David Fondrie from Heartland Advisors: A Glass-Half-Full Guy Looks at the Sequester and Economic Growth

David Fondrie is a Senior Vice President and Portfolio Manager for the Select Value Fund at Heartland Advisors in Milwaukee (www.heartlandfunds.com).   He joined Heartland in 1994 and subsequently served as Heartland’s Director of Equity Research for ten years from 2001 to 2011.  He also held the position of CEO of Heartland Funds from 2006 to 2012.  He’s a Badger from the University of Wisconsin and served with the armed forces in Korea.  He started his career with Price Waterhouse and is a CPA.  Our paths have crossed repeatedly over the years since we had interests in some of the same companies.  Like many Midwesterners, he is a plain-spoken man.

Dave Fondrie, Heartland Advisors Inc

Dave Fondrie, Heartland Advisors Inc

We had an opportunity to chat on March 1, the day the much-discussed government spending sequester went into effect, and I asked him what he thought would happen as a result.

DF:  The headline effect is likely to be worse than the real effect.  It’s not going to be as devastating as the articles in the press would have us believe.  There will no doubt be some pain inflicted on defense stocks, for instance.  But for the most part people have been expecting this to happen, so it is not a surprise, and it is built into the market.  There are too many green shoots in the economy now for something like the sequester to knock them all down.

JA:  Are you seeing it more like a speed bump than a brick wall?

DF: Yes, exactly.  I think Congress will get around to the budget and the cuts, adjusting them to what makes more sense.  If you look around at the United States economy right now, what is striking is what is going on in the oil and gas field.  Suddenly we are one of the lowest-cost energy producers and consumers in the world.  Not only does that have a direct effect on business, it is creating a new industry that is building out the infrastructure that will allow us to provide low-cost natural gas energy to industrial America.  This has put us in quite a positive situation.

We are paying $3.50 for natural gas, where Europe is paying $12.00 and Japan is paying  $16.00.  So to me that means that companies that rely on energy for their operations are much better off here than in other major developed economies around the world.  A steel forge, for instance or a company like Precision Castparts Corp (PCP), which use enormous amounts of energy in making parts, are a lot better off here than anywhere else.  Fertilizer plants.  The renaissance in chemicals here is extraordinary.  There are 12 new ammonia plants on the drawing boards, and they all will have a reliable and lowcost stream of natural gas as both energy and raw material.  We can use that ammonia domestically and stop importing it from other economies.

LNG.  There are a number of proposals for LNG plants.  These days we are talking about exporting LNG, where we never thought about anything but importing it in years gone by.  I think this low-cost energy source is underappreciated.  In fact it will spur the continued development of oil and gas, infrastructure, chemical plants, and other types of industrial expansion.   All of that is good for the economy.  Add to that some continued improvement in employment and housing, with home prices increasing, and we foresee stronger consumer confidence, especially as a result of higher home prices.  Already 401(k) values have been improving, and it is undeniable that we are in a low interest-rate environment as well.

All this headline talk about the sequester risk is overblown.  There is no doubt that federal spending and the size of the national debt have to be brought under control.  Entitlement plans have to be rationalized.  But add to the overall situation the fact that China is clearly recovering.  Chinese electrical usage is up, their industrial consumption of materials and energy is up, and as China grows, their growth is good for the other economies that feed her growth.  Europe is not likely to get any worse.

We’re looking for 2.5% to 3% GDP growth in 2013.  The stock markets continue to be reasonably valued.  Corporate balance sheets are good; earnings are good and continuing to improve modestly.  The S&P 500 is trading at 14 times earnings, where in the past it has traded at an average of 16 times earnings.

The wild card is what happens with interest rates.  People have not yet abandoned bonds, but the inflows have receded after several years.  There have been outflows from the equity markets for five years.  Now we are seeing a trickle-back return to the equity markets.  Sadly there is a pattern that is repeating itself, with many buyers entering at the midpoint of an equity run, not at the beginning.  But this is the way cycles go.  We are in the 4th or 5th inning if you take a long view of this bull market over the last three years.

