Dear Investors,

After a relatively mild correction in April, the equity markets rebounded in the last two months of the quarter, leading to numerous new record highs for the year. In conjunction with this, economic data has cooled modestly, and even more importantly, recent inflation statistics have been very encouraging. These developments have given investors more confidence that the stickiness in pricing we experienced in the first quarter was more likely the result of seasonal factors. Now that we can safely rule out a period of stagflation – higher prices and a weak economy – the coveted ‘soft landing’ scenario is now most likely to unfold over the coming months. However, somewhat concerningly, the highest valuations associated with this type of Goldilocks not-too-hot, not-too-cold outlook have been concentrated within a tiny group of the largest components of the indices. This divergence in valuations between the largest companies and the rest of the market (and especially the small cap universe) has been growing for several years, but it has recently gotten even more dramatic. In the second quarter of the year, most small cap indices were actually down despite a very healthy return for the broader indices. Admittedly, we have been expecting small caps to close this valuation gap for a while, but we remain adamant this level of divergence is very rare, and in our opinion, unlikely to continue for much longer. Although frustrating in the short term, we continue to believe in the fundamental prospects of the Fund’s holdings and that they will eventually be rewarded with much higher valuations once the markets return to broader participation.

The Jacob Internet Fund added one new position in the quarter, Flutter Entertainment. Through an aggressive merger and acquisition strategy, Flutter has become one of the largest online gaming companies in the world. Its most consequential purchase was the controlling stake they bought in 2018 in FanDuel, which at the time was strictly a daily fantasy sports site. Shortly thereafter, the US Supreme Court struck down legal restrictions for sports betting and opened up an enormous opportunity. FanDuel, and existing Fund holding DraftKings, quickly launched online websites and apps in the states that were first to legalize. Starting with a very large number of fantasy sports customers, they were quick to take leading positions in sports gambling and general iGaming, getting a significant head start over major casino operators. As Flutter still has most of its operation overseas, and has only recently begun trading on the NYSE, Flutter’s stock price has not fully reflected this FanDuel stake. Additionally, we believe FanDuel will eventually be spun out of Flutter, leading to a positive revaluation by the market.   

The Jacob Small Cap Growth fund also added one new position in the quarter, Cartesian Therapeutics. Cartesian is developing an mRNA therapy (using the same underlying genetic technology used in the Covid vaccines and Funds’ holding Arcturus) for autoimmune diseases. In late 2022, a German rheumatologist Dr. Georg Schett, published a landmark paper describing how a CAR (chimeric antigen receptor)-T cell therapy targeting B-cell abnormalities in patients with SLE, more commonly referred to as lupus, seemed to cure patients of the disease. Follow-up papers in 2023 and earlier this year, showed a similarly encouraging and durable impact in treated patients. Numerous companies are now pursuing development of traditional DNA-based CAR-T therapies in autoimmune disease because of Schett’s work. An mRNA-based CAR-T solution, if sufficiently efficacious and durable, would likely avoid some of the serious near- and long-term safety challenges of a traditional DNA-based therapy. The company recently updated investors from an ongoing Phase II trial in a disease called myasthenia gravis. While the data was mixed, we saw enough promise there to take advantage of the market’s poor reaction and add it to the portfolio.   

The Jacob Discovery fund added three new positions in the quarter, Cartesian Therapeutics, Cerus and CreditRiskMonitor.com. Cerus is the world’s leading producer of blood purification technologies, and its Intercept system helps ensure the safety of donated blood throughout the world. It is the only company with an FDA-approved product for pathogen reduced platelets and has continued to innovate with newer technologies to drive the market forward, one of which is focusing on red blood cells and recently reported solid results in a BARDA-supported Phase 3 trial of cardiac surgery patients. While growth has slowed over the past couple of years on inventory issues and some post-pandemic challenges, the long-term tailwind for the company’s product remains strong given the increasingly complex and diverse set of pathogen outbreaks around the globe. We believe Cerus’ moat is solid and believe the company will follow through on its feasible plan to reach cash flow breakeven that we think will drive a re-rating in the company’s valuation. CreditRiskMonitor.com is a unique small company that provides commercial credit reports and bankruptcy risk analysis to its corporate clients, including 40% of the Fortune 1000. The company has generated consistent but modest revenue growth and profit for several years now and trades at a very small multiple of its cash flow. The company provides proprietary bankruptcy risk scores, which help clients assess the healthiness of their supply chain partners and customers. We see the company as a fairly low risk play on what we believe will be a rise in corporate bankruptcies moving forward, with a slowing economy and the end of the ultra-low interest rate world.

The Jacob Forward ETF also added positions in Flutter Entertainment and Cartesian Therapeutics in the quarter.

Ryan Jacob
Portfolio Manager
Jacob Internet Fund
Jacob Small Cap Growth Fund
Jacob Forward ETF

Darren Chervitz
Portfolio Manager
Jacob Discovery Fund

www.jacobfunds.com

Jacob Internet Fund, Small Cap Growth Fund and Discovery Fund Risk Disclosures:

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.

Jacob Forward ETF Risk Disclosure:

Investing involves risk; Principal loss is possible. Please see the prospectus for the risks associated with investing in the Fund.

Click here for a link to the Jacob Forward ETF prospectus.

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 May 31, 2024.
Click here to view the holdings for the Jacob Small Cap Growth Fund, as of May 31, 2024.
Click here to view the holdings for the Jacob Discovery Fund, as of May 31, 2024.
Click here to view the current holdings for the Jacob Forward ETF.

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.