Management Commentary: October 2017
Dear Investors,
While the equity markets generally stayed within a trading range for most of the summer, many major stock indexes have recently made new highs. Geopolitical events and natural disasters have kept investors a bit anxious, but not enough to lessen optimism about the overall economy. Data continued to slowly improve and it is possible that we could finally trend above 3% growth annually for the first time in many years. Inflation is still well below the Fed’s target and long-term interest rates have remained benign. Arguably, this could put the equity markets on an even stronger footing for the balance of the year. While we are seeing early indications that investors are becoming more risk tolerant, it has only recently begun to translate fully into smaller-cap stocks. Across all of the funds, we remain well positioned to seek to benefit from this shift from a narrower, top-heavy market to a broader advance in stock prices.
Jacob Internet Fund
The Jacob Internet Fund added four new positions in the quarter: Teladoc, Tabula Rasa Healthcare, Instructure and Helios & Matheson Analytics. Teladoc is the leading virtual care medical provider through phone and video consultations. This market has finally started to reach mainstream adoption with many large companies and insurance providers now offering these services as both an added benefit for employees and as a cost-saving tool for insurers. With only single-digit utilization today, we believe greater penetration and new customers will likely lead to substantial growth over the next few years.
Tabula Rasa Healthcare is another beneficiary of a trend toward more in-home care services. Tabula Rasa’s main service today is personalized drug therapy and delivery to help reduce medication risk. Misuse of prescription drugs is one of the largest causes of patient deaths and costly hospitalizations. The company has developed a software platform that enables healthcare organizations to optimize medication regimens that can lead to less risk and safer outcomes. As they continue to transition to a higher-margin software model, we are expecting positive cash flow and earnings to potentially accelerate.
Instructure is a cloud-based learning management software company that started in the education market, focusing on K-12 and higher education needs. Their portal product (Canvas) is a meaningful improvement from traditional on-premise software providers and can be implemented much faster and with substantially lower upfront costs. The larger market opportunity for Instructure could be in the enterprise market with a relatively new product (Edge) that has shown it can successfully win business from incumbent players.
Finally, Helios & Matheson Analytics interested us for its majority stake in a private company (MoviePass) which has recently launched a $9.95/month movie subscription service. Quickly surpassing 400,000 subscribers in less than a few months, it has attracted a lot of interest and is furiously trying to keep up with demand. While it’s too soon to know how this new type of model will evolve, we believe MoviePass could end up as a significant player in the movie business and change consumer habits in positive ways for the entire industry.
Jacob Small Cap Growth Fund
In addition to Teladoc, Tabula Rasa Healthcare and Instructure, The Jacob Small Cap Growth Fund also purchased one additional position in the quarter: American Eagle Outfitters. A long-established teen brand, American Eagle Outfitters has been plagued by a fickler retail environment and sales moving online. While they are as exposed as many are to the decline in mall shopping, American Eagle has successfully launched a new brand recently (Aerie) that has picked up meaningful share in the lingerie market. Victoria Secret, long the dominant player in this segment, has had trouble in recent years appealing to a younger demographic, opening up this opportunity for Aerie. Additionally, American Eagle’s strategy is to combine their mall space with Aerie allowing them to operate more efficiently and potentially benefit from shared traffic. Sporting a clean balance sheet and an inexpensive valuation, we believe American Eagle was an attractive addition for the Fund.
Jacob Discovery Fund
The Jacob Discovery Fund added positions in Tabula Rasa Healthcare, Instructure and Helios & Matheson Analytics 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. Micro cap 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.
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 most recent holdings for the Jacob Internet Fund.
Click here to view the most recent holdings for the Jacob Small Cap Growth Fund.
Click here to view the most recent holdings for the Jacob Discovery Fund.
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.