JA:  So are you buying energy companies?

DF:  Not particularly.  Low energy prices are not particularly favorable for exploration and production companies.  But we are looking closely and buying companies that supply goods and services to the energy patch.  For the last two or three years, for instance, it has been apparent that there will have to continue to be huge investments in the energy patch.  If you are drilling in North Dakota, you may have no infrastructure to bring the liquids you are pumping to the refineries, which all tend to be downriver by quite a distance.  We have huge backups in Oklahoma because there is not enough pipeline to carry all the energy.  One company we have owned for 2 to 3 years is Mas Tec Inc (MTZ).  We bought it in the 12s and it closed Friday at $30.78.  Part of their business is in pipelines, and they have also done well at the gathering systems in areas where energy is being produced at the wellhead.  Those are both high-growth areas; the stock was trading cheap two years ago, and it has given us a reward.  Quanta Services Inc (PWR) is very much the same story – we used to own that stock as well, but we sold it when its valuation reached what we thought was a sensible level; in their case they are exposed to pipeline development and new high-voltage lines.

JA:  How about life sciences companies?

DF:  The FDA has been problematic as they have increased their oversight of the industry resulting in complex regulations and inspection observations (commonly called 483 observations).   We own Hospira Inc (HSP), which was a spinout a few years back from Abbott Laboratories  (ABT).  They have run awry of the FDA at a manufacturing facility in Rocky Mount, North Carolina.  In Hospira’s case, addressing the 483 observations and revising processes and procedures has resulted in over $300 million in costs and reduced output of drugs that are already in short supply.  We are all concerned with safety; however those concerns should be balanced with a sensible and timely regulatory process.

JA: Does that put a caution flag out?

DF:  I can’t speculate on what kinds of furloughs the FDA will have to put into effect.   I doubt that we will have chickens rotting on processing lines waiting for FDA inspectors as the press and certain congressional members have suggested, but the big issues around drug approvals will continue to be important, and is likely to be slowed down even further with the automatic budget cuts.  Hopefully they will prioritize their cutbacks and the expense reductions will have less impact than we might expect.  But government does not always work very efficiently.  We hope they will be smart and furlough the poor performers instead of just following  a LIFO pattern.

JA:  How do you feel about ObamaCare and stocks?

DF:  I do sense that there is a bit more thought being given to the impact of ObamaCare.  We just reviewed the 2014 Medicare Advantage benchmark payment rates by the Centers for Medicare and Medicaid Services (CMS), and the cuts were more draconian than expected.  But the government was clear that they are not trying to cripple the HMOs because they are a vital part of the new program.  I am a glass-half-full guy most of the time, and I think if people sit down and talk they can get to some reasonable results; let’s hope that happens.  There is always give-and-take with reimbursement rates, and they end up meeting someplace in the middle.  US businesses are resilient; once they know where the boundaries are, what the rules are, they adjust.  What happens is what you expect in a capitalist system: change comes quickly.  Capitalism works pretty well.

JA:  Where do you think people ought to be looking in the equity markets this year?

DF:  I am in the camp that says we will continue to have a modest economic recovery.  In that kind of environment you have to look at cyclical companies.  We are overweight in industrials and information technology companies.  Everyone is going to look at productivity, and technology is important there.  People will continue to invest in technology to improve productivity.  We are going to be hooking up all kinds of machines at home and in factories to the Internet.  We think tech plays work.  We might stay away from actual PCs, but mobility will continue to expand, and downloads will continue to grow, keeping  Internet growth robust.  Probably financials are good, due in large part to a stronger housing market.  We are a little more cautious on that because the interest rate environment does not allow much net interest rate gain to banks.  But housing will drive loan growth, and the banks have plenty of capital to lend.  With business loans at 3.5%, it is hard for banks to make money.  If we got an uptick of half a percent, it would do wonders.

