Management Commentary: July 2018
Dear Investors,
The second quarter saw a continued rebound from the very turbulent start to 2018. However, the Nasdaq was the only major broad index to make new highs over the past month, with the Dow and the S&P 500 still well below their January levels. Trade tensions continue to dominate the headlines, so it’s not surprising that large multi-national companies are exhibiting the most weakness. In addition, somewhat tempered global growth rates led to much better relative performance for U.S.-focused smaller cap names, fitting nicely with how we have positioned the Fund’s portfolios over the past couple of years. Given recent events, we have continued positioning the funds seeking to take advantage of these trends.
Jacob Internet Fund
The Jacob Internet Fund added one new position in the quarter: YY Inc. YY is a leading Chinese live streaming platform, with its most recent success in the area of gaming and e-sports. Around the world, streaming services have exploded, with the Chinese market in particular becoming one of the most robust. The recent investment in Huya, YY’s gaming subsidiary, by Tencent, the leading game developer in China, should provide a material boost to the platform, which is already the dominant player in the market. Huya’s IPO in May, and its subsequent rise in price, has led it to become almost half the value of YY in total. If YY and Huya can retain their market share, we believe YY is an attractive way to play the continued growth in live streaming popularity.
Jacob Small Cap Growth Fund
The Jacob Small Cap Growth Fund added one new position in the quarter as well: Rosehill Resources. As part of our plan to diversify our energy exposure this year, we initiated a position in this small Delaware operator in the Permian basin. While still very early in its development, Rosehill has made encouraging progress in its drilling program and already has proven out a significant portion of its acreage. That, combined with a relatively clean balance sheet, should allow them to continue an aggressive drilling schedule while also able to make some small adjacent acquisitions. If Rosehill can come close to its guidance for production and EBITDA over the next 12-18 months, we believe there is an opportunity for an increase in valuation multiples and share price growth.
Jacob Discovery Fund
The Jacob Discovery Fund added two new positions in the quarter: Krystal Biotech and Build-A-Bear Workshop. Krystal Biotech is a gene therapy company creating treatments for rare skin diseases and chronic wounds with a proprietary modified viral vector platform. Its most advanced product is being clinically studied to treat a devastating disease called dystrophic epidermolysis bullosa (DEB). While still early in the drug's development - the first human patient was only dosed a couple of months ago - gene therapy solutions have proven to show a lot of promise in a number of diseases caused by specific mutations and we are hopeful that Krystal's drug will prove similarly effective in delivering functional collagen VII to patients suffering from DEB.
Build-A-Bear Workshop is a well-known retailer of personalized stuffed animal creations. The 400-plus store chain has suffered a number of setbacks in recent months including the loss of one of its most successful stores in Disney Anaheim, the liquidation of inventory from the now-bankrupt Toys R Us, and a general secular downturn in mall traffic. However the company has several initiatives to reinvigorate its business, including a partnership with the Girl Scouts, new stores in non-mall tourist locations, and upcoming changes to its important birthday party business. Plus, we believe the store still offers a differentiated product and a destination-type retail experience that malls are desperate to attract. In addition Build-a-Bear has no debt and feel trades at a low EBITDA multiple, making the retailer an attractive turnaround investment opportunity.
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 most recent holdings for the Jacob Internet Fund, as of November 30, 2018.
Click here to view the most recent holdings for the Jacob Small Cap Growth Fund, as of November 30, 2018.
Click here to view the most recent holdings for the Jacob Discovery Fund, as of November 30, 2018.
Please note that these fund holdings are subject to change and should not be considered a recommendation to buy or sell any security.
The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the Nasdaq.
The S&P 500 a market cap-weighted index based on the market capitalizations of 500 large companies having common stock listed on the NYSE and the Nasdaq.
The Nasdaq is a market cap-weighted index of over 3,300 common stocks and similar securities listed on the NASDAQ stock exchange .
Earnings growth is not representative of the Fund’s future performance.
The Jacob Funds are distributed by Quasar Distributors, LLC.