Special Situations: You spend a lot of time traveling the world looking for investment opportunities. A recent event you attended was the LD Micro Conference in Los Angeles. What made that worth the trip?
Jim Collins: Chris Lahiji and his team put on the premier small- and micro-cap conference. The Invitational is a slam-bam, in-your-face, 100-companies-in-11 hours micro-cap love-in. Obviously, I couldn't attend every presentation, but the overarching goal at a conference is to find one name. If I can just find one great idea, that really can make my year performance-wise.
SS: How do you decide what company presentations to visit and what makes a company worth following up?
JC: My main focus recently has been energy, so I attend every possible oil and gas presentation. Outside of energy, I am most attracted to companies that have clearly defined prospects for revenue growth and are EBITDA positive.
SS: Did you find any interesting energy-related companies?
JC: I met with Torchlight Energy Resources Inc. (TRCH:NASDAQ), which has projects in Texas, Oklahoma and Kansas. The company recently announced that it is acquiring 172,000 acres in West Texas known as the Orogrande Basin. It is a large target, mostly contiguous, and that will aid in exploitation. This acreage was part of the University of Texas in a county that has seen very little drilling activity recently. That makes Torchlight a pioneer, which can mean more risk, but also potentially much more return.
Torchlight will act as the operator, which is a shift from its historic non-operating model. The geologist, Rich Masterson, is a legend in Texas. His efforts have led to much of the development in the Permian basin.
SS: What else did you find?
JC: I met privately with management from Deep Down Inc. (DPDW:OTCQX), the "Mr. Fix-it" of the deep-sea drilling industry. Deep Down provides non-helical umbilicals and flying leads to oil producers and drilling equipment manufacturers. While always looking to grow its customer base through long lead-time orders, the real value added for Deep Down seems to come from last-minute "uh oh" calls from oil majors. We have a problem and we need a quick fix—and Deep Down can provide that.
Deep-sea drilling is expanding rapidly. The industry has rocketed back after the BP Macondo-driven slowdown. Deep Down was called in to help during that crisis, and rapid growth is predicted for the next five years.
I'm certainly guilty at times of blindly focusing on the unconventional drilling revolution in North America. It's a great big world out there for oil exploration, and massive discoveries off the coasts of Brazil and West Africa will be exploited. The Australian government's pro-energy independence stance is truly refreshing compared with our own government's mind-numbingly stupid energy policy. Douglas-Westwood recently released a forecast for subsea hardware capital expenditures of $117 billion for 2014–2018, an 80% increase from the preceding five-year period.
So, there will be much more deep-sea drilling and that will drive business for Deep Down. Some of that business may come in the form of last minute, late night phone calls to Deep Down's CEO Ron Smith, but the business will come. It's an inherently unpredictable business, but it's a great niche, and for patient investors, it's certainly an interesting play.
SS: What is another example of a name you found at a conference that made the travel worthwhile?
JC: At LD's last conference in December, I wandered into a presentation of a company with which I was unfamiliar: True Drinks Inc. (TRUU:OTCQB) and its AquaBall naturally flavored water. True Drinks' AquaBall is a sugar-free, vitamin-enhanced flavored water product that is packaged in round containers adorned with characters from movies like Frozen and the Avengers. It's a tasty and healthy solution to children's hydration, but it is the company's licensing agreements with Disney and Marvel that add the "wow" factor to the packaging and make AquaBall stand out in the crowded market for kids' drinks. Without True Drinks' 58% gain since I bought it for my initial Mad Money portfolio on January 17, that portfolio wouldn't be crushing its benchmarks. My clients and I are glad it is.
SS: What are some candidates that could be the next True Drinks?
JC: The best story I have heard lately is Energous Corp. (WATT:NASDAQ), a wireless transmitter/antenna system that provides power to multiple devices within 15 feet via a Wi-Fi-type signal. No mats, no pads, and, for the love of God, no cords.
Energous' WattUp system is currently designed to interface with a receiving module contained in a "backpack." Think of an OtterBox protective iPhone case and the receiving unit is not much larger. But the technology is moving so fast in this space that it is quite possible the backpack may not even be necessary—and the WattUp technology could be placed directly on a chip.
"Torchlight Energy Resources Inc. is acquiring 172,000 acres in West Texas known as the Orogrande Basin."
That's the killer app here. You probably haven't seen a Wi-Fi or Bluetooth "dongle" for a while, but they were common in the last decade. Quite simply, it is possible you'll never be able to see the WattUp technology. But as someone who is constantly seeing the battery icon on my phone flash red, I know this technology is in demand.
I haven't run numbers, and in Energous' case that is in keeping with management's advice. Energous' business model is based on commercial licensing of its technology, and, as WattUp has not yet been commercialized, it has no meaningful revenues. But, crucially, financing is in place for Energous. The company raised $25 million with its IPO on March 28 and has no debt.
This is an idea stock and while a company at this youthful stage is not usually listed on a major exchange, Energous could truly grow into something special. This type of story should not be the sole province of VC-types. Why should the people on Sand Hill Road have all the fun?
SS: Do you have one more idea?
JC: A story that is intriguing for altogether different reasons is 22nd Century Group Inc. (XXII:NYSE). 22nd Century bills itself as a plant biotechnology company, but the company's core competency is the ability to genetically engineer tobacco crops to vary the level of nicotinic alkaloids within the leaf. So, 22nd Century can generate a very low nicotine blend that allows smokers to puff away while doing less damage to their bodies.
It's an interesting technology, and the company can deliver cigarettes that are way beyond the tight range of tar/nicotine ratios that current mass brands inhabit. Very low nicotine cigarettes have been shown to aid smoking cessation rates as smokers get the behavioral reassurance from lighting up, but could develop less dependence on the nicotine itself.
SS: What is the market for a product like this?
JC: Company President Henry Sicignano mentioned the magic word in the tobacco world: China.
I had the pleasure of visiting the Middle Kingdom a few years ago, and the first thing I noticed upon disembarking the world's fastest train in Shanghai was the density of tobacco smoke matching the density of human beings. It's no secret that the number one seller of cigarettes in the world is the Chinese government, and profits from those sales fund much of what Beijing does.
So, while it is quite unlikely that 22nd Century will be allowed to enter the heavily fortified Chinese market on its own, 22nd Century management could license its technology. China's government is clearly weighing the public health risks of a nation of heavy smokers versus the revenues involved. Low nicotine products could be a win-win in that scenario, and it's easy to conceive of a massive stream of royalty payments coming to 22nd Century from such a large, smoky market.
SS: Thank you for sharing.
Jim Collins is the founding partner of Portfolio Guru. Collins preaches the gospel of income investing via his newsletter, The Portfolio Guru Post, and uses income investing principles to manage money for individuals on a fee-only, separately managed account basis. Previously, Collins spent 10 years as an equity analyst in New York and London covering the automotive sector for Lehman Brothers; Donaldson, Lufkin & Jenrette; and UBS. He holds a Bachelor of Arts in economics and history from Duke University and has completed the academic requirements for the CFA designation.
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1) JT Long conducted this interview for Streetwise Reports' Special Situations, and provides services to Streetwise Reports as an employee. She owns, or her family owns, shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Torchlight Energy Resources Inc., Deep Down Inc., True Drinks Inc. and Energous Corp. Streetwise Reports does not accept stock in exchange for its services.
3) Jim Collins: I own, or my family owns, shares of the following companies mentioned in this interview: Torchlight Energy Resources Inc., True Drinks Inc. and Energous Corp. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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