EQM Capital Blog

EQM Capital LLC Mid Cap Quant Portfolio Kicks Off Year in Positive Territory

Posted by on Feb 3, 2014 in EQM Capital Blog

There is almost no debating that January was a rough month for the equity markets. Turmoil in emerging markets, mediocre corporate earnings results, weak economic data, and bad weather all created a tough start of the year for the stock market. The Dow was down 5.3% and the S&P 500 declined 3.6% – their worst monthly percentage declines since May of 2012.  The NASDAQ weathered the storm better, declining only 1.7%, but it still had its worst month since October 2012.

The Mid Cap indices also did not go unscathed, with the S&P 400 Index declining 2.2% and the Russell Mid Cap Index sliding almost 2%.  But despite a challenging market environment, Mid Cap Quant managed to eke out a positive return in January, delivering a return of 1%.  Top portfolio performers in January included SolarCity (SCTY), Under Armour (UA), and Alkermes (ALKS) which were all up more than 20% for the month.

SolarCity (SCTY) is one of the pioneers in residential solar leasing and is poised to benefit from accelerating industry growth as retail electricity customers switch to solar and an increasing number of states in the U.S. attempt to achieve grid parity by 2016.  Deutsche Bank, who just initiated coverage with a BUY rating, expects the company’s installed base of solar customers to double by the end of 2014.  Helping along this trend are declining costs, coupled with rising volumes which are driving increased scalability and operating leverage.

Shares of portfolio holding Under Armour (UA) rose to an all-time high after posting exceptionally strong earnings results.  Results were boosted by the recent cold weather, but the company has posted at least 20% revenue growth over the last 15 quarters.  Under Armour continues to be an innovator in athletic apparel, having just launched a new line of ColdGear apparel and its lightweight Speedform running shoes.  Having successfully built the brand in the U.S., the company expects to extend its reach globally over the coming quarters.

Drug manufacturer Alkermes (ALKS) was another top performing holding for the month, as it continues to benefit from integration of its Elan acquisition.  It recently received an additional infusion of cash from an investment by Invesco Perpetual, which may set the stage for more opportunistic acquisitions in the CNS (central nervous system) drug space.  The company already has many promising drugs in its late-stage CNS pipeline, including one to treat schizophrenia and another for major depressive disorder.

Admittedly, not all the stocks in the portfolio avoided the January downturn in the market.  Portfolio holdings Groupon (GRPN), Fifth and Pacific Companies (FNP), and Ubiquiti Networks (UBNT) all suffered declines in January.  Groupon and Fifth and Pacific, both retail related stocks, were hurt by the bad weather blanketing most of the country.  Ubiquiti’s decline was likely attributable to profit-taking and de-risking in the current market environment, after experiencing strong returns in 2013.

 

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EQM Capital LLC Year in Review

Posted by on Jan 6, 2014 in EQM Capital Blog

2013 marked a record year for the US equity markets, fueled by an improving economic outlook helped along by Fed stimulus.  Here are a few of the economic catalysts that propelled the US markets this year:

  • US GDP growth remains slow but resilient.
  • The employment picture is steadily improving.
  • Corporate profits are on the rise.
  • Inflation remains subdued.
  • Housing has staged an impressive recovery.

Because of this economic improvement, in the coming year we can expect a rise in interest rates.  This should be good for stocks, but it will be a negative headwind for bonds.  Which leads to the question:  if we know interest rates are likely to rise, why own bonds at all?  The answer is quite simple:  holding bonds acts as a hedge or downside insurance should the stock market experience a correction.

The other thing to realize is that bonds are less volatile than stocks.  In 1994 for example, when interest rates increased significantly over a short span of time, the Barclay’s Aggregate Bond Index declined only 2.9% for the year.  That magnitude is hardly disastrous.  And by utilizing active fixed income managers who are managing the duration of their bond portfolios, interest rate risk may be minimized further.  So in essence, holding bonds in the current environment is necessary to minimize overall portfolio risk.

Outside of the US, Japan’s economy is performing well and Europe is in the early stages of an economic recovery.  The outlook for Emerging Markets also appears to be improving. Whereas the US was the place to be in 2013, there may be better opportunities overseas in the coming year.

Investors should remain well diversified in order to maximize investment opportunities.  A diversified portfolio helps smooth returns while facilitating long term appreciation.

Most equity strategists believe 2014 will be a good year for the market, but not a great year.  According to S&P Capital IQ, if the market follows history, on average the market rises 10% after a great year of 20% gains or more.

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The Case For Quant Investing

Posted by on Nov 13, 2013 in EQM Capital Blog

Quant Investing Defined

So what exactly is quantitative investing and why do I think it is it preferable to the traditional method of analyzing company research reports, accounting statements, and meeting with company management?  A traditional manager digs very deeply into each investment.  Because the portfolio he or she is going to hold is very concentrated (holding maybe 10 to 25 stocks), the level of investment conviction has to be very, very high.  That is the case because the risk of ruin if a stock “blows up” in a 10 stock portfolio is very real.

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Is There Method To Methode’s Price Madness?

Posted by on Sep 3, 2013 in EQM Capital Blog

Methode Electronics (MEI) surged to a 12-year high last week after soaring 32.5% on strong earnings results. The company reported a profit of $0.36 share, which was far above analyst forecasts for $0.21. Sales of $167.3 million also beat forecasts for $148.5 million. The company guided earnings up to a range of $1.40 to $1.60, which was well above the consensus of $1.05. More significantly, the company reported its best quarter on record in its 47 years of being a public company. So it’s no wonder that investors were impressed by these results. But what is behind the company’s breakout earnings results, and will they continue?

