Oh no. Not more about MicroVision. Yep. But not because it is MicroVision. This blog is an extension of my book, Dream. Invest. Live., which I knew could only represent what happened up until it was published. The world continues to change, and that’s why I write this blog. MicroVision and GigOptix, however, are doing a fine job of illustrating the vagaries of the investing world. Rather than write about abstractions, I write about these very real case studies that directly affect my life because it is the best way to illustrate what it is like to invest for the long term. This week, the investing world raised a small cheer for GIG, and couldn’t decide what to do with MVIS. So goes the world of Long Term Buy and Hold investing. Good news doesn’t always receive a DNDN kind of response, even when investors think it should.
Long term buy and hold (LTBH) is an investment strategy that some consider anachronistic. Buy a stock that is undervalued. Wait a few years while the company grows and matures. Sell the stock at a higher price to investors who want a growth company or a mature company. Repeat as necessary. It is a style that worked well enough for me that I retired at 38. It was a style that worked well enough that friends encouraged me to write the book. It was a style that stopped working about the time of The Great Recession (and the end of my early retirement). One current question is, “Has the world changed enough to invalidate a strategy that relies on patience measured in years instead of quarters, months, weeks, days, hours, minutes, or seconds?” When computers can control trades with buy and sell cycles measured in micro-seconds, does it make sense to trade on the scale of years?
Of course, I think LTBH is still valid, just like knowing that gusts of winds can upset a sailboat, but it still makes sense to pay attention to the prevailing winds for long voyages.
A critical event for any small company with a new idea is the transition from hope and plans to reality and confirmation. Find a good idea. Develop it well enough to make it marketable. Market it. Hope enough customers buy enough of the product. That first bit of marketing and those first sales represent the key event. After that key event, successful companies expect to have steadily increasing sales, increasing profits, and increasing demand for their products and stock. That critical transition time isn’t one event; it is a series of events. GigOptix and MicroVision are in their own versions of that transition. This week saw good news from both.
GigOptix announced their first profitable quarter that would please accountants. MicroVision announced their best earnings report, which some investors considered impressive enough to suggest profitability within the next year or two. Profitability is a big thing. In previous posts I’ve documented my estimates for GIG and MVIS. For both stocks, a tripling of the stock price wouldn’t surpass my conservative estimate. For the week, GIG was up 39% and MVIS was down 3%. GIG’s action was appreciated, but leaves a lot of potential before it reaches my expectations. MVIS’s action has become too familiar; investors buying the rumor, selling the news, and waiting for the really big announcement, whatever that may be. It could happen. Any tangible mention of Apple and MVIS spikes the stock, or at least the blog traffic.
Conservative estimates of the market suggest planning for a return of about 7%. The daily reality is different. Any day the markets are open, there are usually a few stocks that have gained more than 20%. The highest I’ve witnessed was 640%. The highest that’s happened in my portfolio was 240%. More commonly for small stocks hitting big news is a rise of 140%. With that perspective, +39% and -3% aren’t big news.
I was fortunate. After the beginning of The Great Recession, my portfolio recovered much more quickly than the market because of small stocks reaching critical events. American Superconductor (AMSC) made a smart acquisition that created a half billion dollar revenue stream. Dendreon (DNDN) received FDA approval for a transformative cancer vaccine. Within three months DNDN went from $2.60 to $25.74. The day with the biggest news, DNDN went up 130%. About a year later it hit $54. (Then it went bankrupt, but that’s another long, and yet to be resolved drama.) If you want to vicariously experience such an event, go back to my original, orphaned blog.
Those closest to the news frequently don’t understand why the rest of the crowd isn’t cheering. Familiarity has a value.
GigOptix expects to continue growing, probably at about 20% annual, given their recent performance (which is not a guarantee of future results.) If GIG increases by 39% every week, it will reach my conservative estimate in less than a month. My nominal estimate is based on Present Value of Future Revenues Discounted for Risk (read the book for details), but I haven’t calculated that lately. (Got a value for the 100Ghz eletro-optical switch market with projections?)
MicroVision expects to continue growing, and expects to finally tell us more about what they’ve been working on in secret with at least three, and maybe a half dozen, major customers. From barely avoiding bankruptcy in the last few years, to surviving on development contracts, to finally transitioning to multiple revenue streams based on licensing, royalties, and component sales, MicroVision may have finally cleared the major hurdles and can begin running at full speed. Sony has announced that a MicroVision enabled pico-projector will be released this October. There’s good reason to expect an innovative smartphone from another customer this year. And there are various hints about several other customers who showed prototypes back at the Consumer Electronics Show in January, plenty of time for companies like Celluon to bring a product to market.
MicroVision’s, MVIS’ problem probably comes from the lack of quantifiable evidence of the potential new business. The company did announce one of its best earnings reports, but the revenues only suggested eventual cash-flow positive, and pointed to eventual profitability. Without substantive evidence, risk-averse investors will walk away and watch from a distance. The best earnings report ever, wasn’t sufficient for them.
Since The Great Recession, investors are more risk-averse, wealthy investors are more likely to hedge their investments, and computers are more likely to take advantage of sporadic trading patterns. That may be why small stocks that were dominated by individual investors no longer act the way they did. Or, it could just be that I need yet more patience as good news from small companies arrives under the fog created by major news items from Greece and China.
My best response as an individual investor is to follow logic and math, and to trust myself, and to question myself. The situation is improving. My portfolio only reflects a small portion of the potential, which may only be a temporary delay. Yes, I’ll continue to write about GIG, MVIS, AMSC, and others, because the reality of investing is best told in long form, not in pithy catch-phrases. If you want to witness a bit of investing reality, continue staying tuned, and I’ll endeavour to continue chronicling the journey. (And, if you want the back story, go buy my book. It has data and details, and hopefully humor.)