In tech companies, we like Cisco Systems Inc (CSCO).  We see Cisco as a chief enabler of the infrastructure of the Internet.  Cloud computing is driving a lot of internet traffic.  Cisco is cheap at 12 times earnings, and there is that nice dividend yield of 3% too.  The balance sheet is pristine; altogether it is a very attractive risk-reward proposition.  I run a value-oriented multicap fund.  Cisco is seen as a growth stock, but right now it is also a value stock.  They have gotten their act together after some unwise acquisitions a few years back; we think the downside is minimal.

JA:  What about social media?

DF:  Social media doesn’t really fit our style.  Even Google is not in an area where we play.  Thematically I like agricultural plays like Archer Daniels Midland Company (ADM).  It is trading a bit above book value, and the dividend yield is 2.4%.  If we have a big corn crop, ADM is going to benefit from processing all that corn.  I believe we will have a big corn crop this year, and we need one.  ADM’s PE is under the S&P 500.  I can’t predict the weather, but we are getting moisture that we badly need in the Midwest, so the water table can support strong crops this year.  We’re looking at fertilizer companies, seed companies, and farm equipment (especially on a dip).  Railroads are a bit expensive right now, but it is worth noting that the number of rail cars carrying oil is growing at 25%, which makes those cars part of the infrastructure for moving energy.  Oil companies and refiners are buying those cars and the rails are moving them.  We’ll buy rails on dips too.

One final area that is more in the later innings is deepwater offshore.  We are particularly interested in drilling off the east and west coasts of Africa.  We like the companies that build out those platforms and subsea infrastructure to bring that oil to market.  We like the boat companies that service those rigs.  These are long-cycle investments; the big international oil companies don’t start-and-stop those projects.

JA:  What about shipping companies?

DF:  There may be too much capacity there.  OSG went bankrupt.  What has happened in the US is that we are importing less oil than we were five years ago, and the amount we are producing here has increased.  Our demand for oil from overseas has decreased.  So tanker ship demand has decreased as well.  If China starts to really boom again, that could absorb some of the excess capacity, but I don’t see that as near-term.

JA:  How about the greenback?

DF: The euro is at risk, but the dollar should hold its own.  If the Chinese let their currency float more that might affect the dollar, but for now the dollar is fine.

JA:  Is there an upside to the 2.5% to 3% GDP growth you mentioned?

DF:  Maybe in the back half.  If we resolve our government problems, that might restore more confidence.

JA:  Thanks, Dave.

Allen & Caron owns none of the stocks mentioned in this interview, and Joe Allen owns none of the stocks mentioned in his personal accounts.  Please do your own research.  JA

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Autumn Leaves, October Baseball, DEALS-DEALS-DEALS

The World Series is in sight.  The market is reaching for Dow 10,000.  Topcoats are coming out of closets in the upper midwest and northeast.  Leaves are turning red, orange and gold in the hardwood forests.  And that other cheery mark of autumn is back with us this year as well: deal flow.  Although it is clearly out of our bailiwick, this morning’s Blackstone article is a keynote: CEO Stephen Schwarzman is looking for 8 big IPOs in the near future: http://finance.yahoo.com/news/Blackstone-CEO-sees-up-to-8-apf-176726039.html?x=0&sec=topStories&pos=2&asset=&ccode=.  Call it a series of liquidity events for Blackstone; call it a mitzvah for the NYC-based asset manager.  At the same time, Kohlberg Kravis Roberts is looking to monetize its purchase of Dollar General Stores in an IPO.  The earth trembles at the footfall of giants.

But the smaller fry are active as well, and that may be considerably more important for the vast majority of us.  Throwing a dart at the board, look at Milwaukee-based employee-owned investment bank, RW Baird, fairly recently emancipated by former owner Northwestern Mutual Life, whose headquarters is virtually across the street.  In an industry that was quiet as a tomb a year ago, Baird has completed 7 follow-on offerings since the week before Labor Day.  Those 7 offerings total $831.6 million raised, probably a better-than-expected September.  And the deals were all over the place: http://www.rwbaird.com/ci/investment-banking/equity/equity-transactions.aspx

Point is that Baird is not alone in making hay while the sun shines (a particularly autumnal saying).  One of the sure-fire signs of life in the deal business in Manhattan is the line-up of Lincoln Towncars outside the big law offices at night, when the indentured young lawyers work on prospectus alterations, re-model changing forecasts, etc.  An informal survey shows very long lines outside Cravath Swain & Moore in Worldwide Plaza on 8th Avenue, and outside Proskauer Rose in the Morgan Stanley building on 48th St.  Hmmm.

