Trump vs FBI, Snap update, Why Nvidia rules the cloud and more

Click here to listen to an edited podcast version of this week’s Trading With Cody Q&A Conference Call or read on for the full transcript.

Let’s talk markets. I guess right now you can’t talk markets without talking politics. Comey. Fired. The FBI Director fired by the President of the United States who is under investigation by the FBI for Russian influence in the elections. I guess that is the best way to put it. Comey’s now former Bureau is in charge of that investigation. That is a big deal today and everyone is talking about it. The futures were down pretty good this morning after that news hit last night. Of course, things stabilized and the $DJIA is down fractionally and the $SPX and $COMP are up fractionally as I speak. Oil is up a couple of bucks.

Guys, we go through these geopolitical worries a lot. They very rarely turn into catalysts. Meaning, almost every day, especially with Trump because of his tweeting activity being so prolific, he is in the news every day. And, then something like this, it’s real news. Is it a catalyst? It’s a worry, but not necessarily a catalyst. I was sick to my stomach a little bit this morning when I started reading about all of this. I didn’t watch it last night because I was taking care of Lyncoln. Amaris is up in Albuquerque at the hospital by the way and I am going to get out here this afternoon to go see her.

I click on all these stories about Comey and read NY Times, Wall Street Journal, NY Daily News, NY Post. The NY Times is the Democrat/Liberals’ version of serious news. Wall Street Journal is the Republican/Conservative’s version of serious news. The Post is Republican/Conservative for “tabloid-ish” take on the news and the NY Daily news is that for Democrat/Liberals. This is one of those things I talk about all the time — that even those fine institutions I read every day, those historic storied institutions I read every day like this, they are all partisan. When you read their takes on news like today, the partisanship always rings clearly through if you go back-to-back in reading those newspapers.

Going back to it, it made me worried reading all of those newspapers today. Their partisan takes, you know the Republican rags try to make it sound like it is no big deal or real positive and the Democrat rags make it sound like it is betrayal. The last time it happened, of course, was when Clinton fired his FBI Bureau Chief in 1993 and it sounded essentially almost like the same reported reasons that there was no confidence in the Director and the Director lost the ability to manage the FBI efficiently or well.

So, I was worried about it. Yeah. I don’t like the optics of Trump the President being under investigation and firing the head of the Bureau that is supposed to be investigating him. A lot of what is happening with Trump and the volatility of it all worries me. But does that turn it into a catalyst? That’s the rub. Does it become the catalyst that makes the markets crash or go lower even or get a 5% or 10% pullback to price in some of my internal worry and many other millions of Americans internal worries? Probably not. Probably not.

These factors that we have talked about for 5-8 years, from the 0% interest rates, the lingering bail outs that every day all of the emergency measures that are there to prop up all of the bank earnings and all of the giant conglomerate earnings, those things are still in place. In my mind, what is going to cause that next catalyst, the real crash or crisis, something more substantial than a 5% or 10% pullback, is going to be that there has been such a mispricing of risks. Something that the banks are levered up on and that middle America has bet millions, billions, trillions of dollars on that something gets mispriced and there is someone that is exposed.

Like Goldman Sachs or Bank of America or someone being exposed in emerging market stocks, emerging market bonds. Right now, we are in year seven of a global recovery/expansion and it seems safe to invest anywhere but Venezuela or North Korea. Russia? What are Russia’s interest rates right now? They are certainly not in panic mode.

The perceived safety around the world in developing/emerging markets is ripe for being a catalyst. But you would still have to have the crash in those markets before you’d start having those catalysts hit our markets. You’d probably get a 5% or 10% or even 15% pricing of that risk inside of our markets as you get some these crashes in emerging markets or emerging bond markets or emerging stock markets. Those are places we should be worried about Black Swans coming. I don’t know if it is today still. It hasn’t been yet and it doesn’t seem like it is here. I worry about it every day, though, as I discuss almost every time we do these podcasts.

