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Q2 2018

July 2, 2018

What’s on my mind? 

Tariffs

On 5/4/18 more than 1,100 leading economists sent a letter to President Trump urging the White House to reverse course on recent trade tactics — lest the U.S. repeat one of the biggest mistakes of the Great Depression.

The letter, organized by the conservative-leaning National Taxpayers Union, warned that recent tariffs and trade protectionism were harmful to the US economy. The economists cited a 1930 letter that warned Congress against passing the Smoot-Hawley Act, a large package of tariffs that many studies cite as a major reason for the depth of the Great Depression.

“Congress did not take economists’ advice in 1930, and Americans across the country paid the price,” the letter says. “The undersigned economists and teachers of economics strongly urge you not to repeat that mistake. Much has changed since 1930 — for example, trade is now significantly more important to our economy — but the fundamental economic principles as explained at the time have not.”  The Smoot-Hawley tariffs–much like Trump’s measures–were designed as protection for U.S. industries, but they ended up making the situation worse.

Contributors to the new letter included 14 Nobel laureates and economists from across the political spectrum, including former chairs of the Council of Economic Advisers under Presidents Barack Obama, George W. Bush, and Bill Clinton.  The letter also quotes the warnings from the 1930 letter, which warns that tariffs: raise prices on consumers, damage industries that rely on trade directly or indirectly, hurt the fortunes of American farmers and lead to retaliatory measures from other countries.  The 1930 letter also painted the tariffs as a threat to national security.

“Finally, we would urge our Government to consider the bitterness which a policy of higher tariffs would inevitably inject into our international relations,” the 80-year-old letter read. “A tariff war does not furnish good soil for the growth of world peace.

 There is no need for further comment.

And the saying goes, what gets measured gets managed. 

TowerJazz – What’s wrong? NOTHING (Except the stock price)!

TSEM’s CEO, Russell Ellwanger, said the company formally began or was informed of wins for “several varied industry-defining projects with respective customer market leaders” during the quarter. This year, he expects the company’s results to improve: “Present customer forecasts show continued quarter over quarter growth throughout 2018, with a fourth quarter demonstrating over 25% organic business unit growth against the first quarter, and with commensurate bottom line achievements.”

While Tower expects revenue to improve later this year, investors are focused on the here and now, sending the stock lower after a weak first-quarter report.  BTW, even though the company was profitable, this shortfall in the first quarter was the first in several years.  TSEM is best in industry by most every metric.  The decline of price validates herd mentality and computer trading taking a stock below its true valuation.  A key metric – TSEM generates exceptional free cash flow (FCF).

TowerJazz is a long-term hold, and we will likely own this into the 2020s.  My advice: Stop looking at the PRICE, it’s currently not relevant to the company’s long-term prospects!  A lead analyst maintains his $46 price target.

ENPHASE – What’s right?  Everything!

We caught a freight train.  I initially bought ENPH for my PA (personal accounts) in June 2017 after attending their yearly investor update in NYC.  I came upon the story after learning that two billionaires (one, the retired founder & CEO of Cypress Semiconductor) were putting $10 million each into the company. I wondered why they would waste their time on a sub-dollar stock. My research prior to this meeting revealed that there was talk of an ENPH bankruptcy. But that’s not what I heard.  What I heard appeared too good to be true (and we know what they say about that, right?) At that time, it was much too soon to invest for clients but appropriate for my personal, high- risk accounts.

I would not add this to client portfolios until validating the finances and the company’s long-term viability and potential.  Only months later, after much research, did I have the confidence to buy for clients.  Since original client purchase (12/2017 – 1/2018), roughly six months ago, we’re up approximately 200%.  Please note: I believe that Enphase’s stock price is currently ahead of itself, but by 2020, the groundwork they’ve laid will alter the company’s history.

So, why did we buy Enphase?  Before answering, I want to digress and clarify the GCM philosophy and investment approach.  I believe it’s important for those entrusting me with their wealth to understand my tactics.

First and foremost, we’re trying to increase wealth in an intentional manner.  Every investment comes down to a risk/reward decision, but there are other essential factors to becoming a GCM stock.  Let’s delve.

The Value of Virtue

GCM looks for sustainable companies.  We do not take a financial interest in a company for next year or even the year-after results, but rather look ahead for a minimum of 3-10 years.  I want to be an owner, not a casual observer.  I want to witness a company achieve its goals and be assured that they’re good stewards and citizens, employee-focused, financially-sound and environmentally-aware.  I’d like leadership to manage a company with the same degree of responsibility that my wife and I use to manage our family and household.

