New trends in American Markets:
Investing in Process and Service Optimized Companies
Letter from Joe Mangan, Managing Director
As many have seen, a tremendous bull run ended in dramatic fashion with COVID-19 appearing and quickly turning our everyday lives upside down. To add to the uncertainty, Saudi Arabia and Russia entered into an oil price war that has caused the market to react even more. Oil is trading much lower than the US based firms’ break-even point ($50-55/barrel), causing distress and potential for massive lay-offs in our oil industry. This can be slowed down or prevented if the US can help negotiate an end to the war between Saudi Arabia and Russia. Our team at Parabolic Financial Services, LLC will continue to provide updated data to our network of investors as the market tries to digest destroyed supply chains and changing demand for product and service in industries that led the US Markets to swell well above all-time highs. Investors must realize the market’s extreme volatility will run through cycles since it is now 80% traded by algorithms. These algorithms adjust momentum based on news and market sentiment in an astonishing fashion. In order for the market to return to effective stability, signs of the peak of the COVID-19 pandemic will need to start to set in.
Meanwhile, we desire to equip our network of investors with the ability to research potential investment ideas once the market starts to consolidate for future growth. It will be important to understand the changing business landscape and how it will affect future investments. Looking at the history of the past major market corrections and downturns, companies that are gaining traction and were already traded below their industry standard multiples value prior to the downturn tend to present very favorable ROI (Return on Investment) in the years to come. Business today is vastly different from even 10 years ago. The new technology era and emerging markets are rapidly replacing outdated corporate style operations.
The formation of the new Gig Economy where companies have an easier time finding contractors with the expertise needed to improve R&D and innovation is one example of the changing business landscape. This change has widely pressed the need for product diversification and customization which has taken over with the help of the latest technologies and the ease of locating expertise and qualified personnel. Big Data companies like Salesforce, Splunk, and Elastic provide information that allows for a more fine-tuned approach to investing in strategic product placement and optimized sales targeting to meet demand where it exists. Ease of access to a wider set of customers or strong targeted marketing through the Internet has allowed new entrants in industries that were considered mature and had high barriers of entry.
With business and technology continuing to evolve, how will your investments stack up against their direct and indirect competition? Parabolic Financial Services continues to compile data and research on companies who capitalize on this change in business. Below, we highlight trends and emerging markets that demonstrate strong opportunity for growth:
*Disclaimer: This letter does not suggest the companies’ stock prices constitute a buy at this given time. The market is extremely volatile with no timeline of when COVID-19 economic impacts will pass by. The current market has a very short-term outlook with supply chain and demand fluctuations that we have not seen before leading to extreme uncertainty.
- 3-D Printing
- Solar Energy
- Sustainable Systems
Highlighted companies: SolarEdge Inc (NASDAQ:SEDG), Materialise (NASDAQ:MTLS), Proto Labs (NYSE:PRLB), Invesco Global Clean Energy ETF (NYSE: PBD)
Artificial Intelligence (AI)
- Visual Design Applications
- System Optimization Tools
Highlighted companies: Microsoft (NASDAQ:MSFT), Verizon Wireless (NYSE:VZ)
- RNA Applications
- New Era of Vaccine Design
- Targeted Procedures Through Robotics
- Cancer Drugs
Highlighted companies: Moderna Therapeutics(NASDAQ:MRNA)
VBI Vaccines (NASDAQ:VBIV) Sellas Life Sciences (NASDAQ:SLS), Genprex Inc (NASDAQ:GNPX), and Oragenics (NYSE:OGEN)
*Disclaimer: Small Cap Biotech goes through extensive dilution through new share issuance. This industry carries extra risk due to heavy cash burn on Product R&D
- Big Data Capabilities
- Targeted Marketing Applications & Companies
Highlighted companies: Verizon Wireless (NYSE:VZ), Defiance Next Gen Connectivity (NYSE: FIVG), Ericsson (NASDAQ:ERIC), Global X Internet of Things ETF (NASDAQ:SNSR)
Internet of Things
- Subscription Based Services– replacing traditional jobs
Highlighted companies: Global X Internet of Things ETF (NASDAQ:SNSR), Teladoc Health (NYSE: TDOC), Salesforce (NYSE:CRM), Splunk Inc (NASDAQ:SPLK), and Elastic NV (NYSE: ESTC)
REITs (Real Estate Funds)
- Healthcare and Nursing Homes
- Airbnb Style Vacation Properties
Highlighted companies: Omega Healthcare (NYSE:OHI), Ventas(NYSE:VTR), LTC Properties (NYSE:LTC), Hersha Hospitality Trust (NYSE:HT)
Emerging Markets (lowering cost of basic US manufacturing processes)
Argentina, Brazil, China, India, Indonesia, Mexico, Poland, South Africa, South Korea, and Turkey
Companies not investing millions of dollars into many of the highlighted trends to create synergies will start to see their market share and customer base disappear. This article highlights some companies and funds that show promise through this trend. These Stocks and funds discussed are not an exhaustive list but provide insight into where you might start your research and which companies may provide a unique opportunity. My team and I are dedicated to continue innovating and providing valuable insights to anyone who crosses paths with us.
