Sunday, February 4, 2018

Atomera and Moore's Law

Tiny, unheard of Atomera (ATOM) could be Act II of a really big high tech show. What was Act I? It was erbium doping, which revolutionized fiber optic high tech in the '90s. The growth of the network was hampered by lack of a clean way to amplify optical signals. You had to convert light speed down to a crawl at electron speed to amplify, then convert back to light. Then the erbium doped fiber amplifier or EDFA was born where glass fiber was doped with erbium allowing pure optical amplification. The rest is history.

Now high tech is up against another constraint where a similar invention is needed. When Intel put forth Moore's Law, it seemed it would go on forever with transistors on a chip doubling every 18 months bringing down cost while improving performance. It's debated, but 50 years later, it may be coming up against physical boundaries that will change the industry.

As was noted recently in Barron's, Moore’s Law is “no longer a law in terms of the time frame” of improvement of chips, according to Scott Bibaud. “In 2012, the cost per transistor for the first time did not go down,” he observes, an ominous sign for the industry. Bibaud has served as Senior Vice President and General Manager of Altera’s Communications and Broadcast Division (later bought by Intel) and was chief of Mobile Platforms Group at Broadcom. In 2015, he took over as CEO at Atomera.

With Moore's Law in control, chip makers eagerly retooled the next generation smaller node, currently going from 20 nanometer to 14 nanometer. But with the Internet of Things (IOT) the wave of the future, they are not so eager. According to Bibaud:
“People are saying 28-nanometer will be useful for many years ... And 40-nanometer chips are big in the world of automotive chips and for the Internet of Things. We’ve even heard that the 130-nanometer node has the most new design starts of any node today for things like analog and sensor and power applications.”
So the new IOT chips place less demand on Moore's Law continuance as does Nvidia's approach of parallel processing in their GPU. When video and gaming took over a lot of our computer viewing, Nvidia invented, in 1999, a totally different processor (Graphics Processing Unit) that didn't need high transistor density because it dumped its workload into many hundreds of parallel paths that together put all the color blobs and motion on our screens. Since then, however, they have discovered that these processors are very good at concurrent number crunching, and they are teaching them to do a lot of what the old school, Moore's Law dependent chips were doing. For more on this, see my recent Forbes article "Why Moore's Law Now Favors Nvidia Over Intel."

But GPUs and IOT will never replace the ever advancing need for higher semi efficiency. The chip industry desperately needs some kind of big efficiency invention right now, like the fiber networks received in the '90s with the EDFA, giving ramped up performance on existing node designs, calming the costly panic into the next node. Atomera is poised to hand them just that. And they're doing it with some more doping of silica - oxygen this time instead of erbium. And they're doing it with the very same PhD that invented the erbium doping - Dr. Robert Mears, the founder of Atomera. In 2001, it was private and known as Mears Technologies.

In the 2016 annual report (when they went public) they open with:
"There is no manufacturing process as complicated as making a semiconductor chip ... In January we changed the name of our company to more accurately represent the advanced material science we are providing to the industry in an era when semiconductor advances are increasingly happening at the atomic level."
Mears is now the Chief Technical Officer of Atomera. He has an array of patents on his invention called MST (Mears Silicon Technology) that dopes a transistor with oxygen atoms in a way that dramatically improves electron flow. This allows several benefits like smartphones with 50% better battery use, but more importantly it provides "more than Moore" tooling and cost benefits to chip makers, per their website.

The strong link between Robert Mears' Act I and II is evident in Wikipedia's box summary for him. It simply reads "Born: England    Occupation: Physicist and engineer   Known for: Invented EDFA, founded Atomera   Notable work: EDFA, Mears Silicon Technology." If the oxygen doping does what the erbium doping did, ATOM is in for some big things.

I called Atomera "unheard of" but that's not entirely true. There is no analyst coverage yet, but there was the article in Barron's August 17, 2017 "Atomera Hopes To Make Money Solving The Breakdown Of Moore's Law" and a nice article at Seeking Alpha February 1, 2018 focusing on the Internet Of Things, the web connected device revolution now engulfing us.

Then there is the January 30, 2018 press release "Atomera Continues To Grow Customer Pipeline" that seems to have brought some attention and activated the stagnant stock, sending it up about 50% the following week in the face of a sharp market selloff. I have been long the stock since December at $4 and feel it is a growth item you hang onto until the thesis is altered.

This is a risky, pre-revenue, one trick pony with heavily patented oxygen doping being the only product offered. But the market may now be grappling with the possibility of a $67 million market cap company engaging some $3.5 billion of addressable market.

In the Barron's article of late 2017, Bibaud said Atomera is “very well capitalized,” with “almost three years of burn left” in terms of cash on hand. If you look at cash and equivalents at end of the first public year, 2016, it was $26.7 million. By end of 2017, it was $17.4 million - a burn rate of $9.3 million per annum. So that suggests something more like two years of burn left before a dilution may be called on. But they seem poised to either start signing lucrative licence agreements (or start getting rejected) well before two years have elapsed. And they are not in any kind of debt trouble reporting debt and lease level at zero. In the latest quarter reported 5/3/18 they report:

  • Grew the number of customers in Phase III Integration by 50% to nine
  • Initiated first customer multi-process evaluations
  • 17 engagements underway with 14 customers
  • Completed Atomera's first installation of MST technology at a customer fab

From the Barron's article, quoting Scott Bibaud, Atomera CEO:
“I don’t know if I can quantify the degree of confidence I have in their signing,” he says, “but they are spending a lot of money in evaluation, it’s quite expensive,” suggesting that they wouldn’t be doing so only to end up walking away.

