Management Commentary: April 2021
Dear Investors,
Thankfully, we saw positive progress against COVID-19 in the quarter, with the introduction of several effective vaccines to help reduce the number of hospitalizations and deaths from this virus. This helped lead to a surge in equity prices with many stocks now exceeding pre-pandemic levels. Additionally, an easy money policy from the Federal Reserve, combined with massive fiscal stimulus, have also been drivers in this sharp recovery. Most recently, many states have begun to accelerate their reopenings as metrics continue to improve, leading to even more optimism from investors that earnings and GDP growth accelerate for the rest of this year. As for the Funds, we were fortunate to own many companies that were not only able to post robust results through the pandemic but have also benefitted from a gradual return to normalcy. While we are expecting and planning for higher near-term volatility, given the many uncertainties that still exist, we still are seeing many exciting opportunities across a variety of sectors.
Jacob Internet Fund
The Jacob Internet Fund added four new positions in the quarter: Telos, Zovio, Porch, Esports Entertainment and Silver Spike Acquisition. Telos, a decades-long trusted provider for compliance and security services for large government agencies for (such as the DoD and CIA), is now making an aggressive push for commercial customers as well with its cloud-based solutions. This evolution is likely to lead to higher margins and growth rates as large technology partners like AWS, Azure and system integrators highlight Telos’ services. Zovio, is in the midst of a significant transition away from its long-standing and long-suffering online university business into a broader education software and services business, with a focus on revenue generated from its online tutoring and bootcamp type classes. While still participating in the economics from its recent agreement to sell its Ashford University to a subsidiary of the University of Arizona to power its online curriculum, the growth from these other online services is still not being fully recognized by investors, giving us a very reasonable valuation for the stock. Porch offers a comprehensive list of services to new homeowners from a clever starting point of their leadership position in home inspection software. By being at the front end of the home buying process, Porch can assist homeowners in navigating the various pain points in a move, while also providing prospects for businesses for the various services necessary in a new house. Esports Entertainment is an emerging player in real money wagering on esports (online competitive gaming) events and tournaments. This is one of the fastest-growing areas in both gaming and gambling today, and while the competitive landscape is far from settled, Esports has done an admirable job of acquiring properties that should benefit from these trends. Finally, Silver Spike Acquisitions is a recent SPAC that will become when its proposed merger closes. Weedmaps is one of the largest online directories of marijuana dispensaries in the U.S. and also has an easy-to-use software platform to help small cannabis retailers manage a very complex business. As individual states continue to open up their markets to legalization, Weedmaps provides much-needed services for consumers and retailers in what is likely to remain a very regulated and fragmented industry.
Jacob Small Cap Growth Fund
Besides the above referenced Telos, Porch, Esports Entertainment and Silver Spike Acquisition, The Jacob Small Cap Growth Fund also added positions in Thunderbird Entertainment, U.S. Express and Akouos. Thunderbird Entertainment is an award-winning Canadian-based producer of family-related content, including many successful animated and live-action series. With strong relationships with all of the major streaming companies, Thunderbird produces shows in one of the most desirable channels for streamers to keep and add subscribers. Recent expansions into merchandising are also promising and could lead to a higher margin profile, which is already solid thanks to strong managerial execution as well as favorable economic subsidies from the Canadian government for locally produced content. U.S. Express, a traditional long- and medium-haul trucking company, is looking to revolutionize the business by introducing a more efficient, lower-cost, more scalable business model with an entirely new brand called Variant. It’s an ambitious technology-driven program that includes a new mobile app and route mapping optimization software that has shown some early success at reducing driver turnover (a huge problem endemic to the industry), better safety and higher utilization, all of which should lead to significantly higher profitability if the benefits prove to be sustainable upon a fuller rollout. Akouos is a very early-stage precision gene medicine company focusing on inner-ear conditions that lead to hearing loss. While the inner ear anatomical structure and the hearing process is an intricate complicated system that has foiled many scientists and companies attempting to treat diseases in this area, Akouos has some very interesting proprietary methods and technologies, such as a library of unique viral vectors designed especially for delivery into the ear, that may help solve some of the field’s most bedeviling obstacles. Although the timeline for the start of clinical trials have been somewhat delayed due to manufacturing issues, Akouos’s promising pipeline of candidates could lead to breakthrough treatments in what would be an enormous market that has no therapeutic options today.