That’s my opening for today. I’m open for questions. I have questions in the Chat Room and via email as well.

Q. $TST? Any change? Any reason for the pop?

With your somewhat special insight into TST, how would you say their performance matches up with your latest evaluation — “Last quarter was hopefully the ‘kitchen sink’ quarter in which management through all the bad stuff in and hopefully now we start to see some turn in the businesses.” They’re moving a bit today. Is this a good entry point, or do we stay away? Still rate it a (7)? Thanks.

Did anyone listen to $TST CC? If yes, can you share a bit what you heard out there? Seeking Alpha still didn’t add CC transcript and the stock continues to rally today.

A. TST has had a big pop lately, but let’s be clear the stock has only popped back to where my cost basis is. The earnings call still wasn’t great. It was stabilized in some places. The good news is they are not burning cash. They actually increased cash in the last quarter and I think that is probably a relief and probably a reason the stock has popped a little bit. But again, when you are talking about a stock that is trading tens of thousands of shares and the share price is less than $1. It doesn’t take much buying power to move it 5% or 10%. The market cap on this thing is less than $30 million. They have cash of $24 million so the enterprise value is only $6 million right now. That low enterprise value underscores why I do own the stock, because I do think there is more than $6 million of value in the $60 million of revenue the company generates and in the brand itself. They still had a big down turn in business to consumer revenue, B2C as they call it, which is their subscription revenue. That is where the big hit was. I think they have actually started to see it turn in their advertising revenue and the reporting on thestreet.com has gotten markedly better in the last six months. As a consumer of their product, I can tell you that.

There were some positives in the report. Most obviously the cash non-burn and the cash actual increase was nice. They still have to get that stock above a $1 pretty darn soon, don’t they, or they are going to end up being delisted from the stock exchange that they are currently on. Remember that I am picturing this as venture capitalist. I invest in this knowing that is a $30 million market cap and it is a $6 million enterprise value. So, if there is any turn in the business at all that is real that is started right now, the stock is going to go up a bunch no matter what exchange it is on. And, we will get a double or triple or more out of it if they end up generating even $5 or $10 million of cash out of the $60 million revenue run rate. There was no clear turn to that right now. There was hints of a good turn and some stabilization in the quarter.

I have a personal relationship on a lot of levels with a lot of people at that company and I love the CEO who has been there about a year now, I think. That is partly why we bought the stock. And, I think I am seeing him get that Titanic-sized ship turned over there. It’s a small company but it has been around for fifteen years and turning something like that around isn’t going to happen overnight.

Q. Given all that do you consider this an entry point in $TST or should we give it a week or so? I’m not in it yet.

A. Especially again with it being a penny stock, they do have a large shareholder out there who has been selling and if he hits it hard because he only has a small piece left, the thing can drop 10% in an hour. It is just off of there not being enough liquidity in that name to handle either buying or selling of any magnitude. Look, I bought it here. It is basically at my cost basis. Actually, I think I might be slightly profitable at $0.94 because I did two tranches, if I am not mistaken. I am not trying to trade it. I have no idea if it will go to $0.80 or $1.20 in the next thirty days. I do know that if 90 days from now the next report shows more cash generation, that stock will be higher after that report. I do know that if they actually generated $3 or $4 million of cash this year, which is possible over the next twelve months, the stock will be worth $2 or $3. Of course whether the earnings are there or not, the market can undervalue it still.

Q. Subscriber follow-up: You say you have two tranches in it right now. Would you as Mr. Venture Capitalist Investor and with everything you’ve said about it, would you be thinking at well about hedging towards your holdings right now?