Atomera, with just under 20 employees at the moment, is currently staffing up because “we’re bringing in a lot of new customers” in the evaluation stage.
In August, when this piece was done, Atomera had four customers in the evaluation stage. Now they have 14 per the January 30 news release, representing about 50% of the biggest semiconductor companies in the world.

My bullish thesis would change, of course, if the first customer decision was a "no" as they seem likely to accept or reject the technology as a group.

Wednesday, December 27, 2017

My Two Cents On Bitcoin

Everybody and their dog is buzzing about Bitcoin, whether they're investing analysts or not. So I'll toss in my two pennies. Like most everybody, I thought it was a bizarre scheme when I first became aware of it. I hadn't heard of blockchain though, and the two are different animals. Blockchain is the enabling technology for cryto-currenies, but likely will be the enabling technology for all the business world of the future. It's just making its debut into our consciousness with a screwball thing like Bitcoin.

There is a school of thought that goes like this, "Blockchain is to value now as the internet was to information in 1995". By "value" is meant any business transaction where green visor humans push pencils to update everyone's ledger in a brick and mortar unit. They may push some of these results onto the internet, but the "unit" is now becoming the block in blockchains on the 'net.

As an article from back in June in explains:
Venture capitalist William Mougayar calls blockchain “the second significant overlay on the internet, just as the web was the first layer back in 1990”. When most people think of blockchain, Bitcoin instantly comes to mind. But the potential that excites Mougayar and many others goes far beyond financial transactions made using such digital currencies. It touches on what we at Ripple have for many years called “the Internet of Value.” ...
In the US, a typical international payment takes 3-5 days to settle, has an error rate of at least 5% and an average cost of $42. Worldwide, there are $180 trillion worth of cross-border payments made every year, with a combined cost of more than $1.7 trillion a year.
This is archaic when we have something like the internet. Of course the first thing that comes to mind with this is security of all that value online. But the internet nerds claim blockchain itself has never been hacked is not hackable. The "on ramps" have all the normal problems such as lost or hacked passwords, thumbdrives and so on. But the blockchain itself is said to be an advancement in security.

But anyway, back to the Bitcoin craze. It is less predictable whether crpto-currency will be a standard in the future as blockchain will probably be. I am getting the impression that Bitcoin is now dragging the budding blockchain stocks around with it and thus making them a danger. I had three blockchain tech stocks in the fund, but they had run so much, two more than doubling, that I've parked them on the sidelines for now.  I'm a believer in blockchain, but I just don't know about crypto.

Bitcoin itself appears to me to be at a precarious technical juncture. I say "technical" because there appears to be no way to value Bitcoin fundamentally. About the closest thing to such a valuation I've seen is given by an article from The Economic Times  titled "Bitcoin: This One Factor Could Tell How Far Bitcoin Will Plunge". The idea is to value the Bitcoin price by the value of bitcoin transactions - by how much it is actually used as a medium of exchange. As the following graph from the article shows, this value gauge has grown in close proximity to the price, up until about a month ago.

I have added an estimate of what this transaction value has been since 12/20/17, where the graph stops, from the total number of transactions from the running total at, which assumes the value per transaction has stayed about the same and the processing flow has been operating OK.
The graph suggests the price of Bitcoin has overheated and is due for a cool down. This agrees with convention technical behavior in that the price action seems bent on forming a classic head and shoulders top way up there above its "value":

The price action seems like it's stalling around the shoulder area of $15000 to $17000, which would complete the right shoulder of a major top. I like the blockchain enablers, the real ones, not just the jokers with no credible history of running a business who are slapping on a "blockchain" hat to jump their stock. But I am going to wait until Bitcoin works its way out of this sticky wicket one way or the other before dabbling with blockchain anymore. The good stocks here may be a lot like the good networking stocks of 1995.

Sunday, November 12, 2017

The New Xoma - A Modified Risk Way Of Investing In The Genetic Era

You may have heard that this year's Nobel Prize in Physiology or Medicine went to Jeffery Hall, Michael Rosbash, and Michael Young for their work in unraveling the workings of our body's daily clock - the circadian rhythm. You may not think too much about partying all night or getting up at 2 am for work, but your body thinks about it plenty. We know that the 24 hour light/dark cycle effects our chemistry and health, but they have found that plant leaves, for example, can open up and close even when put in complete dark - controlled not by light, but by genes.

As explained in the Biotechin.Asia report on the Nobel Prize, it's the genes that the prize winners solved to advance our understanding of the clock. This years Nobel Prize reflects the genetic revolution I wrote an article about. I called it "Insider Wisdom And The New Medicine". There is a revolution going on in medicine and it could usher in a whole new array of effective, more palatable therapy. But how do you invest safely in something this new? The genetic developers are typically tiny upstart companies going into a sea of red to put drugs through clinical trials for FDA approval. But only about one of 10 ever gets approved and the casualty rate of these stocks is high. You can own stock in the large biopharmas that are now more than ever tending to collaborate with the more promising candidates of the small caps, and often buy them out. This is lower risk, but you would likely be better off with a biotech ETF.

