3 Small Caps With Big Upside (Episode 51)

Well, the three stocks we're gonna talk about today are all small market cap, no bigger than $2 billion of market cap at purchase. And the reason that matters is in a recession like we're in run right now, market recession, at least small cap stocks are the ones that get hit the hardest first. But people don't kind of think through the corollary of that, which is on the recovery. Whenever that comes, small cap socks are the ones that do the best. So our goal today to introduce to your audience three ideas of the next, call it 12 to 24 months, could be really significant outperformers.

Randy. So Amherst is the leading player in a space known as Biomanufacturing, or more colloquially a synthetic biology. And basically it's a space that through the advent of artificial intelligence and big data and all of the kind of big internet themes, cloud that you've heard over the last decade or two has come into its moment. It's essentially the idea that we can accelerate the the evolutionary process of biology to create things in a lab that are cleaner, better for the earth and cheaper to produce.

Yeah, so AMS is an interesting play because it's been public for 20 years, and in that timeframe, if you go back a decade, these are guys that try to save the world. And so a decade ago they said, What's something that we can really make an impact on the world? And the answer was fuel. They said, All right, well we can basically stop the need to draw carbon out of the ground. The problem is the way that these biomanufacturing companies evolve with precision fermentation is its small batch production. So think about something like bakers yeast or a beer brewer for example. And the reason I say it that way is when you compete against the Costcos of the world that compete on a penny one way or the other on oil prices, it's a gross margin business. So small batch production loses out to the big scale.

The shale revolution happened, price of oil dropped for a hundred dollars a barrel, $30 a barrel. Every other company that was trying to do this went bankrupt. AMS is the sole survivor. But as part of that, the lesson they learned was how do we get higher and higher gross margins? And the answer was, the closer you get to the end user or the consumer, the higher you get paid and your gross margins. And so in this case, they have made a real push into beauty, specifically hair and skincare and for example, anyone of What I like about this company is that any of your listeners can go to Sephora and test bio songs, which is a hundred percent and AMS own brand or J vn, that's Jonathan Benness. He's the the flowing hair guy on Netflix's Queer Eye. The right guy.

And you can go and for $20, which is the price point of the shampoo, you can test these things that you know, we're essentially lab made and why does that matter? So, so think about hair, right? Conditioner, all of us use conditioner and most conditioners use silicons. That's how we make hair soft. The problem with silicons is it does not biodegrade in the ocean. Now there is a non silicon version of a conditioner chemically. It is the same exact formulation as what you put on your car when you go in the car wash. Oh, nice. So this company, yeah, I know this company, AMS created a molecule called Hemi Squa, which has the same exact benefit except totally biodegradable, much lighter, much better for the earth. And that's part of the reason this company that was launched one year ago this month now has over it's worth over 500 million today.

And one of the things that we should mention about AMS is if I look at bio sounds, that brand that I mentioned at Sephora, which is backed by another molecule called Squalling, that's worth upwards of a billion dollars, the JVM brand, they've nine brands by the way. I'm just giving you two of them. It's worth $500 million. And the entire enterprise value of the of the stock today is less than 2 billion. So my point is, you're getting to buy these growth names because of the retrenchment that's happened in 2022. You're getting to buy these growth names at value prices with what a traditional value manager would call a huge margin of safety.

That's exactly right. And you know, Kathy Wood has been really big on Tesla. And the reason she loves Tesla is the vertical integration. And that's, that's literal the number one thing, the business model that she likes. Hammers has done the same thing. They're lab to market, which is a cute pun on you know, farm to table, but lab to market and the idea they created in their lab, they then create these ingredients, they create a brand. So for example, I mentioned J vn, Hemi Squealing did not exist in the public domain two years ago. Now the L'Oreal Estee Lauds of the world come to lvmh, which owns Sephora. They say, Hey, where do we get this ingredient? Where do we get Hemi Squa Lane? Sephora then turned and says, Well you gotta go to Amherst to buy it. Amherst has a huge plant in Brazil called Bar Beita, which anyone interested in this should Google Amherst Bar Beita. There's an eight minute video and it's worth watching. It's 25 football fields in size, it's humongous and it's the largest precision ferment in the world. And so AMS uses the consumer goods as the tip of the spear to introduce new molecules, which then get passed on to the industry through the sale of their ingredients. It is total virtuous cycle and it is vertically integrated.

Oh no, I mean this is definitely the internet in 1993.

Absolutely. So I think it is appropriate to paint it in that way. Now, I can't tell you for the space in general what's gonna be pets.com or what's gonna be Amazon. But the idea is that this will be a foundational play. And in fact today on CNBC there was mention that after the chips, you know, issue with China, the microchips, semiconductors, what's the next industry that we're gonna, you know, try and onshore back to America more? In the end, the thing they were talking about was synthetic biology. So this is becoming more and more relevant, specific to your question, this is a great example of a company because it's so early stage that the analysts are totally offside. You mentioned kind of profit projections. You know, the analysts this year are projecting rough numbers on consensus, 350 million of top line for 2022 revenue. This company has the possibility of doubling that number.