Deal Flow Media’s database service, PrivateRaise, put out a press release this morning announcing that deal flow in the PIPE market “returned to historical levels” in the 3rd quarter: http://www.privateraise.com/press/2009-10-14.php.  US companies raised $7.9 billion in 290 PIPE deals.  Microcap issuers raised $3 billion in 242 deals in the quarter, according to Brett Goetschius, ed of The PIPEs Report.

In our sector of the market, we tend to see more PIPEs than registered offerings, although smaller companies are hastening to put shelf registrations on file, and smaller underwriters are increasingly doing “registered-direct” offerings, which combine a lot of the marketing advantages of a PIPE with the immediate-liquidity of a registered offering.  Another dart thrown lands on San Francisco-based Merriman Curhan Ford* (Nasdaq: MERR; www.merrimanco.com).  As an investment bank, MCF is specialized in Cleantech, Internet/Media and Healthcare, and the deal flow there has noticeably improved from their published tombstones.  Two deals (a financing and an M&A transaction) for Prague-based KIT-Digital (Nasdaq: KITD; http://www.kitd.com) , a debt deal for Bellevue WA-based Coinstar Inc (Nasdaq: CSTR; http://www.coinstar.com/) , a debt deal for Houston-based Rick’s Cabaret (Nasdaq: RICK; http://www.rickscabaret.com/), an M&A deal for Raptor Pharmaceuticals (Nasdaq: RPTPD; http://www.raptorpharma.com/), a follow-on offering for Mountain View CA-based Vivus (Nasdaq: VVUS; http://www.vivus.com/), a registered-direct deal for Gaithersburg MD-based GenVec Inc (Nasdaq: GNVC, http://www.genvec.com), a follow-on offering for Bethesda MD-based Micromet Inc (Nasdaq: MITI, http://www.micromet.de/), and a private placement for Australian coal producer Cougar Energy.  While not the investment banker’s full-employment act, it is a lot better than packing your things in a cardboard box and waiting to be checked out, which was what was happening a year ago in midtown Manhattan.

From what we can tell, much of the deal flow is entering the stream through small investment banks commonly called “boutique” banks — many of whom do not offer the “full-service” that bigger, more traditional banks offer.  They may or may not be broker-dealers, for instance.  They may or they may not have a proprietary trading desk or market-making operation.  They may or they may not have a sales force, many of the smaller boutiques choosing to outsource virtually everything but the brain-power and essential connections and networks of the partners.  Sometimes it is hard to tell a banker from an asset manager in these cases, because many of them co-invest in their deals a la the traditional UK or European “merchant bank.”

Like many companies in our space, we are watching several deals-in-the-making, and have conducted several “beauty pageants” for companies looking for investment banking services.  Although the pace of deals does not seem feverish as it did a couple of years ago, it is definitely oiled up and ready to rip.  And many of the recent big-deal offerings have performed quite well, thanks very much.  Look at the stock of A123 Systems (Nasdaq: AONE), which has virtually doubled the investment of people who bought on the recent offering and held the stock instead of flipping it.  And, stripped of the glamor, A123 is basically an early-stage company whose horizon is pink with sales potential, but whose glory days are putatively out there in the unknown future.

Stay tuned, lots of new products hitting the market week by week. 

*Allen & Caron, publisher of this blog, has provided project services to MCF for certain of its international ADR clients.