If you want to venture into the topsy turvy arena of the genetic revolution with the smaller companies, there is another choice now developing that offers much higher return. The Ligand "model" is what it's often called and Ligand Pharmaceuticals is the first to decisively go down this road. A Forbes 2015 article details this nicely. Up until 2008, Ligand had been swinging the trials bat with no earnings home runs to show for it. As the Forbes piece relates:
On his first day as chief executive of Ligand Pharmaceuticals in January 2007, John Higgins was shown into a conference room in the biotech firm's 135,000-square-foot San Diego headquarters. Inside was a table so mammoth, Higgins recalls, "you could practically land a corporate jet on it." 
The new CEO immediately instructed the head of facilities to find a carpenter and cut it up into smaller tables. Higgins wasn't some scientist-turned-empire builder trying to make Ligand into the next Amgen or Genentech. He was a hit man, brought in amid a raid by activist Daniel Loeb of Third Point LLC to stem the losses at the once-promising biotech firm and turn whatever was left into quick cash. 
What was left was an array of promising medicine needing big money for trials. Higgins started his hit by slashing Ligand's workforce from 365 down to around 20, where it is today. You could say he turned Ligand into the Wal-Mart of biotech. He proceeded to "farm out" Ligand's better prospects to the big companies with what you hear so much of today - royalty agreements, milestone payments on successful trials, and other high volume, less-than-home-run reward. The Higgins philosophy:
... no matter how many Nobel Prize-winning scientists you put on your advisory staff, there's no certainty your decision making about a drug will be right ... He's rebuilt the company along lines that would make a Texas wildcatter proud: spreading bets and relying on other people's money to find winners
I won't recount the results of this "hit man" other than to say they were extremely successful. After turning EBITDA positive, cash flow climbed like a clock from $2 million in 2012 to 60 million current TTM. The stock had swooned from a speculative $140 in 2004 to around $8 in 2010, when the Higgins plan took hold. It's now a cash flow rich $143 . As the article summed it up:
No question Higgins has wrung the romance of biotech right out of Ligand. But there's also no question he's made it Loeb-proof. There's nothing left for a takeover artist to cut. "No other biotech has this story," Higgins says. "No other biotech with success could show a flat expense line."
OK, so you've missed the train on Ligand. But there is another train boarding - Xoma Corp (XOMA). About three years after Higgins first took his seat at the much smaller tables at Ligand, Xoma began adopting this same business model. From a 2010 write-up in Wikenvest:
XOMA has evolved into a sort of research and development outsourcing company." 
But they didn't decisively ditch the old model until 2015, when disaster struck. A failed Phase III endpoint smashed the stock down from around $100 to the mid-teens in a day. The stock has been in this doghouse ever since, until now. Ironically, it was the same Gevokizumab that ran the stock up recently when it was announced it was being farmed out to Novartis for development against other things. It's a versatile monoclonal antibody, what the "mab" stands for at the end of the drug name.
This model switch is drawing some attention as seen by the massive upgrade in Barron's in September:
We are upgrading our rating on Xoma to Outperform from Neutral and increasing our 12-month price target to $19 from $9. 
We drew a line in the sand requiring a deal to validate the new business model of lean operating expenses and licensing revenues and Xoma (ticker: XOMA) delivered. So we are upgrading and increasing our price target to include potential royalties on gevokizumab and canakinumab for cardiovascular-disease sales.
In my insiders and genetic medicine article linked above, I detail why the Baker Brothers are perhaps the savviest insiders in medicine to pay attention to. The Bakers had XOMA as one of their small, select handful of mega-weighted stocks until the 2015 disaster, when they abandoned ship. But this was heavy validation of their basic concept and pipeline, as is the major corroboration now with Novartis. Genetically programmed antibodies are a major Baker interest.

The similarity between XOMA and LGND is being noticed by biotech pundits, but Xoma has a long hill to climb to be as successful with this as Ligand. However, if they continue to progress, they will inevitably command the kind of "royalty premium" that Ligand now enjoys - a five year average multiple on its revenue of 22! Adjusting Xoma's current 4 multiple to Ligand's current 27 implies another six fold increase in the stock, not even counting future revenue growth.

They reported their quarter Nov. 6 and it was a crazy, massive beat. As for their press releases, I find the latest one listed at their website from October 4 interesting. It's titled "XOMA Announces Multiple New License Agreements For Proprietary Phage Display Libraries." Phage displays are cataloged antibody configurations that apparently can be "looked up" to match the profile of specific disorders being worked on. The US National Library of Medicine, has a section called "Phage Display - A Powerful Technique For Immunotherapy" and Xoma is a major trafficker in phage display, claiming in the press release, "XOMA's premier antibody discovery platform includes three phage display libraries, which are among the largest in the world."

Thursday, August 17, 2017

The Cheapest FANG Stock You Never Heard Of

Tired of overthinking and overpaying for the modern growth phenomena that is FANG? Afraid the next tech wreck will wreck your portfolio? Don't want to be at the mercy of a FANG member hiccup in results at these high multiples? There are FANG support stocks that are levered to this growth beast, but about all of them are well known and suffer the same over-buzzed and over-owned problems as the Fab Four. Well if you want a new, hot performing, very under-the-radar, pick-and-shovel play for FANG that's been around for over 20 years with no debt and no dilution, keep reading. It has been growing results faster than any of the FANG members the last three years, and is currently at a 1.6 multiple on sales, a 3.9 multiple on cash flow, and a TTM PE of 4.

