Cabot Early Opportunities 112

In this month’s issue of Cabot Early Opportunities we serve up a diverse group of stocks with exposure to vastly different areas of the economy.

There’s some software and biotech, and plenty of IPOs, but also a few ways to play rising strength in cyclical stocks.

Enjoy!

Cabot Early Opportunities 112

Stock Name	Market Cap	Price	Investment Type
Altair Engineering (ALTR)	$3.0 billion	42.25	Growth – Industrial Software
Azek (AZEK)	$6.0 billion	38.76	Growth – Construction Materials
Jamf (JAMF)	$4.5 billion	38.54	Rapid Growth – Software
Nikola (NKLA)	$14.9 billion	39.18	Development – Electric/Hydrogen Auto
TFF Pharma (TFFP)	$271 million	12.98	Development – Biotech

Is The Hydrogen Economy Becoming Reality?
Hydrogen has been a hot topic among investors lately because of recent announcements in both the U.S. and EU about ramping up hydrogen use as a way to boost economic growth in a post-COVID-19 world, and as a way to transition into greener economies.
Turning first to the EU, there are two plans with meaningful implications.

First is the Energy Systems Integration initiative. This plan creates a framework for bridging the gaps between all the different sources of energy, and industries that are reliant upon them, to arrive at a more holistic energy system that supports a climate-neutral economy at the lowest cost across sectors. The EU is talking about “resolute action” over the next five to 10 years to reach climate neutrality by 2050.

Second is the Hydrogen Strategy, which presents ways in which hydrogen can help decarbonize the EU economy in a cost-effective way, while supporting economic growth and recovery.

Priority will be given to developing hydrogen production from renewable electricity, though other forms of low-carbon hydrogen are recognized as necessary to bridge the gap between now and a greener future. The EU sees hydrogen meeting 24% of global energy demand by 2050 and making cumulative investment of 180 to 470 billion EUR over the same time frame. Specifically mentioned is the potential for hydrogen in long-haul trucking, which may have positive implications for hydrogen vehicles such as those being developed by Nikola (NKLA), which is making its debut in this Issue of Cabot Early Opportunities.

Not to be outdone, murmurings of clean energy in the U.S. are beginning to raise eyebrows. Democratic Presidential candidate Joe Biden recently unveiled his climate plan to build a modern, sustainable infrastructure and an equitable clean energy future.

Biden’s high level plan, which also serves as a platform to hurl its fair share of criticism at President Trump’s handling of both the climate crisis and COVID-19 pandemic, states he will “launch a national effort aimed at creating the jobs we need to build a modern, sustainable infrastructure now and deliver an equitable clean energy future.”

Biden calls for $2 trillion in clean energy investments over his first term across infrastructure, the auto industry, public transportation, power generation, building efficiency, agriculture & conservation, and clean energy technologies.

Like the EU’s plan, Biden’s talks about the U.S. reaching net zero emissions by 2050.

While there is plenty of political posturing behind the timing of these plans, one doesn’t have to burn a lot of mental energy to envision a prolonged period of massive clean energy investment and technological innovation to move the world away from dirty fuels and toward renewables.

In terms of our exposure to clean energy we are already holding positions in both Bloom Energy (BE) and SolarEdge Technologies (SEDG), the latter of which is up over 100% from our entry point.

Today we’re also adding half a position in Nikola (NKLA), which represents a play on electric and hydrogen powered vehicles.

While there are sure to be ups and downs in clean energy and hydrogen stocks along the way, it’s starting to feel like a greener world is fast becoming a reality.

Enjoy the ride.

What to Do Now
Take it slow and average in to new positions.
Growth stocks have experienced a huge rally off the March lows and we’re seeing signs that many may have topped out, at least in the near-term. Software stock valuations are near record highs and there is likely to be a shift in expectations regarding work-from-home plays if and when vaccines start to get approved. And then there’s the upcoming election.

Still, we think we’re in a bull market and a new economic cycle brought on by the pandemic, and that accommodative fiscal policy and more stimulus will help markets move higher over the coming 12 months. It just won’t be a straight line higher.

The best way to balance all the factors is to spread out your investments across sectors, stocks, and time. This is especially important when pursuing aggressive growth opportunities, which is the sandbox we play in.