Buy-and-Hold Investing Is Not Dead: An Interview with David Skriloff of MKM

David Skriloff is a Renaissance financial guy – either that or a man with more lives than a cat. He is currently running MKM Capital Advisors LLC in New York City, a firm he founded in June 2008, after a couple of years as a Managing Director at Vision Capital Advisors where, among other things, he raised a $100 million closed-end fund for investing in China.He was a co-founder and EVP of Millivision, a homeland security company that eventually was subsumed by L-3, and whose scanning technology has recently been introduced by L-3 and the TSA at Denver Airport.Prior to that he was CFO of eGlobe, a Nasdaq-listed international telcom carrier, and was co-head of telcom banking at Gerard Klauer Mattison in their go-go days throughout the 1990s. He went to school at Carnegie-Mellon in electrical engineering, and took an MBA from NYU.

David Skriloff, MKM Capital Advisors LLC

David Skriloff, MKM Capital Advisors LLC

 David founded MKM with the goal of being a longterm investor in small and microcap companies.  Most of the investments in his $20 million portfolio are publicly traded (75%); the nonpublic portion (25%) is composed of companies with a prospect of near-term liquidity, either from M&A activity or from a potential reverse merger into a public shell.  MKM is industry agnostic, but invests in non-cyclicals and tends to be event-driven.

 We talked to David yesterday and asked him to give us an example of the type of company he looks for.He nominated Covington, KY-based Valley Forge Composite Technologies Inc (EBB: VLYF, http://www.vlyf.com), a “homeland security” company in the broadest sense.

They have,” Skriloff said, “two detection systems: one that looks at people, and the other that looks at metal cargo containers.Our judgment is that the cargo screening system is far and away the best available, especially since cargo container screening is a difficult task .This is the only technology that we know of that works. Their people screener is also the best of breed but in a more competitive space.  We are excited about both products, particularly since the company has recently announced its first major order from a Middle East government, but are most excited by the cargo screener since it is truly unique. With my background at Millivision, transportation scanning is a segment I have paid a lot of attention to.

“Valley Forge is a newish company founded on technology that originated in Russia. In a post-9-11 effort to guarantee that Russian nuclear scientists did not go to work for ‘dangerous’ regimes, the US, through DOE, provided funding for the commercialization of certain Russian technologies.  Through this program Valley Forge was able to form a joint venture with Lawrence Livermore Labs and the Russian Lebedev Institute to commercialize Lebedev technologies.  MKM was the first institutional investor; prior investments were a combination of government grants and friends & family.”

We checked, and VLYF closed March 3 with a market cap of just under $25 million, a stock price of $0.47, and average trading volume of just over 30,000 shares, probably double-counted. We asked if stock liquidity is not a concern for MKM.

“We don’t care about liquidity,” Skriloff said.“We are not short-term investors. There is a point of view that says that low liquidity can position us to get an even better value for our investment than we would if there were a lot of trading. We tend to buy senior secured convertible notes with warrants, and we are very risk-averse, which means that we try to make sure that our investment is potentially covered with some saleable asset. In the case of VLYF, we could recoup easily by selling the technology.  But assuming the company performs in the way we believe it will, our investors will do very well indeed.”

That example told us a lot about the style of investing, which seems to be characterized by an eagle eye for strong niche noncyclical products balanced by a careful structure pointed at capital preservation.

“We seldom look at biotechs or drug development companies,” he said.  “The problem is that drug development is too expensive, takes too long, takes too many expensive people and laboratories. Medical devices are different; we tend to like them. If their 510(k) is nearly finished, they have potential joint-venture partners, and they are pointed at major indications, we want to see them.

For instance, we have investments in a diabetes device company, Echo Therapeutics Inc (EBB: ECTE, http:www.echotx.com) . It is a company that has developed a non-invasive, needle-free, continuous glucose monitor in conjunction with MIT.  But we are wary of large cash burn rates in today’s economy. We tend to like companies that, in a pinch, we could keep funded ourselves if no one else stepped up to the plate – not that we prefer to be a sole funder (we don’t), but being a sole funder is better than a sale on the courthouse steps.”  ECTE is trading at $0.62, vs a 52-week high of  $2.15, for a market cap of about $11.7 million.