I speak of Network-1 Technologies, Inc. (NTIP) and they chase no subscriber base, have no cost of advertising (which is one reason you've never heard of them) and have been turning roughly half their sales into EBITDA. You see, the big players (Samsung, Google, Facebook, Apple, et al) come to them for permission to play. They are a tiny $100 million market cap David that owns a wide assortment critical patents at the heart of every Goliath Amazon and Amazon want-to-be.

The Long History Of This Company

They didn't start out doing patents. They were formed in 1990 selling "prepackaged software" as their SEC business classification stated, mainly security firewalls under the name "Network-1 Security Solutions" with the ticker NSSI, going public in 1998. They are still listed by the SEC as "prepackaged software" but they are into a whole new thing business-wise.

In April, 2004 reporting 2003 results, they stated the change in focus of the company:
Network-1 discontinued its software product offering in December 2002. In November 2003 Network-1 commenced a new business consisting of the acquisition, development, licensing and protection of its intellectual property which currently consists of a portfolio of telecommunications and data networking patents. In February 2004, the Company initiated its licensing efforts relating to its patent (U.S. Patent No. 6,218,930) covering the remote delivery of power over Ethernet cables (the "Remote Power Patent"). 
Al Gore's claim about inventing the internet comes to mind, only these guys can actually claim a facsimile of that honor. So what about this pipe dream of a tiny band of highwaymen erecting a toll booth to collect patent usage bounty from FANG?  How has this worked out in real life?

There was a 2000% rise in the stock after the business model switch. But to be fair, it was from 2003, when the dot bomb had flattened the stock to near zero. As security software peddlers, their results were consistently pathetic, typically loosing over five times their sales in loss from continuing operations.

So the math had to be impressive if they just survived, and they did. What strikes me about this chart is that, after the gleam in speculators' eyes went away in 2000, the stock went into a 15 year base, and even with results now that are what the internet speculators were dreaming of in 2000 without a dime of cash flow, the stock is just barely poking its nose out of the base with a PE of 4 with no fan far. But the base breakage is accompanied by a massive increase in volume, and the ownership appears to be extremely stronghanded as evidenced by the near zero reaction by the stock to the sharp, broad selloff of early 2016. All this suggests there is much more to come.

It's also interesting in this chart that the company seemed to know that much better things would be happening soon in 2011, when they initiated their stock buyback program, and again 2014, when they uplisted their stock from OTCBB to the NYSE.

The Genius Behind The Big Change - Corey M. Horowitz

Horowitz was Chairman of the Board starting in 1996 before becoming CEO with the new vision. The November, 2003 launch of the patent business coincides with the December, 2003 start of the role of a this legal genius as CEO. He is the guiding inspiration for spotting the key patents, working deals with the inventors to monetize their work on the big stage with royalties to the inventors and licensing revenue from the big fish. It's like Shark Tank in reverse with the sharks being in the hot seat. I say "legal genius" not because he has a law degree, but because his gang, consisting of a handful employees, has been drawing the likes of Apple, Cisco, and Google, with their armies of lawyers, into court to get patent rights squared away - and winning. Legal fees are a big expense for the company. In Bloomberg's profile of Horowitz, they allude to his talent:
Mr. Horowitz was an early stage investor in Network 1 and helped transform that company into an award-winning distributed firewall vendor prior to its being taken public in 1998 ...  In 2003, as Chairman, Mr. Horowitz supervised the winding down of operations, sale of the product suite and the development of alternative business opportunities. Since 2004, he served as the Chief Executive Officer and transformed the company into a business specializing in the licensing and enforcement of intellectual property, resulting in a 25 fold appreciation in its stock price
Horowitz puts his money where his genius is, owning roughly a third of the shares. I like it when founding individuals own this kind of interest.

You can find almost nothing written or said about this company. Jeff Marston did a nice article at Seeking Alpha back in March, "Network-1 Technologies: Catalysts On The Horizon" where he explains the patent portfolio status.  And an earlier PRO article by Tom Shaughnessy from March, 2015 "Network-1 Techologies: An Undiscovered Cash Rich Company ..." discusses the patents. In lieu of the debt or dilution you'd fear with a 'net nanocap, this outfit had, as of March, 2015, laid claim to about $12 M in share buybacks on a market cap of $56M.  That's 21% of the company grabbed by the company. They now have roughly $50 M in cash and a current ratio of 22. As Shaughnessy stated:
NTIP is a uniquely financially strong microcap company which positively differentiates it from other microcaps in the space.
Is this the same company that was losing over five times their sales and needing over $40 M in paid in capital to survive in the tech boom? I think they've made a wise change in direction.  It's not that this patent brokering thing is NTIP's invention. As Marston points out, there are others doing a similar thing: RPC Corp. (RPXC) Acacia Research Corp. (ACTG) Wi-Lan Inc. (WILN) and Marathon Patent Group Inc. (MARA). But they all have had negative or spotty results with it. They just don't seem to have the flare for this sort of thing that NTIP's Horowitz has.

