Saturday, September 23, 2017

AIM seniors (Grant Runnoe, Max Mattappillil, Tim Milani and Cathy Gong) pitched their equity recommendations this past Friday afternoon in the AIM Room

The 3rd Set of Marquette AIM Equity Fund pitches for the Class of 2018 were presented on Friday, September 22, 2017 in the AIM Room 

This past week, the 3rd set of stock recommendations were presented by students in the AIM Class of 2018.  The pitches were presented in the College of Business Administration's AIM Room and over 45 students were in attendance.

Cathy Gong, Max Mattappillil, Grant Runoe and Tim Milani

In addition to the seniors and juniors regularly in attendance for the Friday afternoon pitches, alumni and parents also viewed the AIM presentations via webcast throughout the afternoon. Mr. Bill Walker and students in the AIM Classes of 2018 and 2019 asked excellent questions of the student-presenters and offered many useful observations and comments. 

Max Mattappillil
Applied Mathematical Economics, Physics and
Applied Investment Management Progam

This week’s equity write-ups can be found at:

Students in the AIM program manage over $2,600,000 of the University's endowment. Balloting will take place over the weekend to determine which of the stocks listed above will be added to the AIM Funds.

Grant Runnoe, Max Mattappillil, Tim Milani and Cathy Gong were the presenters this week. Following their final buy/sell recommendations, ballots were sent to students in the AIM Class of 2018 to determine which stocks are added to the funds. A 2/3rd affirmative vote is required for a new security to be added to either the AIM Small Cap or International Fund.

Cathy Gong pitched AIA Group Limited
Grant Runnoe pitched Magna International
Tim Milani made his case for adding Alibaba
to the AIM International Fund

The AIM student equity pitches take place each Friday afternoon during the semester – either in the AIM Room or at a local investment company. The students prepare and distribute a professional equity write-up (note: every AIM write-up since the inception of the program in 2005 is archived here). 

Friday, September 22, 2017

A Current AIM International Fund Holding: Argo Group International Holdings, LTD (AGII) by: Joe Flynn "Hurricanes and Insurance Don't Mix Well"

Argo Group International Holdings, LTD (AGII, $60.70): “Argo is Time to Go”
By: Joe Flynn, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.


Argo Group International Holdings, LTD (NASDAQ: AGII) underwrites specialty insurance and reinsurance products in the property and casualty market worldwide. The company reorganized its reporting structure during 1Q17 and now operates through two segments: U.S. Operations & International Operations.

• Industry competition in the market and the inability to increase prices will likely weigh on profits going forward. AGII will see earnings growth come under pressure in 2017 & 2018. However, Investments in technology and gains from cyber offerings would complement the company’s existing services and help offset the effect.

• The broad recovery of property & casualty insurance has halted, and low interest rates remain a drag on bond yields. AGII’s invested premiums are very sensitive to interest-rates, but have the ability to improve ROE if tightening continues.

• The industry’s current capacity is a major concern making it crucial for AGII to return capital. Share repurchases and dividends may protect the stock’s downside in the near term, but capital appreciation looks to be uninspiring over the long term.

Key points: AGII’s risk/reward profile has seen better days. The challenging pricing environment will likely extend into this year and beyond. Costs from the recent acquisition of Ariel Re will also weigh on share net. Losses are expected to show deterioration resulting in weaker earnings through 2018.  However, the recent strength in investment income reassures AGII’s ability to meet its obligations in the near term. The industry has experienced insignificant investment income since the financial crisis from the low yields offered on bonds.

AGII started to shift exposure to higher returning vehicles such as equities & corporate debt to combat low interest rates. Recently, the fed began gradually increasing rates and AGII was the beneficiary of a greater risk profile. AGII’s portfolio duration of 2.2 years and portfolio leverage of 2.44x makes the portfolio very sensitive to interest rates. According to estimates, having 2x portfolio leverage modeled  ROE gains of 15-16 bps/year after a 50bp increase in rates. Net investment income made up 60% of net income in the first half of year. This could indicate that AGII relies too much on investments to drive bottom line growth. The 30% increase of investment income this past year looks to have peaked and challenges lie ahead.  A rising rate environment would be the best case scenario to for any chance of continued investment growth.

The fed hasn’t been very clear regarding rate hikes and economic figures such as wage growth do not seem to indicate inflation. Therefore, it looks like the industry’s capacity will determine the direction of P&C stocks. The insurance industry is oversupplied after a prolonged period of minor catastrophe risk. AGII will have difficulties raising rates due to the unattractive supply levels, which will continue eating into profits.  Share buybacks must be a key initiative for insurers facing the limited coverage demand. AGII currently is buying back shares and increased their dividend, but concerns about future cash flow generation have been raised.