As we all navigate this trying time, do not forget the strength in numbers and in adherence to the guidelines provided by our nations which will allow us to overcome this pandemic.
Below this letter also provides a sample written report about SolarEdge below (Written in April 2019).
If you are interested in acquiring additional information on these particular companies please contact us through: [email protected]
Example PFS Short Report
SolarEdge (SEDG) a company headquartered out of Israel has grown to become one of the fastest up and coming solar companies. They previously only specialized in inverters but with a series of acquisitions, they now are poised to become a leader in rooftop solar electronics. Despite the limited markets, SolarEdge has been able to continually grow their free cash flow over the past 2 years. At year-end 2016 SolarEdge had $4 Million free cash flow but has increased to $117 Million as of the 2018 year-end. That is a 39x growth on free cash flow despite adding multiple M&As into the mix. SolarEdge closed 2018 at a gross margin of 34.06% but we expect a continued increase in 2019. FirstSolar is trading at a higher Price/Forward Earnings despite only having 17.48% gross margin. First Solar in 2017 was trading at a 46.95 and SolarEdge at 17.76. At year-end, Price/Forward earnings for First Solar were 16.95 while SolarEdge traded at a 10.71. SolarEdge has always traded well below industry comparables. The most recent low valuation can be attributed to their recent M&As that cause price retracement until realization of the mergers begin to happen.
Another aspect of SolarEdge’s advantages is that its inventory turnover has been very competitive in the industry. Over the past 3 years, SolarEdge has turned inventory every 5.02 days. At the same time, First Solar has been turning inventory every 6 days.
SolarEdge will continue to see growth through a set of very important mergers and acquisitions. The key acquisition to take account of is the purchase of South Korean battery maker Kokam. Kokam has 20 years of experience producing 80 different types of Lithium batteries. This vertical integration can be a catalyst for gaining a much larger market share. Getting batteries at cost will significantly lower their COGS. This realization will be seen drastically in their future earnings report.
Another important strategic move was the addition of new markets by adding both Kokam and SRAM to create a very important synergy as they plan on entering the EV space. “We are pleased to welcome SMRE to the SolarEdge family. We believe that our technological synergies combined with our complementary areas of expertise will empower SolarEdge’s growing business group at a time when the world is undergoing a clean energy transformation and e-mobility revolution,” stated Guy Sella, CEO, Chairman and Founder of SolarEdge.
“Macro-wise, we are becoming more and more a smart energy provider and less a pure-play inverter provider, but we are still super committed to providing state-of-the-art inverters and solutions to the market,” said Lior Handelsman, founder, and VP of marketing and product strategy, in a December interview.
With the continued growth and strategic plan to diversify manufacturing outside of China to achieve lower production costs and navigate away from tariffs are other positive catalysts for the stock moving towards industry-standard multiples. SolarEdge will become a top player and might even surpass First Solar and Enphase.
*Disclaimer: Parabolic Financial Services, LLC price targets take a deeper look into supply and demand in particular stocks and this data can change drastically even within a week of trade action. This can change our current price point analysis which would lower our proprietary momentum calculations that predict future price movement. This could lead to a lower 3-6 month forward outlook from a technical standpoint. This price target also could further get impacted if the whole solar industry changes from a positive outlook to a negative outlook due to the current tariff negotiations between the U.S and China.