This past quarter was most noteworthy for its volatility, with a significant market decline in May almost completely reversed by the end of June. Much of this can be traced back to concerns about global growth and continuing trade tensions between us and the rest of the world. More recent economic indicators have been weakening due to this uncertainty, and as a result, inflation figures have been more subdued. Long-term interest rates also declined in the quarter as expectations are that the Fed will have to cut rates sooner and more often than many thought necessary just a few months ago. While we still believe rising interest rates are the main risk threatening market stability over the next several years, we acknowledge that conditions have changed enough that this is unlikely for at least the balance of the year. This leaves us less confident about the robustness of the U.S. economy in the near-term, but more confident that lower interest rates will likely act as a ballast for equities. Even with these changing expectations, our investing strategy only changes incrementally, with lower weightings in those names that have the most sensitivity to rising rates and more focus on those companies that can overcome a slowing economy. Valuations continue to generally be undemanding and will look even more attractive if interest rates move lower over the next few quarters.
Jacob Internet Fund
The Jacob Internet Fund added one new name in the quarter: SharpSpring. SharpSpring provides cloud-based marketing solutions helping its customers create and manage all aspects of their online marketing campaigns. While not a pioneer in the space, SharpSpring provides a suitably robust platform for smaller companies to manage these functions with much less complexity and at only a fraction of the price than software sold by competitors focused on larger enterprises. The company also has strong partnerships with many of the top advertising agencies, which sells SharpSpring software to their clients. Not only has this proven to be an effective way to rapidly grow its customer base, but having agencies as reselling partners also results in less of an ongoing support burden for the company as it grows. As SharpSpring continues to gain scale, we believe its growth will translate into impressive profit margins and a much higher valuation for the company.
Jacob Small Cap Growth Fund
The Jacob Small Cap Growth Fund added two new holdings in the quarter: Urban Outfitters and Rafael Holdings. As with many retail names recently, Urban Outfitters has had to deal with both declining retail traffic as well as the possibility of rising costs from Chinese sourcing. Although its core Urban and Anthropology brands have had some fashion hiccups, a more recent concept – Free People – has shown better growth. At close to 3x forward EBITDA for a savvy retailer still very relevant in this current landscape, we believe valuation is just too low on an absolute and relative basis. Rafael Holdings is one of these under-the-radar situations that has some very interesting potential, even though it is unfollowed by Wall Street. Founded by serial entrepreneur Howard Jonas, the company is the majority shareholder in Rafael Pharmaceuticals, whose lead drug (devimistat) showed very promising results for pancreatic cancer in its Phase 1 study. In fact, the results were compelling enough that after discussions with the FDA, the company is moving straight to a Phase 3 trial that has already begun. Additionally, the company recently signed a license agreement with Japanese-based Ono Pharmaceuticals that included an upfront cash payment, large prospective milestone payments and reasonable royalty terms for much of the Asia region. We expect that Rafael Holdings will likely be the beneficiary of either a company restructuring or IPO of the pharmaceutical business given its enormous potential if successful.
Jacob Micro Cap Growth Fund
Besides SharpSpring and Rafael Holdings, the Jacob Micro Cap Growth Fund also added two additional new names: IMV and Leju Holdings. IMV is a Canadian biotech firm in early-stage development of an intriguing compound called DPX-Survivac, which is using the company’s proprietary extended delivery platform to target the tumor-associated-antigen survivin, widely expressed in a variety of cancers. Survivac was licensed from Merck, which is currently testing its top-selling Keytruda immunotherapy drug in early-stage combination trials with DPX-Survivac. Results released to date in their ovarian cancer trial have been limited but fairly promising. Leju Holdings is a leading Chinese real estate company helping developers find prospective buyers by listing properties for sale online on its various Web sites and mobile apps, delivering coupons to interested parties, and providing other offline services such as property tours. The company’s financial performance over the years has been volatile, which is not too surprising given the boom-bust nature of the Chinese real estate market. Lately, however, results have improved and the company, which is a significant partner to other big Chinese media companies like Sina and Tencent and has plenty of cash on its balance sheet, is again on the cusp of profitability. We believe the Chinese government has done a decent job at removing some of the more speculative excesses of its housing market and that Leju’s growth going forward should be modest but hopefully more consistent, which should be more than enough to boost the company’s stock price given the current depressed valuation.
Jacob Internet Fund
Jacob Small Cap Growth Fund
Jacob Micro Cap Growth 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 three 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. All three funds also invest in smaller companies, which involve additional risks, such as limited liquidity and greater volatility.
The Internet Fund may invest in fixed income and convertible securities. 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.
Click here to view the Jacob Funds prospectus.
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.
Click here to view the holdings for the Jacob Internet Fund, as of May 31, 2019.
Click here to view the holdings for the Jacob Small Cap Growth Fund, as of May 31, 2019.
Click here to view the holdings for the Jacob Micro Cap Growth Fund, as of May 31, 2019.
Please note that these fund holdings are subject to change and should not be considered a recommendation to buy or sell any security.
Forward EBITDA multiples show how many dollars of enterprise value a company is worth per dollar of estimated earnings before interest, taxes, depreciation and amortization at the end of the current fiscal year.
Earnings growth is not representative of the Fund’s future performance.
The Jacob Funds are distributed by Quasar Distributors, LLC.