The company issued $325M in LT debt in 2017, and now has a D/E ratio of 30% which is significantly higher than the industry’s median of 20%. Many of AGII competitors have begun paying down debt to lessen default risk. The added $55M principal and interest due in 5 years could inhibit the company’s ability of carrying out their capital allocation plans. The leverage also puts AGII in a tough position for a late cycle credit environment and risk facing severe consequences if capital markets dry up.

What has the stock done lately?

Fears of potential claims and increased losses from Hurricane Harvey sent the stock down 6% to $56.50 on September 7. The stock has rebounded to its current level of $60.70 and it appears that companies have the funds to settle the claims of $20B. The financial impact of Harvey was not as devastating as expected and did not free up insurance demand.

Past Year Performance: AGII has increased 10.21% in value over the past year, and just recently was dragged down from the industry’s soft pricing. The stock has had very little volatility and currently has a beta of .80. The three largest shareholders are passive and control around 25% of shares. The stock may have traded due to flows into passive and not on its fundamentals during the period.

Source: FactSet

My Takeaway

The stock was originally pitched with a price target of $69.11. I am revising the price target down to $62.65 or 1x its book value. Assuming the company can continue returning capital to shareholders, the discounted multiple and low beta should provide support for its BV. The excess leverage and interest rate exposure poses several risks and I believe it would be smart to exit the position sooner rather than later. The large weight of insurance stocks in the International Fund have depressed its relative returns, and it would be smart to sell one. One suggestion would be to find a company that has a strong balance sheet to withstand the late cycle or a company with a competitive advantage not tied to the success of its industry. 

Thursday, September 21, 2017

Marquette College of Business Administration External Engagement Video

Click on video or go to:

Third Set of AIM Student Stock Pitches on Friday, September 22, 2017 at 2:30 in the AIM Room

AIM Class of 2018 Student Equity Presentations - Friday, September 22nd

The third set of AIM student equity presentations of the fall semester will be on Friday, September 22, 2017 from 2:30 - 3:30 pm.

Follow the link to review the student equity write-ups for the Friday, September 22nd presentations.

AIM Equity Presentations for Friday, September 22, 2017
Presenter Sector Company Name Ticker
Grant Runnoe Intl Consumer Discretionary Magna International MAG
Max Mattappillil Industrials Albany International, Inc. AIN
Tim Milani International Technology Alibaba Group Holding Ltd. Sponsored ADR  BABA
Cathy Gong International Financial Services AIA Group Limited AAIGY

Location:  Marquette University, College of Business Administration - Straz Hall, 1225 W. Wisconsin Avenue, Milwaukee 53233 - in the AIM Research Room 488, 4th Floor
(pdf directions to AIM Room).  

Equity presentations will continue the rest of the semester on Friday afternoons in the AIM Room except for the following dates:
·         Road Show in Chicago on December 1st

A Current AIM Program Small Cap Equity Holding: Inogen, Inc. (INGN) by: Tim Donovan "A Hold Until More Is Known About Healthcare Reform"

Inogen, Inc. (INGN, $100.87): “Can Portable Oxygen Carry Them into the Future?”
By: Tim Donovan, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and expresses my own opinions. I am not receiving compensation for it and I have no business relationships with any company whose stock is mentioned in this article.

  •  Inogen, Inc (NYSE: INGN) is a medical technology company, which develops, manufactures, and markets portable oxygen compressors for people suffering from chronic respiratory disease. Inogen’s product line acts as a supplement to long-term oxygen therapy.
  •  INGN generated $202.8 million in revenue throughout 2016 from the sales of their proprietary product Inogen One, designed to be a portable single source supplement of condensed oxygen.
  • With a market penetration of 8% of the estimated 2.5 billion to 3 billion people suitable for Inogen One, Inogen’s past success has not yet scraped the surface of the current market.    
  • Sales from the first half of 2017 reached $116.6MM which is up 19.5% compared to the same time frame in 2016.
  • A unique direct sales business model allows Inogen to establish long term relationships with individuals as well as physicians.

