Management Commentary: January 2020
Dear Investors,
Following a summer of numerous false starts, the fourth quarter began with new highs for the equity markets and continued higher through the end of the year. This late surge was mainly the result of several negative factors abating, leading to a more sanguine outlook for the global economy. An initial trade agreement with China removed fears of escalating tariffs in the middle of the holiday season. The three Fed rate cuts gave market participants confidence in a more accommodative monetary policy going forward. Lastly, political risks also eased, with a domestic impeachment trial looking likely to end with a whimper, and an election in the U.K. that appears to signal the beginning of the end of the multi-year drama of Brexit. All in all, it is hard not to make the case that some very significant market risks subsided in the last quarter. While there are still pockets of lofty valuations in various sectors, and a pivotal U.S. election on deck for 2020, overall prices appear to be reasonable given current conditions. We continue to find many unique new opportunities for the Funds and have added to select portfolio positions as our optimism remains high for the New Year.
Jacob Internet Fund
The Jacob Internet Fund added one new position in the quarter: Diamond Eagle Acquisition. Diamond Eagle is a special purpose acquisition company that recently announced a business combination with two private online gaming companies, DraftKings and SBTech. DraftKings, a pioneer in the daily fantasy sports business, has over 4 million players, ~60% global market share and a revenue run rate of more than $300 million. Additionally, early efforts to broaden into traditional sports book operations and iGaming have been very encouraging. Starting in New Jersey in August 2018, DraftKings has consistently maintained greater than 30% online gaming market share as the #2 player, even in the face of fierce competition. As legalization becomes more widespread, we believe the market opportunity for DraftKings could grow over several billion dollars in just a few years. SBTech, which is already providing various services to DraftKings, is a turnkey back-end technology provider for the gaming industry. We are confident that the combined companies will create an online gaming powerhouse, becoming a leader in the evolution of online gaming around the world.
Jacob Small Cap Growth Fund
The Jacob Small Cap Growth Fund also added Diamond Eagle Acquisition as a new position in the quarter.
Jacob Discovery Fund
The Jacob Discovery Fund added three new names in the quarter: Arcturus Therapeutics, MamaMancini’s and Qumu. Arcturus has all the attributes we seek in the biotech space: A potentially broad drug development platform, with an innovative base technology (in this case, a RNA lipid-mediated delivery system called LUNAR); a number of larger pharmaceutical partners (e.g. Takeda, J&J, and Ultragenyx); and multiple shots on goal in a highly varied set of disease targets. While the technology is still incredibly early and needs to demonstrate clinical validation, it could potentially solve some of the efficacy and safety challenges associated with other RNA and RNAi treatments under development, and the company’s partnership agreements already signed include potential milestone and royalty payments exceeding $1 billion.
Qumu offers an enterprise video management system that helps corporations create, distribute, process, store, and search through increasingly large databases of video content, including executive webcasting, employee training, and public communications. With the success of enterprise communication platforms, corporate video content is exploding as more individuals within organizations are empowered to launch streamed webcast events, a phenomenon clearly benefiting Qumu. While the market is highly competitive, and Qumu continues to deal with a transition to the cloud from on-premise, its technology is strong (Gartner has placed it in its Magic Quadrant), and the company has enjoyed solid bookings growth over the past couple of years, while improving gross margins and retention rates, which are now well above 90%.
Finally, MamaMancini’s is a small but innovative food company that made its name serving up delicious meatballs and other related products. CEO Carl Wolf has had a long and successful career in the industry, previously building up the Alpine Lace cheese brand into a $200 million business before selling it to Land O’ Lakes. In addition to its well-received QVC sales efforts, promoted by Dan Mancini (whose mother’s recipes are behind the firm’s name), the company has done an excellent job penetrating new stores and supermarkets throughout the country with its offerings, and recently signed an agreement with Beyond Meat to develop plant-based meatball products, the first of which we have tasted and enjoyed tremendously. The company we believe could see an up-listing to Nasdaq if one or more of its growth initiatives take hold, prospects for which we believe the market isn’t yet appreciating.
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.
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 November 30, 2019.
Click here to view the holdings for the Jacob Small Cap Growth Fund, as of November 30, 2019.
Click here to view the holdings for the Jacob Discovery Fund, as of November 30, 2019.
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 Nasdaq is a market cap-weighted index of over 3,300 common stocks and similar securities listed on the NASDAQ stock exchange. It is not possible to invest in an index.
The Jacob Funds are distributed by Quasar Distributors, LLC.