The Challenging World Of Patent Litigation

How these court cases turn out is very topsy turvy and are a constant battle against the expiration of the patents. The Remote Power Patent that currently has a yearly revenue stream coming to NTIP from Cisco and others expires in 2020. But expirations don't necessarily mean no revenue. For example, there is the case of the Mirror Worlds patents. In 2013, NTIP bought some patents from this company that Apple was infringing on. This was after Mirror Worlds took Apple to court and lost. Steve Jobs realized the value of these patents, saying in a Supreme Court document:
"It may be something for our future, and we may want to secure a license ASAP".  Steve Jobs stated this after seeing a New York Times article that praised Mirror Worlds' new Scopeware product. Scopeware is Dr. Gelernter's (founder of Mirror Worlds) invention for a "document stream operating system and method".
Horowitz bought the patents and got a $25 M settlement from Apple last year even though the patent had just expired. It was more of a penalty awarded by the court for Apple's infringement in the past.
These retroactive awards can apply to patents in general. From Shaughnessy's article:
The Remote Power Patent's royalties are providing a viable stream of revenue, but they can grow. For example, there are 11 infringers who have the potential to owe back damages and future royalty payments. 
NTIP can't rest on their laurels of impressive court wins (batting 1.000 so far) because patents expire and many court wins are one time settlements. They must keep a stream of license revenue and court awards coming, and they seem to be about that with actions beginning with Google and Facebook. But the future of NTIP's revenue is far from an open and shut case. The major risk with this company is the changing legal landscape for IP (Intellectual property) litigation. No one is more aware of that than Horowitz himself.

In a 2015 interview with "The Patent Investor" Horowitz predicted the massive surge in NTIP's results the following two years, but revealed some angst over the future of this patent business model:
“In the next two years, we’re going to wind up with a lot of cash on our balance sheet and then we’ll have to decide what to do next.”
For his part, Horowitz said whether he makes additional patent portfolio purchases will depend on whether the patent market gets better.
Over the past 10 years, patent holder rights have been steadily eroded by a series of court rulings that have taken away injunctive relief, reduced damages and done away with software as a patentable subject matter. In addition, the America Invents Act also established the IPR and CBM review process to give infringers an inexpensive and time-saving tool to invalidate weak patents.
“Patent holder rights have been eviscerated over the past few years and innovation in this country’s been harmed. Ambulance chasers ruined it. I’m negative on the patent business because the game keeps changing, the rules keep changing. That’s not a business for a public company.”

What Is The Attitude Of Horowitz Now, Two Years Later?

Since that discouraging word from Horowitz, the court wins have continued for Network-1, and there seems to be debate around the pendulum swinging back to patent holder rights as conveyed in this coverage of the 2016 NPE conference, attended by Horowitz:
The prevailing mood among the CEOs set a particularly sombre tone for the rest of the event. It was by no means shared by all panelists and delegates (which this blog will follow up on tomorrow), but it did contradict the claims that the pendulum is starting to swing back to stronger patent rights in the US.

As one delegate put it: “The talk at last year’s event was about turning a corner, well it’s proving to be a pretty long corner.” The reality is that while the licensing climate might be improving for some patent owners, for many NPEs it remains very challenging. If the pendulum is moving back towards the centre, it’s not taking everyone with it.
If frivolous lawsuit squashing vs patent rights is indeed a pendulum in history, we seem to be coming off a swing to the squashing, anti-patent end, a swing in which Network-1 has managed to make big hay anyway. The America Invents Act that went into effect in 2013 is generally seen as making life harder for the small inventor. The main reason for this is that it changes patent rights from first-to-invent to first-to-file. Before 2013, if you filed for a patent, someone could come along later claiming they came up with the idea first, thoroughly prove it with documentation, and steal your patent. After 2013, a patent is yours if you filed it first. This puts a lot of pressure on inventors to file before they're ready or before they pay for attorneys, giving a big advantage to bigger companies over lone wolf inventors.

To further aggravate patent rights, the US Supreme Court ruled just this May that patent court cases must be held in the district where the alleged infringement took place. This basically scatters cases away from the knowledgeable patent "specialists" of the Eastern Texas District, where some 39% of all patent cases are held and strong patent rights can be expected.

This would all seem to hurt NTIP until you think about it a little. The 2013 Act actually makes the Network-1 portfolio safer since they deal mainly with filed patents which they have paid for. The new laws prevent any of these patents from being stolen from them. It just makes it harder for those filing. Though they have been filing some patents lately with Professor Ingemar Cox as a consultant to Network-1, they are not in the business of trying to get things filed. And when they do file, they enjoy the advantages a cash rich company has over the others. As for the case location issue, Marston discusses this in his article, "What The Recent Supreme Court Decision Means For Network-1 Technologies". He points out that Network-1 has been filing in other districts, besides Eastern Texas, and they don't file a lot of frivolous lawsuits like a "patent troll" outfit does with a shotgun approach. Network-1 takes more of a smart bomb approach, doesn't go to court with weak patents and wins in any proper court.