Key Points:

As a disruptor to the long-term oxygen care industry, Inogen has gained significant traction with variations of Inogen One, their flagship product, since it was introduced to the market in 2014. Over the past 3 years Inogen’s stock has increased nearly 450%. Part of the reasoning behind the growth was the further development of variations of their Inogen One machine. Today they offer three trim levels; G2, G3, and G4. Most notably, the new G4 model is a light and compact 2.8 pounds, catering to those who suffer from these respiratory disorders yet still wish to lead a more active lifestyle. Inogen’s executive team has reported that this expansion in their product line has provided them with the opportunity to cater to 95% of ambulatory oxygen patients with an increased ability to cater to the patient’s lifestyle.

Since 2014 Inogen has poured a significant of money into more than just their product line. Unique from most medical device companies, Inogen has their own in-house sales and marketing team. The direct-to-customer model not only allows them to develop long standing relationships with customers and doctors, but it eliminates the margin reduction from using a durable medical equipment (DME) provider.

Over the past few years this unique business model and product line expansion has caused significant growth in revenue as well as net income. In 2016 Inogen has seen their top line reach $202.8MM up from $159MM in 2015. This 27.5% topline growth translated even further to the bottom line. Net income over the same time period was up to $11.6MM, a 70.6% increase over 2015. Despite this significant income growth Inogen is only capturing an estimated 8% of the total target market. With an estimated addressable market within the United States of 2.5-3 billion individuals the growth that has been seen over the past 2 years has room to continue into the future.

Despite growth potential, there are risk factors to be taken into account when looking at Inogen. Patients on Medicare make up the majority of their rental market as well as nearly 20% of total revenue. If there is an overhaul in the healthcare system Inogen could lose a significant portion of its rental business as well as a sizable portion of overall revenue.

Another aspect that I look at when analyzing medical equipment companies is a promising product pipeline. To date Inogen seems to have a fairly barren pipelines of new devices, showing that their time and energy is being dedicated to further development of their sales and reimbursement teams. Growth of this aspect of the business is critical for their model to work, but to establish long term market dominance, Inogen may need to look into developing a wider assortment of products.

What has the stock done lately?

So far this year strong performance by the direct-sales force has driven the value of Inogen by 54.1% from $65.55 in January of 2017 up to the current price of $101. Some of this growth can also be attributed to Inogen’s first and second quarter earnings reports, where they beat analyst projections by $0.14 and $0.10 respectively.
During this time Inogen also received EC Certification, allowing the sale of the Inogen One G4 platform in a handful of international countries. With an unpenetrated international market, Inogen is setting itself up to greatly expand the previously estimated 3 billion customer market.

1 Year Price Chart
Source: FactSet

1 Year Price Chart Relative to Russell 2000 Index
Source: FactSet
My Takeaways:

Inogen has successfully disrupted the long-term oxygen therapy industry by providing customers with a user friendly and sustainable source of condensed oxygen. Over the past few years their developing product line and in-house sales and marketing force have provided them with significant traction in the U.S. market. Having begun further expansion into the international space, Inogen has opened up to a significantly larger addressable market. While the potential for the company is high, risks associated with healthcare reform remain a real threat for maintaining their market dominance. This in tandem with a fairly empty pipeline have raised some red flags. When weighing the risks with the opportunities, I believe that there is still some room for growth, however due to political risk factors I am placing a hold recommendation on Inogen for the AIM domestic small cap portfolio.

Wednesday, September 20, 2017

A Current AIM Program Small Cap Equity Holding: Anika Therapeutics, Inc. (ticker: ANIK) by: Jacob Schwister. "This Biotech Requires Close Monitoring"

Anika Therapeutics, Inc. (ANIK, $55.99): “Strong Product Platform with Competitive Advantage”
By: Jacob Schwister, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.


Anika Therapeutics, Inc. (NASDAQ:ANIK) is a global medical technology company focused on developing, manufacturing, and commercializing therapeutic products for pain management and tissue rebuilding.

• Currently, the company has four products in clinical trial phases along with one in early discovery. If these products continue passing their respective stages/trials and eventually launch, Anika could see significant top-line growth.

• The company's Orthobiologics product category accounted for $90M or 87% of the company’s total revenue in 2016. Revenues in this category grew 22% in FY 2016 compared to FY 2015.

• The Orthobiologics market is expected to grow at a CAGR of 4.5% to $7.3B in 2023.

• According to the US Census Bureau, the population age 65 and older is forecasted to double from 47.8M in 2015 to 98.2M in 2060. Most patients Anika’s products treat fall into this age category.

• In the first half of 2017, Anika began Phase III clinical trials of CINGAL in the US. CINGAL has already proved its competitive advantage internationally and a US approval could open up a whole new market.

Key points: As with every medical technology company, Anika's future profitability and growth is driven by current products, prospective products in the pipeline, and strategic partnerships and decisions. Currently, Anika is positioned well in the market with a worldwide network of distributors that has consistently performed well by growing sales and territories.

