January 7, 2014
After some minor weakness in early October, the equity markets have continued to grind higher, with the indexes now nearing all-time highs (except the Nasdaq, of course). Positive economic data has been consistent, if still a bit subdued, while less noise from overseas and our own government has definitely helped. The one prevailing issue for most market observers has finally been addressed; when the Fed will begin its bond tapering program. But as long as the economy continues to strengthen, the markets will likely be able to look past these actions, knowing that we are probably still a year (or two) from the Fed actually raising interest rates. So, as the overall environment is getting less uncertain, but valuations are generally pricing in a decent recovery, we are finding ourselves a little more balanced in our overall view for 2014. That being said, we are still finding a lot of fresh individual opportunities and have been especially active in the last few months adding new names and taking profits in others. As far as position weightings go, we are still following the same playbook: emphasizing secular growers and being more cautious in interest-rate sensitive sectors that rely on a more robust economic recovery.
The Internet fund added two new holdings in the quarter: LinkedIn and Coastal Contacts. LinkedIn is a name we have closely followed since its IPO in 2011 and have been waiting for the business fundamentals to catch up with the stock price (similar to our approach with Facebook). While still expensive based on traditional metrics, LinkedIn epitomizes the value that can be created by a powerful platform. Our investment thesis rests not only on LinkedIn's very defensible position, but also the fact that they have been profitable, have many subscription-based revenue streams, and have been still growing sales over 50% annually. Coastal Contacts is the largest web-based retailer of contact lenses and eyeglasses in Canada, and is redoubling its efforts in the U.S. Coastal should benefit from the gradual move online by consumers and the large base of business and manufacturing capacity that has recently been expanded.
In addition to Coastal Contacts, the Micro Cap fund also added two other new positions: Omeros and Merrimack Pharmaceuticals. Omeros is a very small drug company that has an interesting proprietary platform (PharmacoSurgery) as well as an impressive pipeline of assets. The drug furthest along is an ophthalmic surgery treatment that has completed Phase 3 trials and is currently under FDA review. In addition, Omeros has what we believe is a valuable discovery program focused on finding orphan G protein-coupled receptors, which serve as the target for many of the world's biggest-selling drugs. Merrimack is another very intriguing early-stage drug company, which is trying to attack cancer's complex signal networking system through a number of targeted antibody-based therapies. Merrimack also has a nanotherapeutic program which alters already-approved chemotherapy drugs in such a way that they are absorbed by tumors for longer periods of time, which in theory should increase their efficacy. Results in this arena from a phase 3 trial in pancreatic cancer are due early next year.
In addition to both Omeros and Merrimack Pharmaceuticals, the Small Cap fund added a position in Matador Resources. Matador is a small exploration and production energy company with a significant footprint in the prolific Eagle Ford area, as well as some new prospective acreage in the Permian Basin in West Texas. Additionally, the company has ownership stakes in the Haynesville region, which could contribute to increased cash flow if natural gas prices rise.
The Wisdom fund added one new position in the quarter: Panera Bread. Panera is a bakery-cafe chain that falls into the "fast casual dining" segment of the restaurant industry, which has been growing strongly over the past few years. The small check size and high quality of the food has allowed Panera and others to gain market share from the more established quick-service fast food restaurants. The company has demonstrated an ability to grow at a fast clip and generate a consistent high return on invested capital while maintaining a shareholder-friendly buyback plan over the past three years. In its recent quarterly earnings report, the company showed a slowing same-store-sales growth that disappointed many analysts. Since we feel that this is a temporary phenomenon, the news allowed us to purchase shares at what we believe are very attractive prices.
Jacob Internet Fund
Jacob Small Cap Growth Fund
Jacob Micro Cap Growth Fund
Jacob Wisdom 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 four 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. The Small Cap Fund, Internet Fund and Wisdom Fund will invest in smaller companies, which involve additional risks, such as limited liquidity and greater volatility. The Wisdom Fund may invest in Real Estate Investment Trusts (REITs) which may be affected by economic, legal, cultural, environmental or technological factors that affect property values, rents or occupancies of real estate related to the Fund's holdings. 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.
Any tax or legal information provided is merely a summary of our understanding and interpretation of some of the current income tax regulations and is not exhaustive. Investors must consult their tax advisor or legal counsel for advice and information concerning their particular situation. Neither the Fund nor any of its representatives may give legal or tax advice.
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.
The Nasdaq Index is a market-capitalization weighted index of the more than 3,000 common equities listed on the Nasdaq stock exchange.
Please refer to the prospectus located at www.jacobmutualfunds.com for more complete information including risks, fees and expenses.
Click here to view the holdings for the Jacob Internet Fund, as of November 30, 2013.
Click here to view the holdings for the Jacob Small Cap Growth Fund, as of November 30, 2013.
Click here to view the holdings for the Jacob Micro Cap Growth Fund, as of November 30, 2013.
Click here to view the holdings for the Jacob Wisdom Fund, as of November 30, 2013.
Please note that these holdings are subject to change and should not be considered a recommendation to buy or sell any security.
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Quasar Distributors, LLC, Distributor 1/14