I believe it’s possible for companies to treat their employees and customers well, while also taking steps to avoid pollution; A company whose board of directors that follow best practices will outperform over time.

As most of you know, I have little desire to discuss a stock’s price activity.  There are a million reasons to sell but usually only one reason to buy (unless your child works for a company😊. However, we know that a stock’s price is always front and center and what everyone focuses on.  But, there is so much more to explore such as: How will the company evolve in the long-run? Is it sustainable? Can they or are they transforming to a low-carbon economy? Are they good citizens?

I stand by everything we own, even Exxon (which believes in the threat of global warming and is committed to reducing carbon emissions). I look for well-rounded companies similar to Enphase that serve a purpose.  Our recent stock purchases include Gladstone Land (natural farms across America), New Age Beverage (healthy alternatives to carbonated drinks), Barfresh (healthy natural smoothies that will be served in schools and the military across the country), Intellicheck (IDN) and Widepoint (WYY) saving the world from cyber threats and fraud.  No single company is perfect, but it is my mission to understand and clarify each company’s pros and cons.  (Rest assured, I am not looking to buy tobacco companies, known polluters or companies that mistreat employees or subordinate women.) Our intention is to buy companies that matter and eventually make our portfolios healthier.

Which gets us back to my Enphase rationale. The world is leaning toward clean energy while our administration believes that global warming is a hoax.  Well, it is not a hoax and this thesis is supported by major investment themes today.  I’m currently reading a book called Taming the Sun (by Varun Sivaram), and if this information doesn’t scare you straight, nothing will.

I’ve always wanted to invest in solar and/or renewable energy but never found an easy or profitable way to play it.  The solar panel industry was too competitive, and solar technology was often buried in larger companies.  I found my intro to solar in Enphase after hearing the story in June 2017. Right company, right time, right price, right management team and a balance sheet backed by smart people.  I was hooked.

Enphase converts the sun to AC current in your home/business with their state of the art microinverter.  Inverters aren’t the sexiest business in energy but they’re a critical component to every solar installation.  When the sun hits a solar panel and generates power, it’s in the form of direct current (DC), which is converted to alternating current (AC) that we use in our electrical grid. The inverter is what does the conversion.  Some companies, like SunPower, are even installing Enphase Energy’s microinverters at their plants and shipping them to installers pre-assembled. This saves cost on installation and reduces the number of components installed on each home or commercial rooftop.

Enphase will introduce its latest technology to the market in the first quarter of 2019.  This new version of their inverter (IQ8) will make the grid agnostic and allow energy storage for use when the sun is not available.  Currently, when the electric grid goes down solar panels do not operate.  I’ll be attending their annual meeting at their headquarters in Petaluma, CA in August and get to see the IQ8 demonstrated.  I’ll report back to you with an update.

I never considered “pigeon-holing” GCM’s investment approach, but it appears that the industry has finally caught up and established a term that accurately fits our philosophy.  It’s called ESG, which stands for Environmental, Social, and Governance.  An ESG company is: poised for long-term success, whose management understands and addresses short-term risks and innovates to exploit long-term opportunities.  ESG data offers a means for investors to understand a company’s strategy, corporate purpose and management quality in an unbiased, quantifiable way.

As I stated earlier –  what gets measured gets managed.

It is not enough to just create wealth, but it is enough to create wealth the right way. It is not my goal to profit by maintaining a “win-at-all-cost” attitude but, rather, doing so respectfully and purposefully.    While this strategy may leave some profits behind or take longer to realize success, I can feel confident that my efforts may contribute toward the greater good.

Successes never come without failures… and we’ve had our share of both.  Unipixel is a good example of a company which met our criteria several years ago but ultimately failed to get its product to market.  Although most every client profited before the company’s eventual failure, I view the outcome as an investment disappointment.  Despite setbacks, I hold firm to the ESG approach and will continue to invest based on these principles.

Cheers to socially- and environmentally-responsible investing,

– Len

Goldberg Capital Management is an investment adviser registered with the State of CT Department of Banking. This Newsletter and its contents are for informational and educational purposes only. You alone will need to evaluate the merits and risks associated with the use of the information provided herein. Although this Newsletter may provide information relating to approaches to investing or types of securities and other investments you might wish to buy or sell, no information provided in this Newsletter is intended or should be construed as an investment recommendation or endorsement from Goldberg Capital Management. Please remember that past performance is no guarantee of future results.

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