And I'm including in there in the fourth quarter, the quarter we're recording currently a molecule sale for 350 million. Cuz the other part I should have added to that is consumer introduces a molecule, you sell it to the industry, then the industry says, Oh, we want this so much that we're gonna pay you a lot to get exclusive manufacturing. And it's not in a traditional way that you and I would think of like a hotel sale, right? A physical asset sale where I give you as, okay, here are the keys in this case because they own all of Hemi squealing for example, they can dictate use and geography for example, you can only use it for flavor and fragrance in China, in Europe, in whatever. And so you can carve out this very kind of specific marketing agreement and you know, Wall Street doesn't get that yet. If they sell a molecule this year, which they're talking about doing, they're very confident about this. If they sell a molecule early next year, which they have also said is in line, that would be the fifth straight year of molecule sales. Wall Street still is treating these as one off versus, I would argue this is a discounted stream of cash flow if every year you're doing it. It's part of the business model. And again, we talk about our virtuous cycle, that's the

Well you know, there are six publishing analysts on the name, so it's not uncovered. But I do think you raise a bigger issue on the industry when people look for, I've been in the business 25 years and when I started, you know, the sell side was where you got your ideas and that was part of it. What has changed is that democratization of Wall Street, which is to say outlets like Seeking Alpha or Reddit and anyone interested in this name, there's a very robust Reddit on Amherst they should look into this is kind of people, retail investors in large part who own a significant percent of their net worth in this name and therefore are willing and want to go deeper than a publishing analyst at a traditional sales firm who may cover 15 or 20 names. So by definition, I mean this is one of the largest names in my portfolio, I'm gonna know this name better than a guy who's covering 15 to 20 names and just checking a box, right?

That's why they're not giving credit to the molecule sale. That's why they're discounting the prospects of it getting done. And you know, for this company in particular, cuz I mentioned you've got assets coverage covering the current stock price. If it's not going bankrupt, which it is not, you know, then the question becomes, well what's the upside? And in this case, you know, once the market JP Morgan for example, initiated with a neutral price target on this saying very clearly Rachel the publishing said once they resolve the molecule sale or the financing, I will come in and raise my price target. Literally she wrote it in the paper. So the question becomes you're buying it today, it's roughly $2 and 50 cents, you know, in the public market today, this probably should be worth somewhere between six to $8 and within the next 18 months, you know, this could be easily $20 plus a share. So that's why I'm saying and introducing it to your audience that this is an opportunistic moment and the entire theme as we move on to the next stock that we're talking about is looking at things today in 2022. Because the market is so dislocated that if the baby's been thrown out with the bathwater, where are the opportunities?

Well, Reno Lytics is another example of what we just talked about with ams. That if a company's not going bankrupt, which is what the market is telling us today, you know, what are the prospects? And you can buy renal lytics in the US at trades on the NASDAQ and an ADR and depository receipt form symbol R N lx. And renally is the only play on prognostic. Think about like cancer, precision medicine, prognostic diagnosis for ckd, chronic kidney disease. So the thesis behind lytics is really very simple, which is if we are going to have social medicine as a country, as a world, we need to address the issue of chronic disease. When you look at kind of obesity, you know, and, and you'll just use it in America right now, you know, by 2030 they're predicting 30% of Americans will be clinically obese. That translates to a hundred pounds overweight.

And the problem in kidney disease is twofold. One, you can have 80% loss of kidney function before you realize you have a problem. You wake up one day, your back hurts, you go to the emergency room, you collapse because you're in stage three kidney failure. And the other problem goes back to the 1970s and 1972, President Nixon for a host of reasons, basically made hemodialysis or dialysis as it's more commonly known kind of frontline care. In other words, if you need dialysis you can get it about a hundred thousand Americans a year go on dialysis. The problem with that is once you're hooked up to this machine, and for those in your audience who don't know, dialysis is basically you go to a center, you basically plug into a machine that flushes in three or four hours your entire kidney function for that week. Okay?

The problem with that is once you're on that machine, once you're in kind of late stage kidney disease, your lifespan has three to five years, you're in the, let's call it the twilight of your ears to be kind about it. So the public companies in this space are devid in for zes, you know, 20 some odd million market cap between them. These are the guys that you go to their centers and you get it. Now what's fascinating about the space, and we talked about the problem of chronic illness is that Medicare's budget, 20 some odd percent of Medicare's budget today is spent on kidney disease. And people say, Whoa, how is that possible that, you know, a fifth of of the CMS budget goes and the answer's pretty simple. If you need to get dialysis for example, you can't drive. So CMS pays for you to get driven to the center, pays for your treatment, pays for you to come home.