Despite his moaning about eroding patent holder rights cited above from 2015, Horowitz is now very bullish on his stock. He still owns 33% of the shares and had this to say in a December, 2015 interview at The IP Dealmakers Forum:
“We are buying back our stock because we think it is attractive,” Horowitz said. “I have at least one trial, maybe two trials… I’m very optimistic about the next two to three years.”
He has since launched into some new litigation. And the company's rabid confidence as expressed by its stock repurchase program, initiated with $2 M worth in late 2011, continues unabated. In June, 2015, they announced another $2 M worth of approved buybacks with Horowtiz saying:
"We are pleased to announce another increase to our repurchase program to benefit shareholders at a time when we believe our stock is undervalued," said Corey M. Horowitz, Chairman and CEO of Network-1. "This, our fourth increase of our share repurchase program, reflects our confidence in the long-term potential for Network-1 and our commitment to increasing shareholder value," he added.
But he has gotten much bolder with the buybacks since then. In June, 2017, they announced another $5 M worth approved:
"We are pleased to announce another increase to our Share Repurchase Program to benefit shareholders at a time when we believe our stock is undervalued," said Corey M. Horowitz, Chairman and CEO of Network-1. "This, our fifth increase of our Share Repurchase Program, reflects our confidence in the long-term potential for Network-1 and our commitment to increasing shareholder value," he added.
This grab is aggressive:
permitting the Company to repurchase up to $5,000,000 of shares of its common stock over the next two years (for a total authorization since inception of the program of approximately $17,000,000). To date, the Company has repurchased an aggregate of 7,104,711 shares of its common stock under the Share Repurchase Program since inception of the program in August 2011 at an average price of $1.72 per share or an aggregate cost of approximately $12,214,110 (exclusive of commissions).
All this is on a market cap of just $98 M. They have bought 7.1 M shares compared to a present mutual fund ownership of 5.7 M shares (Morningstar figures). These are all huge numbers compared to a public float of only about 14 M shares. That's ultra piggish. It's almost like you're allowed to buy a private equity company while it's being made over for public consumption. If funds become very interested, it will move the stock needle. The company has been very right with their buyback buying since 2011 when their patent results began springing to life. Now they are more aggressive then ever in these buybacks. As Shaughnessy said in his article from 2015, before the massive $5 M increase this year:
We would be hard pressed to find a microcap company of this size with a comparable repurchase program.

The Patents

I don't want to go into a detailed discussion of all the patents here. Marston and Shaughnessy cover this in their articles linked above, and there is a very nice rundown of the patents on Network-1's website with up-to-date timelines on them. They presently own 28 altogether. I will however summarize the collection. These can be grouped into four batches - Power over Ethernet, Mirror Worlds, Content Monetization, and QoS.

Power over Ethernet  More commonly known as the Remote Power Patent, this is a technique where internet flows can be safely put over standard LAN lines in a local network without harming devices not able to take signal.  It has been subject to three litigations and has contributed $100 M in revenue from over 20 licencees. It expires in 2020. This summary suggests more revenue may be due once the rest of the defendents are found guilty:
So that means Network-1 has now reached settlement and license agreements with twelve of the original sixteen defendants for the licensing of its Remote Power Patent. The remaining four defendants are Avaya Inc., AXIS Communications Inc., Hewlett-Packard Company, and Juniper Networks, Inc. The litigation is currently scheduled for trial in 2017.
The patent was invented by Boris Katzenberg, who was active in the IEEE Task Force that developed the second generation Power Over Ethernet standard.

Mirror Worlds  This small company patented "technologies that enable unified search and indexing, displaying, and archiving of documents in a computer system" resulting from work in the mid 1990s (before the internet) and were later widely used in web based systems. Mirror Worlds took Apple to court and won a $208 M verdict that was not awarded due to a procedural technicality. Per Network-1's website, "Working with Dr. Gelernter, Network-1 acquired the Mirror Worlds portfolio in May 2013. Network-1 believed that under the facts of the previous case, Apple still was obligated to pursue a fair licensing agreement. Network-1 filed a patent infringement action against Apple and Microsoft on May 23, 2013." Last year, they won a $25 M settlement from Apple and $5 from Microsoft.  On May 10, 2017, Mirror Worlds, now a wholly owned subsidiary of Network-1, announced commencement of litigation against Facebook.

The patent was invented by Professor David Gelernter. He wrote a popular book titled Mirror Worlds: or the Day Software Puts the Universe in a Shoebox in 1991. It was a look into the coming of the internet. The above Facebook announcement from noted just how prescient Gelernter was with his amazing book:
As reported in The Economist, "Dr. Gelernter foresaw how computers would be woven into the fabric of everyday life. In his book 'Mirror Worlds,' published in 1991, he accurately described websites, blogging, virtual reality, streaming video, tablet computers, e-books, search engines and internet telephony. More importantly, he anticipated the consequences all this would have on the nature of social interaction, describing distributed online communities that work just as Facebook and Twitter do today."
Content Monetization  Otherwise know as the Cox patents, they were "12 issued patents that relate to identifying or tagging uploaded media content and taking business actions based on the identification" as the website puts it. In 2013 Network-1 bought the patents and is filing for more based on the original patents. In 2014, they began proceedings against Google, specifically against their subsidiary, YouTube, alleging they use this technology without a license. One has to wonder how many more are using it. In June, 2016, the Patent Trial and Appeals Board upheld the patentability of 119 of the 129 claims. Another objection raised by YouTube, Covered Business Method, was reviewed and ruled in favor of Network-1 in October, 2016.

These patents were invented by Professor Ingemar Cox from the University of Copenhagen. He was at Bell Labs and NEC Research Institute, holding over 40 US patents.

QoS  Then there are some "QoS" (Quality of Service) patents they've stashed away and are holding close to the vest for now.


There were several IP companies present at the IP Dealmakers Forum mentioned above, and they agreed that they shouldn't be judged like most companies by quarterly results as patent cases are not a smooth ride. It is difficult, in fact pointless, to project court awards into revenue. But judging from the "near miss" $208 M judgment scuttled by a technicality in one of the cases above, there appears to be even bigger money to be made with these internet defining patents than what Network-1 has done so far. The stock is not pricing any of this in. It is a fascinating speculation with a PE of 4. Network-1 keeps making precision forays into court and bringing home the bacon to inventors and shareholders.

Sunday, June 25, 2017

What Does The Swooning Commodity Index Of 2017 Mean For Gold Miners ?

