The Pearls of the Portfolio

Just back from an epic trip to Montenegro, Croatia and Italy. And, for once, the markets were rather sanguine, if not actually really positive, for TW during my absence. I wasn’t ready to come home and most investors probably wished I’d stayed away as the outperformance during my travels was very enjoyable.

For those who have never been to Dubrovnik, it’s a must see. Called “The Pearl of the Adriatic”, the name is well deserved. It’s quaint, it’s beautiful, it’s reasonably priced and the people are wonderful. It’s also impeccably clean and safe. Simply a gem of a city.

For Game of Thrones fans, this is where a lot of the filming took place and it was the basis for Kings Landing. A massive wall surrounds the town as it sits on the edge of the ocean. The walls are truly impressive but what makes them truly unique is that, despite many wars (including modern weapons in the 1990’s war with Serbia), they have never been breached. They are complete intact which makes Dubrovnik a true diamond in the rough.

Walls and moats are what every one of TW’s micro-cap growth stocks hopes to build around their businesses. Create something of immense value and keep possession of it; that’s the goal of a company in this “public venture capital” space.

Over the seven years of publishing the Tailwinds newsletter, I’ve looked at many companies and invested in quite a few. Each of them had a great story to tell, their own reasons to think their walls were impenetrable and the land worth defending; in the case of Dubrovnik needed to defend itself as it sat on a key trade route. By protecting themselves, they got rich. Having defendable IP is wonderful but only of value if the IP is equally wonderful.

Over the last few years, the number of companies in my portfolio has gotten smaller and smaller. Some of them are recent additions but several have been here almost since the beginning. I’ve always said the benefit of a public venture portfolio is the ability to get out of losers. If a venture portfolio makes all its profits from 10% of their investments, when you can sell losers and reinvest, you hope to end up with a portfolio completely filled with the 10%-ers. Is TW there? It’s starting to feel like that could be the case.

Not to say that things are completely derisked around here. There’s obviously still a lot of execution that needs to transpire for each company. It’s just that while every company has “shots on goal”, it feels like we are at a point where those shots are all appearing to be on target.

I’m going to give four reasons why I’m feeling so optimistic. An optimism that seems to be shared in the markets lately as the portfolio is starting to perform; performance, I might add, that is significantly better than the average micro-cap growth stock of the last few years. The micro-cap growth part of the market has been brutalized and right now these companies all appear to be emerging from that storm cloud.

Aeluma (ALMU) is a more recent addition to the portfolio. They have IP for building large scale semiconductor wafers using newer materials. These materials are in use now but no one else can build them to scale. Thus, Aeluma’s chips are going to have a very significant cost advantage.

Why do I feel that they are going to win? The contracts they have won so far are all very positive proof of the uniqueness of their technology. If winning business in the defense industry is a sign of cutting edge technology, winning business from DARPA and NASA is a sign of best in class. Aeluma’s next market is breaking into the consumer industry. That’s how tech works on the leading edge. You prove it with the toughest customers then roll it out to the mass users.

In his speech at the ringing of the closing bell for Nasdaq, CEO Jonathan Klamkin said this, “Today Nasdaq, Tomorrow the Universe”. Mic drop.

Atomera (ATOM) is my permanent FOMO (Fear Of Missing Out) stock. The technology has great promise. The time to implementation has been glacial. That is about to change and the market, with the stock up double from April’s lows, is starting to catch on to that reality.

In my opinion, there are two potential reasons one would invest in ATOM at this time. They are that the ST Micro relationship is progressing well or that another partnership is coming soon. Either one makes the company a winner; if both happen, it’s off to the races.

Regarding ST Micro, this is CEO Scott Bibaud from May 6’s earnings call; I find this quite compelling.