And so it's a, obviously it's a need, but the point is if we can be prognostic and get ahead of it, you know, I kind of look at it like a Grand Canyon where for Zeus and devita are one side of the Grand Canyon dealing with the late stage end of life. But let's talk about the other side of the Grand Canyon, which is if you go to your primary care physician and he does your blood test and your annual physical and he has a really simple blood-based test to say, Hey listen, odds are you're gonna need some interventions to not have late stage kidney disease. That to me that's retic solution. And that to me seems kind of an obvious solution.

Well, I don't wanna get too caught up in the terminology. The, the point is if we're gonna have an affordable healthcare, so like I think anyone who's ever been to a hospital, whether for a good thing like having a baby or a bad thing, like a major injury, I think everyone agrees that our, our medical system in terms of the prices that we're charged is pretty broken, right?

Right. And think about with inflation this year, what's happening to that ambulance ride as it goes? And the point is, if we're gonna have a medical system going back to the hyper crowded oath, if you want to be able to support a society, you need to have a medical system that works. And so in the case of Renally, what's really interesting is they're not, I mean yes they have support from nephrologists, the people that deal with kidneys, but they're really focusing on the primary care physicians, the people, the frontline people that when you go and get your physical, they say, say okay. And, and what's fascinating, think about your, just, just anecdotally think about your last physical, I would imagine your pcp, your primary care physician probably talked about your cholesterol, right? I feel like that's a very common thing I would imagine, and I'm, I'm guessing here, but I would imagine they probably didn't do a deep dive in your creatinine levels, your kidney function levels, right?

It's pretty basic and that's the point because this is such a silent killer. You don't, it's not cholesterol, oh she's got a 400 cholesterol ldl, we need to like intervene. It doesn't exist that way. And the backdrop of this name in particular, you mentioned the 90% plus retrenchment is if you look at the xbi, which is the healthcare portion of the s and p, we are basically trading today back at 2017 levels, which is to say if you look at what's happened the last five years with S G R T two inhibitors, with CAR T for heart, all these kind of really evolved medicines, the market is basically assigning negative or no value to those evolutions. And I think that is a total, total misstatement by the

Well, you know, this year that we're in is focused a lot on kind of, if you don't have profits today, you're getting tossed out to the rubbish men. But the problem with these kind of companies, especially in kind of biotech has always been, if you don't need to fundraise imminently, it doesn't really matter. So Retic specifically has enough money to get it into 2024. Right? So my point when I said earlier is that the, the threat of chapter is not imminent. Yes, at some point they will have to raise money, absolutely. But in the interim, I think it is very likely they're gonna announce several things, not the least of which is FDA approval cuz the FDA is all about this, not the least of which is a partnership with some of the big pharma players who see a need. And by the way, we're also entering a regulatory regime where regardless of politics, I mean President Trump had something called M C I T, which stand for Medicare Coverage of Innovative Technology.

It was an idea that said we want to get rid of red tape. Historically, if you were an early stage biotech, you would have, you know, you go through FDA approval, you'd get it. But the pain point was after you got FDA approval, you needed to make a business. So the founder would be super diluted, it would just take a ton of time. You didn't have a sales force, M C I T, the goal of M C I T was to say we're gonna simultaneously have FDA approval and if you get an approval, we're gonna give five years of coverage, national coverage at Medicare. While President Biden when he came in, they had some concerns about M C I T. So they overturned the implementation, which was supposed to be last year, but didn't change the fact that everyone recognizes that chronic obesity is a real issue in this country. As such, I'm hearing now that this is gonna be reintroduced in the first quarter of next year, different acronym, T C E T. But the same concept, the idea that how do we have innovative technologies get progress and not get caught up in red tape and re alytics specifically would really benefit from something like

Well, not to rehash Amherst, but Amherst you could see a position where they have a billion dollars of revenue in two years. So that's solves its own issue. Re alytics, you have to track what you think the testing rate is gonna be. So they have what's called a C PT code, which means Medicare can put it in the system and they have an approved reimbursement rate of $950 per test. Okay? So make your math easy, call it a thousand dollars a test with an 80% gross margin on that and then make a decision on how many tests do you think in any given period they're gonna have. But what I would say to you is that, you know, if you have a thousand dollars a test at 50,000 tests a year, you know it's 50 million in revenue and you're trading today like you said at 70 some odd million. So you know at a certain point whether or not you subscribe to revenue multiples, the these growth companies, the the arc is up until the right.