Accordingly, two of today’s new recommendations are being started at “buy a half.” This means buy half the dollar value that you normally would; we’ll look to fill the other half-sized position down the road.

STOCKS

Altair Engineering (ALTR)
Altair Engineering (ALTR) is a $3.0 billion market cap company that specializes in software and cloud solutions for product development, high performance computing (HPC) and simulation.

It’s a play on a concept called the Digital Twin, which is a digital replica of a physical object built with simulation software. A Digital Twin can replace a good deal of expensive and time-consuming physical prototyping.

Altair’s solutions help manufacturing companies innovate across their entire product lifecycle, from concept design, to manufacturing, to in-service operation. At a high level, all of Altair’s customers are involved in some form of product lifecycle management (PLM).

Altair sprung up from the founders’ vision that simulation, machine learning, and optimization tools can transform design and organizational decision making across a wide variety of engineering disciplines. These include structures, motion, fluids, thermal management, electromagnetics, system modeling and embedded systems.

It is somewhat of a cyclical software stock given its exposure to the automotive, aerospace, heavy equipment, engineering and construction markets.

Altair has a patented units-based subscription licensing model. This means customers license a pool of units, which gives users access to Altair’s entire product portfolio. Users dip into the pool of units their organization has paid for, then return them when not in use so someone else can use them. The strategy behind this business model is to reduce friction, let customers use what they need and grow their relationship with Altair over time.

Altair isn’t the most rapid-growth software stock out there. As I mentioned it’s somewhat of a cyclical stock given its industrial exposure. That’s one of the reasons it could work well moving forward – expectations are low, but getting better.

Revenue was up 16% to $459 million in 2019 but is likely to contract by 2% this year. In 2021 analysts see 9% growth. The company is profitable, although adjusted EPS is expected to fall by 62% to $0.11 this year. Next year should be better as analysts see EPS up 118% to $0.24.

The Stock
ALTR came public at 13 in late 2017 and was hot out of the blocks. By October 2018 the stock was at 44. ALTR hasn’t broken out since and sits just a few percentage points below that 44 level today. We’re looking for a breakout to multi-year highs on potential emergence of a new economic cycle to move ALTR back into the spotlight.

AZEK (AZEK)

AZEK (AZEK) was one of the first companies to introduce a premium quality (and premium priced) engineered polymer (plastic) building material that was a viable candidate to replace wooden trim. Soon after introduction in 1999 the signature white trim gained a foothold in coastal communities, where wood was especially prone to rot, then spread inland.

Today, the brand name AZEK has become synonymous with high-end, low-maintenance trim work. It helped define the PVC trim category because, as the company’s website states, “AZEK … will not rot, split, splinter, delaminate, or warp. It’s unappetizing to destructive insects, moisture-resistant, and doesn’t need staining or sealing. It stays strong whether it’s installed in contact with soil or concrete.”

What more can you ask for?

There are, of course, some drawbacks to AZEK trim. But when used for its intended purposes and installed properly it truly is a miracle product. That success has led to considerable brand loyalty and a steady growth profile that has afforded AZEK the financial flexibility to expand both organically and through acquisitions. The company now offers products beyond trim, including railings, decking, siding, cladding and sheet goods.

Three of the more significant acquisitions are TimberTech (2012), UltraLox Railing (2017) and Versatex Trim (2018). Most recently, in 2020, AZEK acquired Return Polymers, a leader in PVC recycling and compounding. This acquisition should help profit margins and brings full-service recycled material processing, sourcing, logistical support, and scrap management programs into the AZEK family, which is now on pace to recycle 300 million pounds of waste and scrap into new products every year.

Today, the main brands are AZEK, TimberTech, Versatex, Scranton Products, Ultralox and Vycom. Altogether, the company offers a wide assortment of residential and commercial building materials, marine grade products, and plastic playground materials.

Clearly, an investment in AZEK represents a play on construction and remodeling (revenue is split roughly 83%/17% residential/commercial), but it is also a bet on continued demand for high-performance, low-maintenance PVC and composite building materials.

The company, which just went public on June 12 and has a market cap of $6 billion, grew 2019 revenue by 16% to $794 million. Adjusted EPS rose by 20% to $0.48.