Our two teams are meeting together on a weekly basis as we push to get the best performance out of our efforts. Many different lots are in the fab with frequent test results indicating a clear path towards qualification. ST has not authorized me to provide additional insight into their schedule, though. One measure of ST’s regard for our technology is the interest we’ve seen from other groups within ST. Today, we are in active discussions with three other product areas in ST beyond Smart Power devices.

Each of these has the potential to lead to new licenses and future royalty streams. It’s clear that Atomera’s technology focus areas have excellent overlap with ST’s overall technology strategy and direction.

When ST Micro starts production, the revenues will likely take Atomera to cash flow positive immediately. The fact that other business units are exploring the technology demonstrates the efficacy and compelling results of MST. ST Micro alone could make ATOM a big company.

But, ST is not their only shot on goal. With a recent partnership announced with a major equipment manufacturer (I’m guessing it’s AMAT), the path to further license partners just got a whole lot smoother. I suggest one listen to the whole earnings call for a lot more detail on this but I’ll simply let Scott sum it up as he did so quite well.

The workload at Atomera has gotten to the point where we are actively recruiting for staff in our engineering team focused on transition to high volume production and in our sales and marketing team focused on closing deals. With applications developing momentum in so many areas, we believe it’s only a matter of time before Atomera becomes a technology licensing powerhouse within the semiconductor industry.

If that doesn’t sound like a company that is on the verge of big things, nothing ever will.

INmune Bio (INMB) is a consulting client so I’m very restricted in my ability to comment in a blog piece. So, I’ll just quote CEO RJ Tesi from the recent earnings call and readers can draw their own conclusions. This is my biggest personal investment ever, by far.

We remain on track for this process [the phase 2 MINDFul Alzheimer’s Disease trial] to be completed in mid-to-late June, and I can tell you we can hardly wait to see the fruits of our labors. This is a moment we’ve been anticipating for several years. We are confident we will report results that will change the care of patients with early Alzheimer’s disease.

enVVeno (NVNO)‘s technology has never really been in doubt in my mind. The numbers put up in their trials has been consistently excellent. The VenoValve is a very compelling proposition for an indication with millions of patients and zero approved competitive products. There’s a great chance for approval and eventually upwards of a billion dollars in annual revenue.

What has been the problem with NVNO is that medical devices are the red-headed stepchild of healthcare investments. Until their products are approved and generating sales, these companies get no respect. This is due to lack of great competitive barriers and lower (than pharma) margins. enVVeno is going to be the exception to that rule and that’s what makes this investment compelling.

Other companies have tried to develop competitive products in CVI and, as of yet, none have had any success. enVVeno will own this market. And, since that’s the case, their margins will be outstanding. A few years from now, this company will (if it’s not acquired prior, which I highly suspect will happen) be worth several billion dollars. Just a few weeks ago it was trading below $50M market cap and just around their cash level. That’s just insane.

As I said earlier, these stocks are starting to perform well. How have they done year to date? ALMU is up over 70%, INMB up almost 50% and NVNO up over 20%.

ATOM is the YTD exception, trading down 44% however that’s deceptive…the stock is up 100% in the last month and up 150% since October. It just made a massive distorting run into year-end which accounts for the YTD lag.

The run ATOM made from October through January 6th was roughly 600%. That on potential news. Now, admittedly, it was from a very low starting point, but one can easily see the potential if/when this company actually has transformative news.

That potential exists in all the companies mentioned. The upside is big. What I’m hoping to stress here is that the execution has been good and the likelihood of that upside being realized is increasing. With a terrible environment for several years, but great progress by the companies, the risk/reward is heavily skewed in our favor. Dubrovnik is the Pearl of the Adriatic. Excitingly, we have a string of potential pearls in the portfolio.

Update on the Russell 2000…

When last I wrote, I mistakenly said Atomera was at a level to stay in the R2K. I had forgotten that it was dropped out last year. Thus, it’s now a likely re-entrant to the index and, as such, should see greater demand. As should Aeluma, which is making a big R2K run and, with a tight float, is likely to see the momentum continue.