There are times in the professional investment management business that we humbly sit back and scratch our heads when observing the workings of the market. The past six months may be the most vivid example of such a time. These times solidify our view that it is futile to try and outguess “the market” at any given moment, and that adherence to strict analysis of business is the best guide in determining where to allocate capital. During the fourth quarter of 2018, we watched many of our companies, the vast majority of which were doing very well in their respective businesses, see their stock prices drop significantly on very little volume in trading, displaying levels of volatility more appropriate to a time of impending or ongoing economic disaster. The first quarter of 2019 was all that in reverse.
The market is fickle. Basing decisions about capital allocation on it is hazardous to financial well-being. We just don’t do it, and it has served us well over the decades. And it appears we are in the minority, which is great for us, and even better for the clients we serve!
On that note, this is a perfect time to provide an update on the “narratives” that we think will drive business. We have determined there are three major areas of change which impact the business landscape, creating three broad categories which we examine and within which we build our narratives for investment decision. Those three broad categories are: Demographics, Technology and Business Processes.
Regarding Demographics, one of the oldest and most successful narratives we have used as the basis for investment decisions over the years involves the aging of the baby boom generation. In order to serve the healthcare needs of the baby boom, the sheer volume of baby boomers has made it very lucrative for medical device companies to develop innovative products to help baby boomers live a more active and productive life much further in age than their parents ever did. Current and former TFCM Core Growth companies such as Glaukos (glaucoma treatments), Mazor Robotics (robotic spinal surgery), and Resmed (sleep apnea treatment) have all seen great success.
The millennial generation has idiosyncrasies all of its own. For example, the “gig” economy is dominated by the millennials. The merits of the gig economy can certainly be debated, but the fact is, millennials are proving to be far more likely to “free-lance” -- witness the rise of Uber and other businesses that employ independent contractors far more readily than ever before. This is changing how millennials interact with traditional financial services. For example, it is far more likely that millennials will not have a checking account. They use pre-paid cards and often pay one another using peer-to-peer services rather than with checks or cash. Companies like Green Dot (banking as a service) are providing the tools to companies who offer such payment terms to millennials. This is just one of the millennial narratives, but it is clearly distinct from the way the baby boom generation interacts with financial services companies and traditional banks.
In the technology world, “cloud computing” has in many ways changed the way businesses operate and structure their technology needs. But now, the cloud concept is no longer the new phenomenon. While there continues to be a significant opportunity both for companies who transition to the cloud and for the companies that provide cloud services, the cloud itself is evolving. We believe the coming years will see a proliferation of a phenomenon known as the “edge cloud,” in which data-center functions move to the edge of the network as more and more devices that require very low latency come on-line. The “Internet of Things” (IoT) has become a buzzword that in some ways has been over-used, but whether it is autonomous vehicles or sensors built into an airplane engine to alert of dangers before they happen, the need for edge cloud capability is growing fast. Companies such as ASOCS, Ltd. (mobile edge clouds), QuickLogic (extremely low-power, “always-on” processing), and Nvidia (high performance graphic processing) may all be positioned to benefit from this transition to the edge.
Business processes are being affected by many of the technology narratives as well, so there is a “cross-over” aspect between these three major narrative categories or “schemas.” Companies are finding it necessary to adapt to all of the technological changes that been taking place at breakneck speed in recent years. As such, companies like EPAM Systems (IT consulting), NV5 Global (outsourced engineering), FactSet Data Services (financial software/databases) and Zuora (subscription services software) are all aiding businesses as they strive to compete.
These are just a few of many narratives, and the themes that drive those narratives, which we are currently pursuing. The most important point in all of this is that the moves in the market prices of our companies are somewhat irrelevant within any brief snapshot in time. Getting these larger narratives right is far more important, and the focus on the narratives is what has allowed us to simply ignore the market and spend our energy researching the companies that we think fit those stories. Stay tuned as we charge forward!
Disclosures: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Taylor Frigon Capital Management LLC (“Taylor Frigon”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Taylor Frigon. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Taylor Frigon is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Taylor Frigon’s current written disclosure Brochure discussing our advisory services and fees is available upon request. If you are a Taylor Frigon client, please remember to contact Taylor Frigon, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.