Jacob Discovery Fund *
Besides Zovio, Porch, Esports Entertainment, Thunderbird Entertainment, U.S. Express and Akous, The Jacob Discovery Fund also added Super League Gaming, Arbutus Biopharma, Big Digital Assets, SRAX, Scout Gaming, Tela Bio, Usio and Transphorm. Super League Gaming is an emerging player in the rapidly growing world of esports gaming and related media content, with a particular focus on competitive amateur gamers. The company’s various tournaments and highlight videos, produced in a professional manner using its own studio, have achieved tremendous growth in engagement over the past couple of years, but little in the way of monetization. A recent proposed acquisition of a gaming-focused streaming software service called Mobcrush has the potential to dramatically reshape the company’s business and accelerate revenue growth. Arbutus is trying to find a cure for chronic Hepatitis B infection, an affliction from which an estimated 300 million people worldwide suffer. Due to the size of the market and success that drug companies have had in treating Hepatitis C, it’s not a surprise that plenty of competitors are also trying to race through the clinic to find a cure for HBV. Arbutus’s early trials have demonstrated some decent signs that its drugs may be able to work at lower and less frequent dosing, but we are also very much intrigued by Arbutus’ intellectual property claims on lipid nanoparticles being used to help deliver the mRNA in the current Covid vaccines, which includes potential royalties and a 16% stake in a company to which it out-licensed that LNP technology. The IP issues are thorny and will take time to resolve but we believe they provide Arbutus with both potential upside and a floor to the current valuation while the company continues to push its HBV therapies through the clinic. Bigg Digital Assets is a cryptocurrency company with two interesting assets: One is the fast-growing Canadian crypto trading platform Netcoins, which is on track to become the first brokerage in the country to get an official crypto dealer license from the Canadian government; the other offers a cryptocurrency security/compliance software product called Qlue, which helps authorities track the movement and parties involved in various blockchain transactions to help them ferret out potentially problematic or suspicious activity. We believe both businesses are exciting in their own right and each could be worth as much as the company’s overall market cap. SRAX sells the SaaS-based service Sequire, which provides important investor transaction data to executives at public companies. Despite having a small team, we have been impressed with the company’s software development, and growth from Sequire has been strong and consistent. We are also big fans of the company’s LD Micro business, a conference company focused on the microcap space that was acquired by SRAX last year and is led by the irrepressible Chris Lahiji. While Scout Gaming owns and operates its own consumer-facing fantasy sports Web site FanTeam, its software also powers the fantasy sports services of nearly every major sports betting service in Europe. Fantasy sports is still a far smaller business overseas vs. here in the U.S. (where FanDuel and DraftKings dominate), so by pooling the collective user bases of these numerous third-party B2B relationships, Scout is able to offer far more attractive prize pools for its tournaments while maintaining its sole focus on continuing to innovate in fantasy sports, as it has done with its latest Jackpot Pick’Em game. Tela Bio is a small innovative provider of natural hernia tissue replacement – derived from sheep stomach – that has slowly been taking share from larger providers of synthetic material. Its Ovitex product is widely regarded as a safer, more durable option for patients undergoing hernia surgery, a fact that clinical data continues to bear out in compelling fashion. An easing Covid situation should mean more hernia surgeries in the coming year, and we believe Tela will continue to gain further adoption, while they also begin to more aggressively market a version of their tissue in the plastic surgery market. Usio is a provider of payment processing solutions, which includes operations in ACH, merchant processing and prepaid cards. Although Covid slowed down growth in dollar volumes processed, other parts of Usio’s business improved because of an increased number of card-not-present transactions. Their exclusive relationship as the ACH provider for Jacob Funds holding Voyager Digital was a huge feather in the company’s cap, a clear tailwind for the company going forward, and we expect Usio to continue to get more involved in the cryptocurrency market. Finally, Transphorm is a provider of high-voltage gallium nitride semiconductor solutions. As the power demands of our electronic devices increase and require more efficiency, silicon is running up against some very real physical limitations. Wideband gap materials like gallium nitride have the chance to replace silicon as the semiconductor of choice in a wide range of applications, including in high-growth areas like electric vehicles and 5G base stations. Transphorm is not without competition in the GaN space (not to mention the competition it will face with manufacturers of silicon carbide, another emerging wideband gap semiconductor), but the company’s efforts to push the boundaries of the technology have won the company important customers in industrial and military markets, and we believe will result in increasing commercial adoption in the near future as increasing power demands necessitate.
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.
Click here to view the Jacob Funds prospectus.
*Effective 12/31/20 the Jacob Micro Cap Growth Fund was renamed as the Jacob Discovery Fund.
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 holdings for the Jacob Internet Fund, as of February 28, 2021.
Click here to view the holdings for the Jacob Small Cap Growth Fund, as of February 28, 2021.
Click here to view the holdings for the Jacob Discovery Fund, as of February 28, 2021.
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.