Groupthink…It’s Not Always Wrong

It generally pays to take the opposite side of the group consensus. When the analyst community all forecasts the same outcome, it’s safe to say that said outcome is already priced into the market. Taking the other side of the group, like going long the S&P 500 last fall for example, is counterintuitively the better trade.

However, when it comes to the TW universe, I believe in a completely different rule of thumb. Stocks that come across my radar screen are, as a group, unknown to most of the investment community. There is little to no analyst coverage and minimal institutional ownership. Overall, they are, like most micro-caps, orphaned by the investment community.

Thus, for TW’s stocks, there is no Wall Street “consensus”. The investment community as a whole doesn’t have a thought about them and trading in the names is driven by algorithms and market makers instead of institutional supply or demand.

Within the TW readership, however, there is quite often a consensus. I have done a great job of finding interesting companies. Some of them have done very well and others have been, in all honesty, epic failures. However, one theme is pretty consistent. When I bring a new idea to the group, if the name resonates within my readership, the company tends to perform.

As far as the TW universe is concerned, consensus amongst an educated, well informed investor group generally leads to a very positive outcome.

Micro-caps being such a unique beast, sometimes this outcome can take a long time to come to fruition. I tend to repeat myself but it’s best to remember, “the market can stay irrational longer than you can stay solvent.” Which, besides implying that leverage is a fool’s game, generally means that you might be right but not necessarily right now.

enVVeno (NVNO) is a great example of a company in which I believe I’m right. The science behind the product is very solid. It works. Meanwhile, the market demand is there and the potential for the VenoValve (and it’s next-generation product that will enter testing later this year) is blockbuster. Meanwhile, funding is secure and clinical results are due in the next few months. In a nutshell, the company is on the verge of success.

I was, however, very early to NVNO. Way too early. Looking at the stock over the 5+ years in which I’ve covered the company, it’s been a disaster.

The “good news” here is that I managed to get out sometime in 2020, taking a loss but living to play another day. Even better news, as a group, my readers were not enthralled with the stock and, while there were losses, many avoided it altogether.

However, since January of 2021, when the stock was at $10, I’ve been getting back into the company. And, when it started trading below cash value, I’ve been backing up the truck. All along, I’ve been spot on about the product and the market opportunity…and dead wrong on the stock.

Back to the point of this blog, having not completely bought into the story the first time around, the TW readership group has recently started coming to a consensus about enVVeno. Acting individually, but viewed as a group, TW’s subscribers are now universally positive about NVNO. The stock is resonating like it never has before.

In my opinion, this bodes very well for the eventual outcome here. When my group of seasoned, many of them professional, investors basically fails to poke a hole in a stock, it pays to own it. NVNO, with many major catalysts over the coming weeks and months, is poised to take off.

In a shameless plug for subscribers to become premium members, the group consensus of which i speak is very visible in the TW Slack forum. It is here where ideas are shared, discussed and often dissed. If a stock idea can get through the Slack group without anyone squashing the thesis, I find it usually is an excellent opportunity and these are situations where I am comfortable taking larger swings.

Which, of course, leads to the obvious question of what other ideas are achieving consensus? Let’s just say that INmune Bio (INMB) has had that status for quite a while. The science still needs to be proven but the overwhelming belief is that we like the direction the company is heading and give them high odds of success.

This past week, proving the market prognosticators wrong as a group, the market continued its path higher. The S&P 500 and Russell 2000 each gained 2% on the week. At Tailwinds, we had an even better run with the average stock I watch up 4% and my portfolios gaining 9%.

Leading the charge higher around here were enVVeno (NVNO) up 19% and TFF Pharma (TFFP) up 21%.

TFF is another company that I’ve followed for a while. I’ve always liked the science here. However, on the back of a very misleading (ie dishonest) CEO, the stock has been terrible for a long time. This is one case where the TW consensus was wrong; as one hedge fund manager told me, “when I CEO lies to you there’s no way to avoid pain.”

Under new leadership, however, consensus on TFF is once again becoming very positive. They have readouts on two phase 2 trials in the next couple months and a current market cap of $20M. Dilution is coming; that is actually going to be THE catalyst that gets the stock going, IMO. Valuation does matter and, based on where this company is at in clinical trials, their valuation is ridiculously low.

I find it interesting that, despite NVNO being up 19% on the week and TFFP being up 21% on the week and 32% month to date, both stocks are basically unchanged for the year. They are not extended on the chart, just recouping their January beatdowns. The train is only just pulling away from the platform in both cases.

In the news last week, Aeluma (ALMU) announced a win with the Department of Defense. The contract, to help develop mass production of quantum computing chips, is further evidence of the strength of their intellectual property portfolio.

ALMU has a limited burn and is offsetting a decent chunk of this by taking in funds from defense contracts. This while they are in testing and qualification for major contracts in the LIDAR industry. This is a high-risk company but the technology is getting greatly derisked with every DoD win and the upside is massive.

Importantly, management is top notched, being very well regarded in this field. With a focus on keeping a low share count and clean balance sheet, ALMU represents a compelling risk/reward opportunity.

Also in the news last week, Lineage Cell Therapeutics (LCTX) raised $14M in a direct offering. I’m not sure why the felt compelled to do so right now but the insider participation here was very strong and certainly makes LCTX a stock to put on your watch list.

Final thought of the week. I continue to think small stocks will have a great chance to rally in the coming months.

Looking back over the last few years, micros boomed during 2020 and 2021 on the back of cheap money. When the FED started pulling in liquidity, the group crashed back to earth (or even below the surface in many cases as a lot of these stocks traded to negative EVs). We are now in the heat of an election year and it’s really tough to see the FED being anything other than accommodative to the economy and the markets.

I think small caps are the place to be in 2024. Find ones with strong balance sheets, cheap valuations and significant catalysts. Emphasis on the last point and icing on the cake if insiders have been buyers.

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