In AZEK’s first quarter as a public company (Q3 2020), reported on August 13, it grew revenue in a very challenging quarter by 1% to $224 million (beating by $13.8 million) while adjusted EPS of $0.13 beat by $0.03. Revenue growth guidance for Q4 of 12% to 17% revenue growth was well above analyst expectations of 8%, and implies full-year 2020 revenue growth should also surpass conservative estimates of 8%.

Looking forward, AZEK should be able to deliver consistent revenue growth of 10% or more, with more rapid earnings growth (estimated at 6% in 2020 then 45% in 2021). The company raised $819 million in its IPO, used $783 million of it to pay down debt, and ended Q3 with $215 million in cash and $507 million in total debt.

The Stock
AZEK came public at 23 on June 12 and closed 18% higher its first day. It has been doing well since. Shares rose steadily through June, then pulled back briefly and found support at 30. AZEK then climbed up to 36 before another short retreat into earnings. After the report on August 13 the stock walked up near 40 before pulling back roughly 8%.

Jamf Holding (JAMF)
Jamf (JAMF) is a newly-public company that sits at the intersection of several positive growth trends, which should collectively lead to durable growth for several years, not to mention above-average investor interest.

The big-picture story is that Jamf is a device management company focused on Apple devices. It is a play on the consumerization of IT. Workers and students are increasingly bringing their own devices into the workplace and school environment, either physically or when working/studying from home.

The industry term for this is bring-your-own-device (BYOD). BYOD is a big trend because people are constantly transitioning between personal and business use of devices and want a consistent user experience and operating system. Having to move to a company or school-issued device from a personal one – especially if that means a transition from iOS to Windows or Android – interrupts workflow and requires a learning curve. It’s far more convenient and efficient just to use one’s own device.

This means a lot more Apple devices are being used in the work and education environments. But they can’t be welcomed with open arms – all these devices need some level of IT support to make sure they meet the privacy, security, and IT-defined permissions of the organization’s ecosystem.

This is where Jamf comes in. The company is the leader in terms of managing Apple devices in both the education and enterprise markets. It manages over 17,000 devices for 40,000 customers and is growing rapidly in the estimated $10 billion market, which is expanding by 18% a year. Jamf’s customers are bigger companies – think IBM and SAP, not small businesses with a few dozen employees.

Apple and Jamf are reported to have a good relationship and Apple is Jamf’s largest reseller. But there is competition. Apple just acquired Fleetsmith, a player in the low-end market, and Microsoft’s device management solution Intune can handle Apple devices too.

Revenue growth has been brisk. Sales rose 36% in 2019 and conservative estimates suggest around 22% growth annually for the next four years. Any uptick in demand from remote students and employees working from home could push those numbers up, though layoffs and constrained IT spending could also impact revenue. Jamf should be profitable this year and moving forward as analysts see estimated EPS of $0.14 in 2020 and $0.21 in 2021.

We’ll want to watch sales into the healthcare markets where HIPAA-compliant iPads have given Jamf a boost, as have trends in education (previously one-third of revenue) as more students are learning in the home environment. Jamf has a market cap of $4.4 billion and a big portion of shares outstanding are owned by Vista Equity Partners, who will probably wind down some of its holdings over time. Management reports Q2 fiscal 2020 results on September 1. Buy a Half

The Stock
JAMF came public at 26 on July 22 and closed at 39, up 51% the first day, when shares traded as high as 51. The stock has since traded in the 35.5 to 43 range. It’s too early to say there’s a trend, either bullish or bearish. Expect the stock to be volatile for at least the next three months.

Nikola (NKLA)
Nikola (NKLA) is the first major American electric car company to go public since Tesla (TSLA) did a decade ago.

As a pre-revenue story stock with a market cap of $14.9 billion and no vehicles on the road Nikola clearly isn’t for everyone. I fully admit we may be too early here. That’s one of the reasons we’re starting with a half-sized position.

The deal is that Nikola is trying to disrupt the current transportation industry by rapidly putting battery electric vehicles (BEV) and fuel cell electric vehicles (FCEV) on the road. It is starting with BEV heavy duty trucks (long haul, waste, etc.) with production anticipated to begin in 2021, then rolling out the FCEV version (which adds a hydrogen fuel cell) to the same truck platform around 2023.