He said his fund likes greentech companies too, primarily those that are developing technologies or gear, rather than those that are generating electricity.  He mentioned a company with a technology developed at Rice University for a new photovoltaic approach that works with the entire light spectrum, and not just visible sunlight. As a result, it can product ‘solar’ electricity even at night, and has no carbon footprint at all. Ideally the technology will lend itself to being silkscreened onto any surface: a roof, for instance. But the identity of that company remains secret, until, one supposes, MKM has completed its investment.

San Diego-based Ethos Environmental Inc (EBB: ETEV, http://www.ethosfr.com) is a favorite. This small company specializes in “additives to fuel and oil. Their EthosFR product,” Skriloff said, ” is a nontoxic, non-hazardous additive that reduces emissions and significantly improves fuel efficiency.  We invested in the third quarter of 2008, and again in February 2009. We believe their California Air Resources Board tests, which will be completed shortly, together with the completion of several trials by large fleets, will make all the difference for them, which also tickles our own event-driven strategy.” ETEV closed on Tuesday at $0.17, with a market cap of $6.5 million, evidence of MKM’s microcap interest.  Their average volume of just over 28,000 shares also testifies to MKM’s independence of a need for stock liquidity at the time of investment.  

We asked David who should be investing in MKM itself. He said it is a hedge fund that requires that its investors be super-accredited, and have $5 million in liquid net work. The investment in MKM ought to be between 2% and 5% of an investor’s portfolio, representing the higher end of risk, volatility and returns (although he believes that the downside is limited since the investments are generally convertible notes backed by assets). He said they were up 5% for 2008, not bad for a fund that was only begun in June and therefore could not have made all its money in the comparatively frothy first half of the year. He said they are flat so far for 2009.

Interested investors can contact Skriloff at david@mkmcap.com,  or by telephone at 212-473-8610.

Investors Like Environmental Prospects — Optimism Prevails in Allianz Survey

Munich-based but worldwide, Allianz Global Investors is a very large asset manager, and as such has a vested interest in knowing the mindset of investors. Late last week, the German giant released a summary of a survey it commissioned from GfK Roper, who interviewed 1200+ people on a variety of subjects. To get the suspense out of the way, optimism was markedly present, with more than half (52%) of the respondents saying that the Dow Jones Industrial Average would be higher a year from now than it is today. “Higher” is a direction, not a level, of course, but it is the outlook that is important. http://mediarelations.allianzgi.com/en/Pressreleases.

The survey elicited responses about some fairly specific items as well.  Key findings included that 78% of investors expect to see more pro-environment business policies under the Obama administation.  In general, the summary of the reaction said that “Despite the sluggish economy, investors are generally optimistic and ready to put their green to work.”

So in spite of the market opening down 100 this morning, we ought to have smiles on our faces.  If the survey proves right, what kinds of companies ought we to look for with our investable dollars?   (The survey says that 48% of investors are likely to invest in environmental companies this year) 

There are a very broad number of companies and types of investments in solar energy, which is probably the broadest category in terms of the availability of choices.  These include big companies like Tempe, AZ-based First Solar (Nasdaq:FSLR, $11.5 billion market cap, http://www.firstsolar.com/).  But it also includes smaller, more speculative companies like Roseville, CA-based Solar Power Inc (EBB:SOPW, $23 million market cap, stock at $0.69, down from a 52-week high of $2.85, http://www.solarpowerinc.net/).   It also includes the formerly fuel-cell-fixated Rochester Hills, MI-based Energy Conversion Devices Inc (Nasdaq:ENER, market cap of about $1 billion, stock at $23.99, down from $83.33, http://www.ovonic.com/). 