Yeah, I mean we're introducing, like I said, everything's under 2 billion mark cap, but a whole different range within that bucket. When disco follows the re lytics story in that both were originally UK listed, re lytics, like I mentioned already came over to Nasdaq Wadico in the next year, probably will. And the reason for that is Wadico is a totally different sector. So Amherst materials re lytics healthcare. Now we're gonna talk about a third sector, which is it when disco is the company that owns the algorithm that allows for live data migration to the cloud. So just think for example, let's say you have to go to the airport today and fly to Texas, right? You go to the airport, you gotta buy a ticket,

That's why I it, that's why I gave an example, you should watch out for the webcam behind you. I'm looking at,

Know, you go to the airport and you say, Right, I gotta buy a ticket today. How do you know that the data, the numbers that the person at the counter is looking match exactly the data in India in the back office. Now historically when Amazon wanted to move its data between data centers, they would literally hire an 18 wheel truck, take the servers and move them overnight from state to state. That is problematic for a lot of reasons, not the least in which security. But the idea as we kind of went through Covid to recognize that li that more and more data was pushed to the cloud chief technology officers said, you know what, we don't need the risk of having onsite servers, let's go to data centers, which are very contained. And you have, that's by the way, data centers for your audience are literally where the internet connects, right?

There's a cage for Google, a cage for Amazon, and there's cords between them. And it's literally we talk about kind of if you really want to hurt our country of the world, where would you bomb? It's not really another World Trade Center, it's the data center. Like take the internet offline and see kinda how people react anyway when disco owns the algorithm. And what's really interesting is the only agnostic cloud provider, meaning it can go on Microsoft Azure, it can go on Google, it can go on Alibaba Cloud, it can go anywhere because it's totally not wedded to one end user. And because of that, all of those frontline sales people, Amazon Web services for example, use their sales people to push the WAN disco product. And you gotta think about data increasingly becoming like a commodity in the sense that a chief technology officer is going to choose the cheapest path as long as every all else equal, right?

If the security is the same, if the data is the same. And what's been really interesting, this has been when disco's breakout year stock has started to move, but people really haven't realized how significant it is. But they have a, a major, major European telephone contractor who has come to them three different times in the year to keep increasing the amount of data they're pushing through because every time the data goes through the cloud, it goes through when disco, when disco runs the till. So we are talking about terra bits of data, which you know, you can't even fathom. It's so big.

Well that was the large May was when they announced the largest contract in the history of the company, but there's still opportunity. And so let me kind of elaborate as to why this space uses a term called rpo. RPO basically stands for deferred revenue plus committed unbuild backlog. It's essentially a roadmap for future revenues, right? When this go today is on pace to end the year with 2022, this current year sales plus RPO of about a hundred million. Contrast this with consensus. Consensus and there's a couple banks including Stifel that publish on this name is still somewhere around 50 million. So if when disco's high bar comes to fruition, publishing analyst's expectations would have to be raised. The stock today trades at two times revenue plus rpo. And if you compare that to the cloud peers, Snowflake for example, they trade at 10 to 12 times or five x that same metric.

Well there's a fundamental issue with tech investing in the uk. You know, we're sitting here in the US when you and I record this and you know 35, 40% of the benchmarks are essentially the fangs, right? Like you're talking about like we're very tech heavy. If you compare that to the footsy, which is the UK equivalent, the ftsc two to 3% of the market there is it, which is to say that market in the UK does not appreciate the nuance and potential of technology investing. And that's also why we're introducing this to your audience today as a new name to look for. Because I fully expect that they would do a cross listing in the next 12 to 18 months and would benefit from the rerating that comes from being a tech company primarily listed in the us By the way, their CFO sits in San Francisco. So if you want an example of how committed they are to coming to the us that's a pretty good flag on the hill.

That's right. And they've done a lot of inroads cuz again, it's UK based, a lot of their companies thus far have been European. But what's really fascinating is all of the applications where we are generating more and more data that we don't think about. You know, think about your smart home, your smart meter, that was one of the contracts they signed this year. Think about autonomous driving and how much data your car puts out into the world. It's another contract they sign this year. I give those examples as to say, people say, how can you get to Terra bit upon te bit of data? This is how every waking moment, more and more of our data is going to the cloud. And if you want it to be live, in other words, if five nine s isn't good enough, you need to be a hundred percent when this goes, who you're gonna have to use to get

That's right. And that's also why I spent a lot of time looking overseas, just because valuations are so much more compelling, especially kind of in a recessionary environment, that when the US investor finally turns and realizes, you know, Zoom existed for example, before the Covid pandemic, but none of us really used it the same way, right? There's really interesting technology advances that are not exclusive to America, right? So if you can find these other things that then come in and are used by American corporates, that's something that's a double tailwind that we especially

Yeah, I mean we try to put a lot of our stuff out. If it's not on the website, it's usually on our LinkedIn, so you can definitely track it that way. And yeah, anyone interested, certainly welcome to call our director marketing. His name is John Black and his phone number is (212) 652-3200.

Thanks for having me.