Nikola is also working on a consumer-oriented truck, called the Badger, which is expected to be available in the same BEV/FCEV configuration.

Finally, the company is working on building out hydrogen fueling infrastructure using equipment from Norwegian hydrogen specialist Nel. The plan is to build around 1,200 hydrogen stations, with locations determined based on pre-orders and initial stations acting as hubs for fleets running in a 250-mile radius. Projected cost per station is $16.6 million. Management says it should announce a construction partner by the end of 2020.

The company has already broken ground on a 1 million-square-foot manufacturing facility in Arizona (capacity to reach 35,000 units annually). In the meantime, the first trucks are being built in Germany with partner IVECO.

It’s easy to see why there is a lot of excitement surrounding Nikola’s zero emission vehicles. The long-haul trucks are expected to sport twice the acceleration as diesel competitors, have a range of 500 to 700 miles, and refill in 10 to 15 minutes (when hydrogen becomes available). There are tons of modern bells and whistles too.

The Badger pickup truck is said to have up to 906 horsepower, a 300/600 mile range (BEV/FCEV), and accelerate from zero to 60 in under three seconds.

Management believes it is going after a $600 billion addressable market (vehicles and energy supply) and that long-haul trucking, which accounts for 5% to 10% of greenhouse gas emissions, is the first step to becoming an industry disruptor. Experienced manufacturing partners include Bosch, Nel, Wabco and CNH Industrial.

A potential major near-term catalyst is the pending announcement of a tier 1 OEM partner for the consumer-oriented Badger truck, which should come within the next month or two.

In terms of customer interest, there is plenty. Initial interest in the consumer-oriented Badger truck approached 90,000 and reservations were estimated to be in the single-digit thousands.

Even bigger is the recent announcement that Republic Services, the second biggest waste services company in the U.S., has placed an order for 2,500 BEV waste trucks. The order includes an option to increase to 5,000 units. Testing begins in early 2022, shipments are scheduled for 2023 and the average price tag per vehicle is said to be around $250,000.

Finally, Nikola is expected to send prototypes of the FCEV to AB Inbev (who has a binding agreement for up to 800 trucks) by the end of 2021.

Nikola has a unique and compelling business model that features bundled pricing and which is intended to make the total cost of ownership for a Nikola FCEV similar to that of a diesel truck.

The bundle includes a 7-year, 700,000-mile lease. It includes the cost of the truck, hydrogen fuel, repairs, and maintenance. Based on initial numbers and an estimated lease cost of $665,000, Nikola is projected to produce a 30% profit ($200,000 per vehicle).

Nikola isn’t focused on near-term profits, but there is a path to profitability based on scaling up the business. Naturally, things can evolve in many ways here but based on balanced projections Nikola could be generating $300 million in revenue in 2022 and get to $10 billion by 2030. There are sure to be equity raises along the way, though Nikola has nearly $1 billion in cash as of right now.

This is clearly a very early-stage company and only suitable for very risk-tolerant investors. I’m expecting significant ups and downs along the way and a lot of positive and negative press as well. Buy a Half

The Stock
NKLA came public when it merged with the SPAC VectorIQ, which was trading near 10 prior to the announcement, then briefly shot up 57% before settling back down. As the merger date approached shares worked their way higher, then post-merger NKLA went ballistic, racing to 35, then surging to an all-time high of 94. Predictably, the stock fell almost as fast as it went up, first into the 60 to 70 range in June, then as low as 29 by the end of July. NKLA has since moved up to 47 before a pullback to the current level around 40. This trading action, while highly unusual, illustrates the speculative nature of this stock. Buy a half and expect a wild ride.

TFF Pharmaceuticals (TFFP)
Many drugs that are intended to treat lung conditions could potentially be more effective if they could be inhaled, thereby getting the treatment directly into the lungs, where it is needed.

Unfortunately, evidence suggests that only 10% of certain drugs actually reach the lungs if inhaled. The remaining 90% can lead to unwanted side effects. As a result, many drugs intended to treat lung conditions are taken orally or intravenously.

The underlying problem comes down to poor water solubility, which can lead to erratic absorption rates and delayed action.

TFF Pharmaceuticals (TFFP) is working on a solution. The Austin, Texas-based company has licensed technology, called Thin Film Freezing, or TFF, that was developed by researchers at the University of Texas at Austin.

