fall below $8 that October. It briefly touched $20 in July of 2019, only to go not see it again for many months and to dip all the way below $10 (a 50% down move) in March of this year. Even after it went back to new highs, we had a 33% correction from April’s seeing $30, retracing back down below $20 this June.

The whole time this happened, these three massive corrections in the stock, it was my largest position and I added on weakness each time. The point being that, if you get the fundamental story right, you can ignore the gyrations of the stock and the overall market (or trade them to your advantage).

One thing I didn’t do during that move was let my position ride. I constantly trimmed it down, adding back on weakness. This sounds shrewd, but, in all honesty, I never came close to repurchasing the total number of shares I started with. The position was large the whole time, but would have been massive with no selling.

The result of this is a new conviction to maintain my positions in high-confidence names as long as their valuation stays reasonable. I have several overweight positions right now. I’m not selling despite the recent strength. The next company that goes for a 10-bagger will bring me along for the ride.

I do believe there are several ten-baggers in the portfolio…positions that will not be trimmed. And, as I look at the rest of 2020 and into 2021, while it would make life easier if the market went straight up, we all know that won’t happen. However, I’m not going to overly concern myself with what’s going on in the market nor what each of my stocks is doing on any given day. Instead, focus on the fundamental stories and get that right…and let it ride.

One company whose current market gyrations have me thoroughly confused is INmune (INMB). INmune has been beaten up lately over delays in approval of their Covid-19 IND. Then, this Tuesday, BTIG initiated coverage with a wonderfully extensive report AND they got their approval. Of course, the stock traded lower on the day and has been smacked silly in the market selloff ever since.

I find INmune to be incredibly compelling right here and now. This is not only due to their Alzheimer’s program, which should have another cohort of positive data in December, but more so over personal excitement with their Covid program. Indulge me on this one, please.

INmune has 12 centers enrolling patients at this time, a number that could increase to 15. Each center is conservatively expected to enroll one patient per week, which means that they will have the first 100 patients enrolled by the end of October.

With a two-week trial, the data on the 100 patients will be available for the Data Monitoring Safety Board (DSMB)’s review in mid-November. This group decides if the trial will enter the second phase or not. Numerous reports and publications continue to point towards cytokine storms as the key issue in CV19 patients, which gives me great optimism in Quellor’s ability to have a positive impact here.

***Further to this point, there was an interesting article in The Lancet this weekend speaking to the benefits of Anti-TNF in Covid-19. Well worth a read.***

If the DSMB gives their approval to move into the second half of the trial, INmune’s stock could move up…a LOT. This is not only because of how much they can impact Covid, which would be a nice boost. It’s really due to the off-label usage that would occur if INmune can truly reduce cytokine storms and cytokine release syndrome (CRS).

CRS is a common problem associated with cancer treatments. In particular, checkpoint inhibitors and CAR-T therapies. If the DSMB says that Quellor is working and the trial should continue, smart investors will start extrapolating what will happen after approval. Covid is a nice win, but we are all hoping for a vaccine to make it go away which would; that would really reduce any direct sales opportunities related to the pandemic.

Approval for Covid, however, represents opportunities far larger for INmune and that’s why I think November could be a huge month for this company. They are very savvy in their approach to using Covid as an accelerated path to getting into cancer patients. Normally, approval in cancer would take many years and millions of dollars. Off-label usage in helping with cytokine release syndrome could happen next year if they are approved for Covid. Well played, INmune.

Atomera (ATOM) was hit this last week on a short seller’s report on Seeking Alpha. I find it very meaningless with the thesis being that the product obviously doesn’t work as they have yet to sign a contract. Once one is signed, and they are imminent, that thesis is shot to hell. Meanwhile, a buying opportunity is presented to investors who might have missed the move.

We will be issuing an initial report on Lantern Pharma (LTRN) next week. This is a unique company that is employing A.I., along with a database of over 500 million biomarker data-points to help direct and repurpose cancer drugs that have shown promise but been shelved for various reasons. The pipeline is strong, the team is brilliant and the process has demonstrated success. We think that their approach is the future of drug development and are excited to roll the story out on a broad basis.