If you haven't noticed, commodities are diving badly this year:

Commodities are consumed by a healthy economy, and dives like this can come before overall downturns. Gold is a commodity that historically is thought to be correlated with the CRB Index. Commodities soared along with gold in the 1970s as capital flowed into hard assets, away from a bad economy. This is all very confusing. So does the bad CRB behavior of late bode ill for gold and the miners now?

Well, if you compare gold and the CRB index over various time frames, you see a somewhat loose correlation. Sometimes they move together, sometimes they don't. But there is one thing the CRB is correlated with much more than gold, and that's oil.

Here we see a broader two year view of the CRB and oil and they look like the very same chart. Since the 2005 massive revision to the CRB index, it mainly does whatever oil does. This oil correlation of the CRB is much tighter than with gold or anything else. The energy complex is about 40% of raw index weighting, but because of the new arithmetic averaging, and oil being much more volatile than most other index components, the CRB winds up being pretty much just the oil chart.

So the real question is "What does swooning oil mean for gold miners? If we look at the year 2001, we have a comparable period where the CRB, much less slaved to oil back then, was also diving like it is this year, and the price of gold wasn't doing much:

Even back then, they were essentially the same chart. Did the gold miners, lacking any clear guidance from the gold price, follow the horrible CRB chart back then?:

Not really. Here, the miners as represented by the HUI index, did not have a bad year with the commodity dive. The gold price ended the year about right where it started, yet the gold miners did a stunning 60% return. And oil, not gold, was probably a big reason why. Gold mines are some of the biggest energy hogs on earth and when oil goes down, gold mining profits go up. You can't be quite that simplistic as gold stocks have a way of anticipating what the prices of both their product and their inputs are going to be. The gold price was beginning its long ascent the next year in 2002 and the stocks were perhaps getting wind of that. And they seemed to be a few months ahead of oil as well. But by and large, other things being equal, gold mining has a strong inverse relation with oil.

When thinking about the energy costs of gold mining, you first consider the monster trucks, bigger than your house, that carry the ore at 0.3 mpg. This is a big part of it as this article shows, giving us this chart of the climbing diesel use for the top five gold miners:

Because the higher ore grades are mined first, the declining grades mean much more rock processed to produce the same amount of gold. This has run diesel usage to a 100% increase the last 10 years producing about the same amount of gold. But the trucking is just a part of overall energy usage. Overall, gold mining is the second most energy intensive product in the world as this British engineering report shows:

Gold is literally off the charts as the arrow points to on this log scale (9000 pound sterling/kg and 6000 Megajoules/kg) and that makes sense when you consider that, as they explain:
Gold is a precious metal which can be sold for a very high price; this means that more energy can be spent in extracting it by mining rocks containing only a small fraction of gold
So they can tolerate a whole bunch of digging and energy use. This is why gold miners typically have total energy cost run roughly a third of their total cost of operation, their biggest single expense. If gold is the second most energy intensive, what is #1? It's diamond mining with many times the energy usage of gold.

Also in the expensive quarter of the above graph is all the metals that makeup the miner's massive equipment. A big chunk of what they don't spend on energy goes to buy and maintain their monster machines. Deflation is good for gold miners. Either inflation or deflation can accompany gold miner climbs as long as currency-in-the-bank is being threatened, as I discussed here. This was the case in the 1920s and '30s when the price of everything went way down, banks failed at record rates, and the gold miners were in massive climbs, both before and after the stock market crash.

As I've written before several times, I think oil will stay moderately priced ($40-$60) for a couple years at least as the shale overcapacity is gradually worked off. Gold miners did exceedingly well in gold's run to $1900 in 2011 on $100 plus oil. If we get a next bull phase for the gold price, they could do vastly better on oil at half that price. That's exactly what happened in last year's mini run up in gold. In 2009-2011, gold climbed 110% with the HUI doing 100%. In 2016, gold climbed just 28%, but the HUI blitzed for 155%. Gold CEOs will be cheering for the "horrible" CRB charts shown above and shale will be the gold miners' new best friend.

Saturday, June 17, 2017

Fed Rate Hikes - The Best Algorithm For Predicting Gold Upside

As nearly the whole world knows, higher interest rates are gold investing's worst enemy. As Warren Buffett has explained, gold is something where we pay to dig it up, we pay to put it away, we pay people to stand around and guard it, and all the while it produces no goods, pays us no dividend or gives us any interest. Well, Warren, if you take the trouble to closely examine the history of Federal Reserve raises in interest rates and gold, you got some more 'splainin to do!

If you look at what happened in the 1970's gold bull market, you see that the more gold had to compete with interest bearing investment, the better it did. In fact, there was a very close, positive correlation between the two:

These were the most extreme US interest rates of all time running to well over 10% and dwarfing our current numbers. Yet they did not kill the gold bull back then. Indeed, they seemingly waved a red cape in its face.