The TFF platform is designed to improve solubility of poorly water-soluble drugs. It is especially useful in generating dry powder particles with properties that are intended to be inhaled. The process creates a “Brittle Matrix Particle,” which has aerodynamic properties that can help as much as 75% of an inhaled drug reach deep into the lungs.

The potential to use the TFF platform to be used for new drugs and to reformulate existing drugs is significant. Many medications may be able to be formulated into a convenient, direct-to-lung dry powder inhaler format that delivers the drug directly to the target site.

There is also potential to develop inhaled vaccines, though management has made it clear that if the TFF platform could work for a COVID-19 vaccine that it would not be until after the first versions of the vaccine are likely ready, given the development time line.

The company is working to bring compounds to market through the 505(b)(2) pathway, which is an accelerated program for molecules previously approved by the FDA. Management is also working with other companies to develop and reformulate drugs using the TFF platform.

The two most advanced internal programs (both Phase 1) are TFF VORI, an inhaled dry powder drug intended to treat Invasive Pulmonary Aspergillosis (IPA), and TFF TAC-LAC, an inhaled dry powder version of tacrolimus, an immunosuppressive drug used in organ transplant medicine.

TFF Triple Combination for COPD/Asthma is a preclinical program aimed at using a three-drug combination, an approach currently approved for marketing and/or under development by several pharma companies. And finally, the company is working with certain drugs, including Remdesivir, to see if the TFF platform can help in treating COVID-19.

TFF Pharma has also recently signed a worldwide licensing deal with Union Therapeutics to use the TFF platform in combination with niclosamide, an existing antiviral drug with over four decades of use, to treat COVID-19 and, potentially, other viruses (such as Zika). Regulatory and sales-based milestone payments could lead to payments of up to $210 million, and there are single-digit royalties on product sales as well.

Finally, the company is working with PLUS Products (PLPRF) to develop a dry powder inhalation form of a THC product.

TFF Pharma is only appropriate for very risk-tolerant investors as it is clearly a high-risk, high-potential-reward stock.

The company has a market cap of just $220 million, lost $3.8 million in Q2 (reported on August 13) and ended the quarter with $22 million in cash. Subsequent to the end of the quarter the company raised roughly $26 million through a private financing round.

The Stock
TFFP came public at 5 on October 25, 2019 and traded around the IPO price until the market fell apart in March, when it fell as low as 3.44. It recovered back to the 5 level quickly and gradually began to rise in June. By late June TFFP was trading near 7, then the stock shot up to 10 on news it was working on a reformulation of Remdesivir. The stock moved up near 14.5 in the days after reporting Q2 results and has since pulled back to around 13.

Previously Recommended Stocks
Today we are making the following changes to our portfolio.

GFL Environmental (GFL) is moved to HOLD. The company was targeted by a short seller after a wave of acquisition announcements. I believe the short attack is baseless, but the stock has still taken a hit. While these annoying events often create buying opportunities, we’ve had GFL at buy for some time so I suspect that those wanting to own it already do. I’ll look to upgrade GFL once the stock starts to act more constructive.

Purple Innovations (PRPL) is moved to SELL. We’ll end up with a modest gain in the single digits. Shares took a hit after earnings were announced and they have continued to trend down since. The news that the co-founders are retiring may not be helping. I’ll move PRPL to my watch list and consider adding back in the future.

An updated table of all stocks rated BUY and HOLD, as well as recent stocks SOLD, is included below.

Please note that stocks rated BUY are suitable for purchasing now. In all cases, and especially recent IPOs, I suggest averaging into every stock to spread out your cost basis.

Those rated HOLD are stocks that still look good and are recommended to be kept in a long-term oriented portfolio. Or they’ve pulled back a little and are under consideration for being dropped.

Stocks rated SOLD didn’t pan out, or the uptrend has run its course for the time being. They should be sold if you own them. SOLD stocks are listed in one monthly Issue, then they fall off the SOLD list.

Please use this list to keep up with my latest thinking, and don’t hesitate to call or email with any questions.

^Average of high and low price if published intraday, or closing price if published after 4 PM ET

The next issue of Cabot Early Opportunities will be published on September 16, 2020

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