A. Personally, no. I don’t want to put any more capital into it personally. That said, if I didn’t think I was going to get a return on this investment in the next two years, I would sell it right now. I think it is worth owning a little bit. I certainly wouldn’t own much. It’s a small cap penny stock that could get delisted. Let’s be realistic about it. You know 0.5% or 1%, something like that. If it goes to $0.20 and you own less than 1% — well, I assume most of you have gained a couple of per cents in your portfolio from $NVDA over the last, well today you probably gained 1% today. TST is not much of a risk a 0.5% of your portfolio, but I wouldn’t put more than that. I am not going to personally.

Q. The euphoria on Trading With Cody lately makes me nervous. Is this a sign of the overall market – extreme euphoria? I’ve been thinking the market will pull back since January and I’m still thinking it has to take a breather at some point soon. Plus, with all the political news today, let’s see what happens… What do you think out there?

A. Yes, I think most of us Trading With Cody subscribers would agree with that worry of yours. Most of my subscribers had been with me several years, or going back 15 years before Trading With Cody existed. And so you guys know that we’ve had a great run but also that over the years, when everyone on the sight is high-fiving everybody and I’m getting great testimonials — you see the euphoria can be a contra-indicator and it is a top marker in the stock market. Whew…I’ve been having that same thought again lately. We’ve got huge returns in the last year. One of the testimonials said in his portfolio that since he joined over year ago, that the market was up 15% and he is up 110%. That’s great and it makes us feel like a genius, right? But, I also know that when we want to feel like a genius a lot of times it is time for me to get my comeuppance. Let’s keep it real on the genius-feelings too too by the way. I am an idiot on $GIMO, Gigamon, and not all of our stocks went up last year. Fitbit anybody? Palo Alto anybody?

At the same time, we’ve got $SEDG up 15% and $NVDA up 20% just today and I do sort of feel the euphoria out there. And, it is a red flag, no doubt. I don’t think we should try to time it at this particular moment, but as I mentioned in the Latest Positions Roundup that I sent out Monday, if you haven’t trimmed some $AMZN, $FB, $GOOGL, $NVDA, $SEDG maybe, certainly those first 5 or 6 names we have got as our biggest positions have doubled or tripled in the last year of they are up 50% in the last six months—Trim. Take 10% off and catch your breath. We are not geniuses. Well, we are (haha), but we won’t feel like geniuses all the time.

Q. What do you feel about $AMBA right now?

A. You know, I mentioned in the Latest Positions Roundup on $AMBA that I am bored. I don’t know if any of you caught the humor on that. I had mentioned in the bullet point before it that I had said I was really bored with $SNE six weeks ago in the March 2017 Latest Positions Roundup and then Sony’s stock subsequently rallied 20% almost immediately thereafter and I wasn’t bored with it anymore. So,then I was like “I’m really bored with $AMBA. It’s not gone anywhere.” I was sort of being facetious and somewhat taunting and making a joke that maybe if I am bored with AMBA, it will go up. As I said on the Latest Positions Roundup, the company supplies Sony which supplies Apple and Samsung. So, Ambarella therefore supplies Apple and Samsung. Ambarella supplies GoPro. Ambarella supplies Taser or Axon, whatever they are calling themselves now, that provides cameras for the military and police. And, there are going to be a lot of robots and self-driving cars and drones that have eyes on them and they need Ambarella technology to do that. And no one is catching Ambarella right now.

So, I am bored with $AMBA stock even though it is incredibly volatile, as it has been stuck range-bound from $40-$60 for about 18 months or something. We originally bought the stock three or four years ago at $30? Trimmed some at $60, trimmed some at $90, trimmed some at $120. Rode it right back down to $40 and I think I nibbled some back at like $80 one time, probably one a half years ago. At any rate, it is not a huge position for me and I am comfortable with it as a potential Revolution Investment. Er, I am never comfortable with anything when it comes to my money being a bet on other places…also known as investing. Frankly, I think $INTC or $NVDA or $SNE should just buy $AMBA and I think that will probably happen in the next two to three years. Hopefully, at a higher level than what it trades at today.