This distribution network helps deliver a diverse portfolio of products. Anika uses a propriety technology that modifies the Hyaluronic Acid (HA) molecule, which is used to rebuild tissue. This technology enables HA to remain in the body for longer, and it also can be tailored to most of their products to be used therapeutically. Further, Anika protects this proprietary technology through multiple patents.

Anika's strengths in the market position them well to take advantage of substantial growth opportunities. Anika plans to capitalize on internal and external opportunities including new product development and launch, a shift in demographics, and growing markets. In 2016, management mentioned they are actively looking for acquisitions to further improve their product base.

Anika competes in a competitive and changing industry that demands consistent new product approvals and launches in order to generate growth. In 2015, Anika announced the decision to commercialize CINGAL in the US using a direct sales model. The Phase III clinical trial began in the second quarter of 2017 and the company expects to complete the study in 2018 leading to a potential approval in 2019. This would allow Anika to continue capitalizing on the $2B Hyaluronic Acid market.

The aging population 65 and older in the US and worldwide will provide many opportunities for Anika to grow their product base and revenues. Those over the age of 65 are more prone to orthopedic disorders; therefore, the demand for joint health and orthopedic products will increase substantially. Though long-term in nature, this driver could start helping the company in the near future.

What has the stock done lately?

Currently the stock is trading near the 52-week high. Over the past five days, the stock increased $1.09 or 1.99%, and over the past three months, the stock increased 19%. These favorable increases can be linked back to the most recent 2Q earnings release in July. Anika reported EPS of $0.76 compared to analysts' estimates of $0.44.

Past Year Performance: ANIK has increased 21.96% in value over the past year, despite significant decreases near the end of the Q1 and early Q3. The stock has been creating new 52-week highs for the past month. The stock seems to be performing well even with the current healthcare reform conditions that are still up in the air.

Source: FactSet
My Takeaway

Anika's 2Q results indicate that the company is performing well and positioned for success. It does concern me that the stock is trading at the 52-week high. Nonetheless, Anika has future pipeline drivers that could boost future growth and profits. The company is highly invested in innovation, and management is actively working hard to stay at the forefront. I believe that Anika has a variety of drivers that should expand their success in the future. With healthcare reform up in the air, it will be crucial to monitor how these may affect Anika.

Kelly O'Reilly of Northwest Passage Capital Advisors Provided Insights into Data Analytics Process to the Students in the AIM Class of 2018

Dr. Kelly P. O'Reilly of Northwest Passage Capital Advisors Presented 'Big Data Analytics' to the AIM Class on Wednesday, September 20, 2017


Dr. Kelly O'Reilly of Northwest Passage Capital Advisors
Kelly O’Reilly (PhD), an advisor to Northwest Passage Capital, a $1 billion emerging market debt fund located in Milwaukee presented in the AIM Room this week. 

The firm is employing state-of-the-art data analytics - along with their traditional sovereign credit analysis - to evaluate the political and economic environment in emerging countries. This is the preamble to their ‘Boots in the Cloud’ strategy:

“Intelligence organizations have historically relied on agents in the field employing well-honed spycraft to collect and report vital information. The long-dated practice of recruiting and using spies is the cornerstone of what is referred to as human intelligence (HUMINT). But technological innovation resulting in the current big data revolution means intelligence gathering is increasingly driven by signal intelligence (SIGINT). Instead of relying on dead drops and written ciphers from secret agents, information is increasingly being gathered by data scientists in Langley or elsewhere, using computing power to apply algorithms and analytics. While human judgment is still required to assess potential threats, today’s collection methods are capable of tapping into vast (and growing) amounts of data and data that is potentially more reliable by eliminating the biases inherent in human cognition.”

Dr. David Krause, AIM program director said, "This was an intriguing presentation and was well attended by the AIM students - in addition to Dr. Thomas Kaczmarek, Adjunct Assistant Professor, Math/Stats/Computer Science at Marquette University. This glimpse into the fascinating would of geo-political big data analytics allows us to stay on top of what is happening in the world of FinTech!"
Tom Kaczmarek, Kelly O'Reilly and David Krause

Dr. Kelly P. O'Reilly
Dr. Kelly O'Reilly
Before joining Northwest Passage Capital Advisors, Dr. K.P. O'Reilly was an assistant professor of political science and global studies at Carroll University. His expertise is in the areas of international security, foreign policy analysis, and political psychology. His research has been published in Political PsychologyForeign Policy Analysis, and Contemporary Security Policy. He regularly teaches courses on contemporary global politics, international conflict and security, U.S. foreign policy, globalization and democracy, and international law. He holds a Ph.D. in political science from the University of South Carolina and a JD from Emory University School of Law.