Small companies like the Israeli 3G Solar Ltd can also be interesting.  They have announced their intention to list on the Toronto Venture Exchange (which claims to have more oil & gas companies than any other exchange in the world, by the way).  Their dye-based solar technology offers variety in a portfolio that is likely to be dominated by Photovoltaics, thin-film technologies and solar concentrators of various kinds.  There is no current date, as far as we know, for the listing in Toronto, but you might want to keep an eye on http://www.3gsolar.com/

We have always been fond of cross-border companies, which frequently offer better values in terms of ratios.  If your taste runs in that direction, have a look at Seville, Spain-based Abengoa (3.2 billion euros revenue for 2007, the latest reported year).  It is more complicated to invest in Abengoa; its shares are theoretically available on the Pink Sheets in the US under the ticker ABGOY, but they seldom trade.  Trading is fairly brisk on the Madrid Exchange, with a current price of 11.80 euros, down from a high of 13.29 euros) http://www.abengoa.com/sites/abengoa/en/gobierno_corporativo/acciones/cotizacion_de_la_accion/index.html

Why Abengoa?  They are building what is claimed to be the largest solar installation anywhere in the world — and it is in Arizona.  The Solana plant is being built near Gila Bend for Arizona Public Service (electric utility), http://www.aps.com/ to generate 280 MW of output power using solar concentrators that melt salt and use the heat generated to drive turbines to supply clean energy to 70,000 homes. 

Abengoa's Solana project near Gila Bend, AZ

Abengoa's Solana project near Gila Bend, AZ

But you may also find that South Melbourne, Australia-based EnviroMission is to your taste: http://www.enviromission.com.au/IRM/content/home.html.  It trades on the ASX, but also trades lazily on the Pink Sheets as OTC: EVOMY ($0.78, very low volume).  EnviroMission looks to build the first Solar Tower power generator in the world — in the US, by the way.  The Solar Tower could be 1000 meters tall, using a chimney theory to loft heat from solar concentrators to drive turbines.  That would be, as we calculate it, taller than a 300-story building.  Pretty interesting. 

EnviroMission's projected Solar Tower (artist rendering)

EnviroMission's projected Solar Tower (artist rendering)

OneMedPlace on the Rise

While the Westin St. Francis Hotel and the JP Morgan Healthcare conference were the center of action in San Francisco the week before last (see Jan 22 post), a growing buzz could be heard a block away at the Sir Francis Drake.  For the second consecutive year, an aspiring media concern held its annual conference in adjunct fashion.

OneMedPlace (www.onemedplace.com) is the internet-based brainchild of Brett Johnson, a Hah-vahd educated, hyperactive entrepeneur of the type that makes most of us feel lazy.  The OneMedPlace idea started with his print publication Healthcare Investment Digest, which highlighted microcap public companies to potential investors.  5 years later the web-based “conglomerate” includes blogs, industry resources, event coverage (e.g., Advamed, Investor conferences), an internet video channel (OneMedTV)  and a multimedia platform from which smallcap companies can tell their stories.

banner_leader_forum2

The 2009 San Francisco conference dubbed OneMedForum (www.onemedforum.com) provided a refreshing break from the same-old, same-old crunch of the larger investor conference down the street.  OneMedPlace featured a series of forums focusing on challenges and opportunities in todays healthcare markets.  Panelists included captains of the medtech industry, VC superstars and a smattering of service providers such as attorneys and I-bankers.  Without exception, the forums were well attended and topical, covering subjects like financing in these bleak times, evolving reimbursement scenarios and technology developments in the various medical specialties.  A second track spotlighted executives of small public and private companies giving their pitch to a an audience of investors that was easily double that of last year’s event. 

Do I sound like a shill?  OK, I do feel  a bit of vindication here as I have several clients that joined OneMedPlace as partners on my recommendation (and a prayer) before it had really “arrived”.  As the site and affiliate programs broaden the audience and grow in stature, those decisions seem to have paid off for small, innovative companies such as Synthemed, Inc (www.synthemed.com) , Endocare, Inc (www.endocare.com), Clarient, inc (www.clarientinc.com), Pegasus Biologics (Pegasusbiologics.com), Clearant, Inc (www.clearant.com), CNS Response (www.cnsresponse.com) and Symphony Medical, Inc (www.symphonymed.com).  Frankly, there are few new channels for microcap communications to investors and this is one that combines some nifty new-media solutions.  Keep your eyes peeled for a new TV service rumored to be introduced this spring….and keep up the good work, Brett.