The 70s rate cycle was not an isolated case in its correlation with gold.  Adam Hamilton presents a detailed history of this in his article this week. He notes:
Before today’s rate-hike cycle was born in mid-December 2015, the Fed had executed fully 11 rate-hike cycles since 1971. Those are defined as 3 or more consecutive FFR increases by the FOMC with no interrupting decreases. Our current rate-hike cycle to which the Fed added a fourth hike this week is the 12th of the modern era, certainly nothing new. So there’s a substantial rate-hike dataset to evaluate gold’s action.
He notes that the average reaction of gold during all 11 previous rate ramp-ups is a climb of 27% including the most recent cycle (2004 - 2006) where rates were aggressively quintupled and gold reacted with a 50% climb over that time. If you are an investor with the mindset that rising rates is a reason to sell or avoid gold, you need to read Adam's article. He points out that our present rate hike cycle is playing out as in the past:

If you look at the four rate raises so far in our current cycle, we see that you are hard pressed to find a guru or algo that predicts gold climbs any better. If you were a newsletter with this track record, you could sell a zillion subscriptions. Note that the arrows all fall on an ascending trend since the first one in late 2015. As the above chart shows, there is typically a decline in gold leading into a much talked about FOMC meeting where everyone has come to expect a rate increase. This weakness also lasts a couple weeks or so after the fact, then a vigorous climb ensues.

Because we have just had a rate increase June 14, that would schedule our current gold weakness into July, which also agrees with many wave counters and technical analysts who are saying July/August is going to be a major bottom. It also agrees with the simple up-trending channel in the above chart that would put a visit to the bottom at about $1220-$1240, probably in July/August. It also agrees quite nicely with my fractal argument presented here. But these rate hikes can also send gold straight into a tizzy as it did the last time in March. So waiting for a bottom could leave you chasing any new exposure you want.

But why would gold, with no interest return and even a cost of storage for physical ownership, behave in such a counter-intuitive way? Is this just to punish investors who try to think logically, Mr. Market's specialty? Hamilton makes the point that these rate changes are well telegraphed. The Fed doesn't like to roil markets, so they don't like to move unless at least 70% in the polling expect them to. So you could have a longer term fundamental working in the background pressuring gold higher while the buy-the-rumor-sell-the-news effect works in the short-term around the Fed meetings.

What could that longer term fundamental be? Well, I don't really know with any certainty. But I suspect it is the age old thing about gold being an alternative currency. Fed rate raising cycles always come after they have done some kind of financial rigging, and that always somehow lessens the soundness of the dollar. It also undermines the natural viability of the economy.

As I discussed in "Fractal And Fundamental Gurus Agreeing On A Gold Mega-Bull" gold has a long history of going into bull phases, along with the stock market, years ahead of some calamity involving dollars in the bank. This was true in the 1920s when the banks were the problem, it was true in the 1960s when a gold decoupling with the dollar and double digit inflation approaching made the dollars the problem. And it is probably true now with some kind of dollars-in-the-bank problem approaching.

You can only speculate on what the gold market may be seeing. But with the European banks on shaky ground and linked to all banks no matter how healthy, you could say it's the banks. And with the dollar's soundness continuing its decay as the world's reserve currency, you could say it's the dollars. There are plenty of problems to choose from. Let's hope the problems are fixed before they get here. But a gold hedge would be in order in the mean time.

Tuesday, June 13, 2017

The FANG Gang Is Challenging The Ascending Wedge

As we all wonder what to do with the mini "tech wreck" that is upon us, it is helpful to step back and check the big technical picture of this group. The group could be defined as big cap growth, not necessarily tech, that has produced a handful of big growth superstars. These stock climbs will sometimes produce a technical condition known as the ascending wedge, which is bearish, and typically result in a trend change, either to a stagnation period or a protracted decline.

To illustrate, let's look at a good growth stock of the recent past that can seemingly do no wrong - Tractor Supply (TSCO), the specialty "recreational farming" supply retailer. If you have ever worked on a small farm like I have, you wonder why they call this "recreational". They have somehow escaped the Amazon squash with their results, but the stock went into a wedge and was squashed anyway:

What is especially bearish is when the A/D trend (upper graph) is broken in conjunction with a wedge. In TSCO's case the trend was blasted with the monster gap down move, and you had no chance to get out ahead of the damage. When this is more gradual, the warning should be heeded.

So where is the FANG gang in relation to the ascending wedge? Not in a good place:

Here we see Netflix earnestly tracing out a wedge, but the A/D trend is intact.

Google is also wedging but with no A/D problem. But stocks often break the wedge before they break the A/D trend, as TSCO did above.

An honorary FANG stock outside of tech is ULTA, the make-up and beauty supply growth beast. It is forming a wedge and also threatening an A/D breakdown as well.

Apple isn't forming a wedge, but it hasn't had much of a chance having broken out of a big downtrend just this year. But Facebook is:

And the leader of the gang:

Amazon's wedge is the most pressuring with a break imminent.  Does all this mean the FANG move is near an end? No, because ascending wedges do break to the upside as well. A case in point is Nvidia :

And another is Dave and Buster's:

But these are the exceptions, and it takes a lot of growth horsepower to break these to the upside, especially when they are proceeding at a valuation speed limit on a basic fundamental like their cash flow:

You can see from the above numbers (from Morningstar) that it took a jump to a 60 multiple on cash flow, not to mention the 13 on sales, for Nvidia to break its wedge to the upside, a rather extreme valuation for an established growth operation. Will all of FANG make this kind of jump? It's possible, but that would be a little crazy.

The large cap growth stocks are up against something of a valuation speed limit, and also up against a trend expiration limit as well. Big trends with wedge formations typically break up before they go over five years or so, and the FANG types are in wedges pushing about four years now.

If this sector does breakup into sideways or moderate declines, it will likely be in conjunction with market leadership rotation into the other good performing but neglected areas, like the financials, especially the quality growth regional banks, materials, and the other bull market sectors.