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Multimedia Game Holdings Reports Q3 Results – Micro and Small Cap Models

Posted by on Jul 30, 2013 in EQM Capital Blog

Multimedia Game Holdings (MGAM) reported Q3 results today (7/30).  The company designs, manufactures, and supplies gaming machines and systems to casino operators in North America, and lottery and bingo operators.   It has a market cap of approximately $889 million.

EPS came in at .28 share which beat the CapitalIQ consensus by .04.  Revenues of $48.1 million also beat the CapitalIQ estimate of $46.7 million. The company guided up earnings and revenues due to an increase in unit sales as well as a sequential increase in the installed base.  A key catalyst is the traction they are getting in Nevada, a new market for them.    The company is aggressively pursuing gaming licenses in states throughout the country, expanding on its existing customer base.

Almost 72% of Multimedia Games’ revenues are recurring through recurring revenue  participation games. These games are highly predictable and steady with the  majority under long-term agreements. The company’s largest participation  contract, which accounts for roughly 15% of its total games deployed, was  extended at the start of last year to late 2017.

The strong earnings report comes on the heals of the acquisition on 7/16 of Shuffle Master (SHFL) by Bally Technologies (BYI) at a 24% premium.  This has led to takeover speculation for other names in the North American casino gaming equipment and systems industry.

Back in the beginning of July, two brokers, Wells Fargo and Imperial Capital initiated coverage on the stock with an Outperform rating.

Disclaimer

The opinions expressed above should not be construed as investment advice. This article is not tailored to specific investment objectives. Reliance on this information for the purpose of buying the securities to which this information relates may expose a person to significant risk. The information contained in this article is not intended to make any offer, inducement, invitation or commitment to purchase, subscribe to, provide or sell any securities, service or product or to provide any recommendations on which one should rely for financial, securities, investment or other advice or to take any decision. Readers are encouraged to seek individual advice from their personal, financial, legal and other advisers before making any investment or financial decisions or purchasing any financial, securities or investment related service or product.

Information provided, whether charts or any other statements regarding market, real estate or other financial information, is obtained from sources, which we and our suppliers believe reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. Nothing in this article should be interpreted to state or imply that past results are an indication of future performance.

 

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Bull Case for Keryx Biopharmaceuticals (KERX)

Posted by on Jul 26, 2013 in EQM Capital Blog

Company Description

Keryx Biopharmaceuticals (KERX) is focused on the acquisition, development and commercialization of medically important pharmaceutical products for the treatment of renal disease.  The company has a market cap of $719 million and is classified as Small Cap.

Flagship Product

Keryx’s main product is Zerenex, an oral, ferric iron-based compound that has the capacity to bind to phosphate and form non-absorbable complexes.  The company is attempting to use Zerenex for two indications:

1.  The first indication is for hyperphosphatemia in patients with end-stage renal disease. Hyperphosphatemia is an electrolyte disturbance in which there is an abnormally elevated level of phosphate in the blood.  Phase III trials were completed in January 2013, with extremely positive results.

2.  The second indication is for the management of serum phosphorus and iron deficiency in anemic patients with Stage 3 to 5 non-dialysis dependent chronic kidney disease.  The Phase II trial for this indication was started in November 2012 and is ongoing.  Should the trial results be positive, AMAG Pharmaceuticals (AMAG), which sells Feraheme for that market would likely take a substantial hit.

Market Potential

There are approximately 600,000 patients with end-state renal disease in the US alone. The majority of these patients require kidney dialysis (400,000).  Globally, there are approximately 2.8 million patients with end-stage renal disease, and over 2 million of them require dialysis.

J.P. Morgan analyst Cory Kasimov said he expects Zerenex to be approved and reach the market in 2014. He said combined annual sales in the U.S. and European Union could reach $500 million a year. Kasimov also expects that Zerenex will receive patent protection until 2014.   His price target on the stock is $13/share.

Takeout Potential

There are several candidates that could potentially acquire Keryx including Amgen (AMGN) with its Epogen drug used to improve red blood cell counts in kidney dialysis patients.

Upcoming Catalysts

This summer, Keryx’s Japanese partner, JT Torii, will publish results as part of the Japanese regulatory filing.  These should provide insights into Keryx’s CKD Phase II trial results.

Fundamentals

Keryx has a favorable cash position of $87.3 million as of their March quarter.  This was a significant increase from $14.7 million in Q4 2012.  The large increase was due to a secondary offering completed on January 29, 2013.  Total liabilities are $8.7 million.  Revenues were $7 million, and the company’s operating loss came in at $2.2 million.  It is unlikely they will need more cash prior to receiving FDA approval for Zerenex.

Disclaimer

The opinions expressed above should not be construed as investment advice. This article is not tailored to specific investment objectives. Reliance on this information for the purpose of buying the securities to which this information relates may expose a person to significant risk. The information contained in this article is not intended to make any offer, inducement, invitation or commitment to purchase, subscribe to, provide or sell any securities, service or product or to provide any recommendations on which one should rely for financial, securities, investment or other advice or to take any decision. Readers are encouraged to seek individual advice from their personal, financial, legal and other advisers before making any investment or financial decisions or purchasing any financial, securities or investment related service or product.

Information provided, whether charts or any other statements regarding market, real estate or other financial information, is obtained from sources, which we and our suppliers believe reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. Nothing in this article should be interpreted to state or imply that past results are an indication of future performance.

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