One Take on JP Morgan Healthcare Conference Week

Something was different about the JP Morgan Conference this year. 

Pretty much everyone involved with medtech investing knows that San Francisco becomes the center of the world during the second week of January.  Melodramatic, perhaps, but for almost a decade and years before that under the Hambrecht and Quist banner, the JP Morgan Healthcare conference has been the best attended and arguably most important event for healthcare investors annually. Each year, hundreds of JPM personnel, medtech executives, venture capitalists and institutional investors pack the halls of the Westin St. Francis Hotel, traveling between company presentations, one-on-one meetings and countless opportunities to network and catch up with the circle of freinds and colleagues that make up the somewhay inbred world of the medical and biotech industries.  Meanwhile, in adjacent hotel suites and coffee shops, competitive investment banks set up shop to make sure they have equal time with company managers in the most “target rich environment” the industry has to offer.

Did a depressing economy and a steep decline in funding in the sector impact the tone of the 2009 event?  In short – yes.  I was told by JP Morgan organizers that far fewer invites went out to presenters and attendees.  In addition, the typically lavish JPM welcome reception, held for the past few years at the San Francisco City Hall, was cancelled.  There seemed to be a tone of austerity, an evident focus on “green” conference initiatives (e.g. recycled supplies, earth friendly materials, etc.) and a square focus on business before social imperatives.

Though more serious in tone, optimism seemed to carry the day as high-profile acquisitions in the industry were pointed to as proof of life and hope for deals in the near term – now financing is another matter completely…..

Some Tools Can Make Investors More Confident in Post-Madoff Fund Reporting

Last night at dinner, an investment-banker friend commented that he did not understand how the Madoff scam could be carried on so hugely and for so long, given the amount of reporting that would have had to be done — or falsified — over the years.  After all, $50 billion ain’t chump change.

I looked around and found that in an article for the British Bankers’ Association’s current November/December 2008 newsletter, Kevin Connelly, an officer of Dublin- and Dallas-based Trintech Inc (Nasdaq:TTPA), says that a large percentage of approximately 10,000 active hedge funds in the US (he says it is a $2 trillion industry, but that valuation was most likely calculated before the recent changes in market valuations) use manual spreadsheets to track, manage and reconcile complex financial transactions.  http://www.bba.org.uk/bba/jsp/Login.jsp?returnPath=%2Fbba%2Froad%2FClassic%2Fdepartment%2F503%2Fjsp%2FRender.jsp%3Fd%3D164%26a%3D15050.  Unfortunately BBA (the newsletter) requires a log-in to read the entire article. 

Connelly says that the “traditional” approach to the task uses basic reconciliation tools that are built into trading or transaction systems, downloading data into spreadsheets, and matching data to general ledge or bank statements.  A tool-based approach focuses on sophisticated solutions to automate the majority of the transaction reconciliation.  He knows about these things because his company, Trintech* (http://www.trintech.com) , is a leading supplier of such tools in the US and around the world.

By automating the reconciliation of accounts, a fund can protect the trade validation process in the front office.  It can provide position management, post-trade compliance, settlement and trade matching; and it can provide enhanced reporting for decision-making. 

That may sound like double-talk to you (it fogs my glasses a bit as well), but what it means is that the principal means of reporting and verifying hedge-fund transactions and results are not yet automated, which means they are, at least to some extent, put together by people with green eyeshades.  Of course if such reports are fully automated, the back office guys cannot rejigger them to make them look better.

If you are interested to find out more about automating the reconciliation process — or if you want to find out if YOUR hedgie is still using manual spreadsheets with their potential for, um, error — have a look at Trintech’s Unity Financial Governance Solutions (http://www.trintech.com/solutions/trintech-unity/).

If you can log in to the BBA newsletter, I encourage you to do so.  Otherwise I think Trintech will send you a copy of the article if you ask them for it.  http://www.trintech.com/contact/