Q. $SNAP. Discuss.

A. (Ha ha) I will admit to you. I’ve been checking that stock. I am pretty cool with our portfolio in general. I am more of the the Warren Buffett thing, where I don’t even need a quote machine most days. I get enough news of what is going on in the market and I know what’s going on with my stocks and I do open the portfolio at least a couple of times a day anyway. So, it isn’t like the days when I was running a hedge fund and had a couple of screens with quotes-blinking lights on it. Now, I have to admit that for the last week, I’ve looked at $SNAP for 5 or 6 times a day while the markets are open. It has been fun. When we bought those call options (knock on wood), you know that stock turned right around. I can’t say it out loud because I don’t want to jinx it.

The answer to your question is like I have said all along since we bought it that my thesis is that Wall Street is expecting single digit growth for users for $SNAP for this quarter. I think it is going to be much bigger than that. I think they will add ten million or more in the United States alone. The market is looking for 8 to 9 million subscribers net-net as a number and we are at 160 million, so ten million in one country alone would beat that. I don’t know if it will be that, but I think it will be 15 or 20 million. If it is, the stock will go up.

And, as I always tell you when you do a bet around an earnings report, you are betting not just that the company beats on the metrics that the market is caring about, but that the market actually responds in the way you hoped it would when it did the beat. Or you could bet against the earnings report and you would hope that the stock would go down. It will take two or three derivatives of my thesis to actually work out. The market has to respect that my theory is meaningful too. There are risks. Someone wrote in that the Snapchat CEO could say something incredibly stupid on the conference call like, “we don’t care about ever making money.” Yeah, that’s a risk. There is always this risk that even if you get the company right, the trend right, the technology road map right, the company blows it anyway. They say that they messed something up or in this case, the CEO could say something wrong. We’ve got these call options and if the markets get hit for him saying something dumb, we will feel dumb too.

All that said guys, in the last three weeks or whatever it has been since we bought those $SNAP call options, I’ve been impressed with the news flow out of Snapchat. The revolutions of some of their strategies that have come out in the news in the last three weeks, including Snapchat partnering with 20 or 30 or different television stations, from HGTV to National Geographic or ABC…a whole bunch of production television companies that make and/or distribute shows are going to start making Snapchat exclusive content that is 3-5 minutes long. Snapchat is going to maybe get into producing and/or funding some of that and there is a production side to their business model that I find fascinating. I bet Mark Zuckerberg was like “Crap, we can’t even copy that.” It is a lot harder to get the partnerships and the agreements when Snapchat has run out and built a moat already getting a bunch of these channels to produce content for them. Now Instagram has to try and go emulate that too if Instagram is going to copy the latest thing Snapchat is doing? So there are already things that Instagram and Facebook have proven brilliant in the last year or two like copying technological features and layouts and user interface features and things from Snapchat. But, you can’t go back and change your strategy and there are things that Snapchat seems to be doing businesswise that I am real impressed with.

What I am getting at, I mentioned the other day in the Latest Positions Roundup, I wouldn’t mind $SNAP just blowing the cover off of the ball and the stock going up just huge and I might not sell all of the call options when they expire. I’d just let some of them turn into stock for me.  I might bet on $SNAP a little bit. We will see what the quarter is. As you guys know. I like for a company to have at least one or two quarters under their belt before I end up calling it a potential Revolution Investment anyway. It will be interesting. I am excited about the call tonight. I am worried the stock could be down 5% or 10% and our call options go from being nearly doubled to down 40% tomorrow. That could happen.