Areas of Expertise

  • U.S. Foreign Analysis
  • National Security Policy
  • International Affairs and Relations
  • International Security and Conflict
  • International Law
  • Political Psychology

Big data analytics presentation in the AIM Room
Dr. Krause said, “Kelly did a wonderful job. I know that Northwest Passage Capital Advisors is ahead of the crowd with their ‘boots in the cloud’ strategy. I’ve taught AIM students how to collect and analyze data from Twitter for consumer goods stocks, but this approach is very special. Their investment process, which assesses political and credit risks, allows them to create an internal rating system and is largely responsible for their superior performance. The use of hard and soft data as tools to evaluate sovereign emerging market debt is distinct. Who needs boots on the ground when the cloud is available?”

Tuesday, September 19, 2017

A Current AIM Small Cap Equity Fund Holding: Flotek industries (ticker: FTK) by William Reckamp. "The Struggle for FTK Continues"

Flotek Industries (FTK, $5.51): “Flotek Flooding Investors with Uncertainty
By: William Reckamp, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.


Flotek Industries, Inc. (NYSE:FTK) develops and distributes specialty chemicals, and down-hole drilling and production equipment for the oilfield service industry.

• Flotek is currently advertising its patented Complex nano-Fluid technologies that supposedly can increase well IRR from 22% to 34% with little associated risk.

• The company has recently sold off its drilling technologies business which net the company $17 million in cash.

• Headquartered in Houston, the company still expects to fulfill orders as it shifts manufacturing from Texas to Oklahoma.

• IBM and Flotek have partnered to create Flotek’s Reservoir Cognitive Consultant, which will allow data scientists and chemists to analyze well data and provide customized chemical solutions to clients.

Key points: The uncertainty of oil prices act as a double edge sword. We’ve seen WTI prices stay between the $45-$50 range in recent months. This has caused Flotek’s share price to float between $5.50-$6 dollars. However with the volatility in prices, upstream companies are looking for improved extraction methods which is cheaper than trying to search for new reserves.

During their August investor presentation, management has expressed considerable optimism in their Complex nano-Fluid technologies. Even during the downturn of oil prices, operators have focused on cost reduction. Upstream clients have flocked to these patented extraction technologies which has caused Domestic Complex nano-Fluid volume (gallons) to grow substantially. The numbers of gallons for these technologies has increased 9 of the last 10 quarters. Even though raw material costs are rising, for the products, John Chisholm (CEO) reassures demand is still there. He states in the 2Q17 earnings call, “Our clients are showing signs of receptivity to a period of increasing pricing as we experienced domestic complex nano-Fluid or CnF revenue outpace volume growth in the quarter.”

Management would like to further match the supply with demand so they have an outlined plan for obtaining this objective. At the end of 2Q17, Flotek was producing 1.5 million gallons of nano-Fluid per month. By the beginning of 2018, they are shooting to expand production to around 2 million gallons per month. Additionally, they have successfully expanded in both the Marcellus and Utica regions which will allow business to increase more quickly into the US northeast region. The new development will likely contribute an extra $.50 a gallon of gross margin.

What has the stock done lately?

Flotek shares have decreased from $5.97 to $5.51 in the past month. Shares rebounded from the monthly low on September 8th at $4.80 largely due to a weekly surge in WTI prices. We have seen an overall downward monthly trend due to an announcement of deteriorating cash flows.

Past Year Performance: Over the course of a year, the share price has fallen 67% from $15.65 to the current $5.21 while WTI prices have grown 4.7%. This relationship begs the question about Flotek’s poor performance. Revenues grew sharply in the first two quarters but it has reported net losses in the last four quarters causing the slide.

Source: FactSet

My Takeaway

It seems as though Flotek is revitalizing its business model and therefore investors should be cautious. They have recently sold off its drilling technologies business and are placing a focus on the complex nano-Fluid technologies segment. Management has made this change seem like a growth catalyst; however, if you look at this internationally they have struggled to sell these products. Flotek’s partnership with IBM seems promising, but they are still in the beginning stages of this technology. Shares have decreased 67% in the last year because they have not reported positive income in the last four quarters. In order to attract investors, Flotek needs to provide an income generating and decisive business model. Hold Flotek until a better energy stock is pitched in the AIM Fund.

Source: FactSet