Management Commentary: January 2018
Dear Investors,
With only a few mild bumps along the way, most major equity indexes resumed their advance during the last quarter. The economy continued to show steady improvement, which is likely only to be helped by the recent tax cut bill signed into law. While long-term interest rates have crept up recently, inflation remains subdued enough to warrant only gradual tightening by the Fed. Thus, we believe while valuations are getting a bit stretched, any acceleration in earnings would lower multiples, easing concerns over further stock gains. Perhaps even more importantly, we have been most encouraged by the performance of small caps in the quarter and still believe that this should continue well into 2018. All of our funds are positioned to seek to take advantage of these recent trends, and should benefit with heavier weightings in smaller cap names versus our benchmarks.
Jacob Internet Fund
The Jacob Internet Fund added two new positions in the quarter: Paypal and Yext. Paypal, one of the early pioneers in the online payment space, has successfully expanded into additional services, such as person-to-person payments (Venmo) and credit. These emerging product categories have led to accelerating growth, which is quite unusual for a company of this size and we believe should lead to higher margins and earnings leverage in future years.
Yext provides a software platform allowing companies of all sizes to manage their presence – including address listings, reviews, and other brand-related information – across 100 different platforms on the Internet, including all of the most popular social media options. With consumers having more and more ways to access information on the Web, maintaining an accurate and updated presence across all of these services is a monumental challenge, but Yext greatly simplifies the process for its clients. Yext has already proven itself with small- and medium-sized businesses and has recently begun a push into larger enterprises. With a very experienced management team – most are Salesforce.com alums – we believe Yext can significantly expand its customer base and at least maintain its impressive growth rates over the next several years.
Jacob Small Cap Growth Fund
In addition to Yext, the Jacob Small Cap Growth Fund also purchased positions in CareDx and Red Lion Hotels in the quarter. CareDx is a leader in molecular testing for heart transplant patients (AlloMap), and is now branching out with a cell-free DNA test for kidney transplants (AlloSure), which helps doctors determine the prognosis of patients, including the likelihood of organ rejection. Targeting a kidney transplant market more than 10x the size of heart transplants and with distinct advantages over a biopsy, AlloSure has the potential to exponentially grow CareDx’s revenues in just the next couple of years. Since launching in October, CareDx has already received orders from 14 kidney transplant centers, and given its history with AlloMap, it is likely they will reach most of the U.S. market by the end of next year. With Medicare establishing healthy reimbursement rates for AlloSure and after a recent equity offering that put the company on a better financial footing, we believe CareDx should be able to take full advantage of this new market opportunity.
Red Lion Hotels is a franchisor of an assortment of hotels, ranging from economy brands like America’s Best Value Inns to high-end units like their newest Hotel RL locations. The company has been very aggressive in acquiring new brands and other franchises and integrating them into its technology platform, which includes a well-regarded reservation software tool and a consumer loyalty program. Besides the benefits from increased scale and more focused brand segmentation, Red Lion should also realize significant proceeds from upcoming hotel sales that are not reflected on the company’s balance sheet and will complete its transformation to an asset-light model. Sporting a management team filled with industry veterans, we are confident that Red Lion can attain much better margins, as well as a valuation multiple more in line with its peers.
Jacob Discovery Fund
The Jacob Discovery Fund also added positions in CareDx and Red Lion Hotels in the quarter. See above for commentary.
Ryan Jacob
Portfolio Manager
Jacob Internet Fund
Jacob Small Cap Growth Fund
Darren Chervitz
Portfolio Manager
Jacob Discovery Fund
Mutual fund investing involves risk. Principal loss is possible. There are specific risks inherent in investing in the Internet area, particularly with respect to smaller capitalized companies and the high volatility of internet stocks. All three funds may invest in foreign securities, which involve greater volatility and political, economic and currency risks, and differences in accounting methods. These risks are greater in emerging markets. All three funds also invest in smaller companies, which involve additional risks, such as limited liquidity and greater volatility.
The Internet Fund may invest in fixed income and convertible securities. Investments in debt securities typically decrease in value when interest rates rise. This risk is usually greater for longer-term debt securities. The market value of convertible securities tends to decline as interest rates increase and, conversely, to increase as interest rates decline. In addition, convertible securities generally offer lower interest or dividend yields than non-convertible securities of similar quality.
Investments in micro capitalization companies may involve greater risks, as these companies tend to have limited product lines, markets and financial or managerial resources. Microcap stocks often also have a more limited trading market, such that the Adviser may not be able to sell stocks at an optimal time or price. In addition, less frequently-traded securities may be subject to more abrupt price movements than securities of larger capitalized companies.
Click here to view the Jacob Funds prospectus.
The information provided herein represents the opinion of Jacob Mutual Funds and is not intended to be a forecast of future events, a guarantee of future results, nor investment advice.
Click here to view the recent holdings for the Jacob Internet Fund, as of November 30, 2017.
Click here to view the most recent holdings for the Jacob Small Cap Growth Fund, as of November 30, 2017.
Click here to view the most recent holdings for the Jacob Discovery Fund, as of November 30, 2017.
Please note that these fund holdings are subject to change and should not be considered a recommendation to buy or sell any security
Earnings growth is not representative of the Fund’s future performance.
The Jacob Funds are distributed by Quasar Distributors, LLC.