UPDATE: $SNAP reported earnings last night and they completely missed my user growth targets and the report is pretty bad anyway. The options aren’t worthless though I am indeed down 35-50% on them now. I’m holding them for now, but will be selling them in the next few days, probably selling 1/2 at a time in two tranches. Remember as I wrote in the Trade Alert: “Clearly, this is a high-risk, high-potential reward trade here. If the stock stalls or drops from here, we’ll lose the entire amount of capital we threw at this. We also have another three weeks before the company reports, and there can be a lot of volatility before then. So I’m throwing a tiny bit of money at these Snap call options for now and will likely do another tranche at some point before that May 10 report.” https://twc.scutify.com/trade-…

Q. $AXGN, where are we in the buying cycle with Axogen?

A. I actually trimmed 10% last week, maybe. The stock has tripled for us since we bought it. It’s an incredible company. What they are doing is really smart and interesting. They take nerves from cadavers and repurpose them hand transplants and any other surgical need to connect nerves. They have the best way to do it, it seems. Scientifically, it seems to be proven. And, probably, more impressive than that has been their execution. The growth has been terrific. Their setting of expectations has been good. They under-promise and they over-deliver and their promises are still full of growth and potential. I’ve been real impressed on all fronts. My hand transplant surgical friend continues to rave about the company and to use their products to put hands back on soldiers.

Subscriber comment: Wow..that’s amazing.

A. Yes, it is. Again, this is a small cap. It wouldn’t surprise me if the stock is back below $10 at some point. Even if it is because some large shareholder sells a chunk and there is not enough liquidity to handle it in the short run. If it happens, I would probably buy more and buy back the shares I just trimmed. If you don’t own any, I might put a toe-hold position in it. And you might get an opportunity at some point to get a better purchase price.

Subscriber follow-up: I’ve been riding it and I love it.

A. Don’t we all right now.

Emailed Q: Please take a look at $FEYE again. Last time you said they would have to show signs of their turnaround for you to become interested. Well, they reported, beat and subsequently raised their guidance. I think the turnaround is happening. Please let me know your thoughts.

A. I am human and I wonder if $FEYE and $GIMO are both tainted in my eyes right now. I already feel like I have plenty of cloud exposure and $FEYE and $GIMO are both cloud-related plays. So, I am probably not going to be $FEYE even if the turnaround looks like it is here. And it does, it is a couple of quarters now that they have not lowered guidance and they have that new management team they put in place last year that looks like they are getting somethings turned around there. I just don’t have the appetite for it right now. Right or wrong. I don’t like the risk profile adding that to my portfolio. On top of the fact, that I mentioned $AMZN, $GOOGL, $PANW, and several others I’ve mentioned are cloud-related plays in our portfolio.

The big beat last night for $NVDA, and the reason the stock is hitting new all-time highs this afternoon, is because the cloud business is selling into servers and they talked about by name in their conference call—tell me if you’ve heard of these– Amazon Web Services? Facebook? $Google? These are their customers who are using artificial intelligence/deep learning/server farm platform technology chips and chips sets from $NVDA. Amazon Web Services, Facebook, Google, Microsoft. I mean like everyone you could possibly want to see is buying $NVDA chips and the cloud business was up double year over year. What even more highlights and underscores the incredible growth that $NVDA is seeing in the cloud was that they grew $266 million last quarter in their cloud/server business. $INTC cloud/server business is 10x bigger right now in their revenue run rate annually and $INTC grew $233 million in cloud/server business last quarter. So, $NVDA is a huge cloud play now and it is yet another exposure to the cloud for us. To tie that back to $FEYE, I don’t have appetite for any more cloud. We have plenty of cloud and we’ve made a lot of money investing in cloud. Sorry we messed up on $GIMO, but holy cow, we have made some great money in the last five years in clouds..in the last year in clouds. We love clouds, but I don’t want any more clouds in my life.

All right, I am going to wrap it up.  I’ve got to get out of here sooner than later and get up to Albuquerque to see Amaris. Thanks for all the prayers and the well wishes that you guys send in email, Facebook or chat. I know a lot of you think or pray about Amaris and my family in different ways and I appreciate all of that. It’s really hard right now to be completely honest and  I am just worried sick about her. Nobody wants their child to be in the hospital. That’s it for today. Thank you.