PORTFOLIO UPDATE: BACK IN IWSY
Jul28

PORTFOLIO UPDATE: BACK IN IWSY

Earlier today I announced a re-initiation of our position in IWSY on Twitter. I've had a more than two year history with this name, originally profiling the company during the first half of 2013 when the stock was trading below $1. The original research report from March 2013 is available here. The biggest frustration for investors in IWSY has been the lack of tangible earnings coming to fruition despite numerous announcements of partnerships and test pilots with major corporations and government sponsored entities. What investors don't realize are the inner-workings of the software business as it pertains to biometrics. In speaking with two software engineers over the past few months, they told me that product testing cycles for major corporations and especially government organizations is a multi-year endeavor. This becomes all the more stretched out when you are dealing with a new technology, such as biometrics. And add to that the fact that the technology IWSY is developing will protect sensitive personal and government information, you start getting the picture of why any organization involved in a test pilot of their technology would want to make sure everything is 100% effective before launching an actual program. Once the programs launch, whether in the case of Deutsche Bahn, the major retailer in Mexico (rumored to be Wal-Mart), or the newly announced partnership with Lockheed Martin, the SaaS model that has been implemented flows almost purely to the bottom line. The monthly user fees from just a single major contract instantly transforms the company into a substantial producer of cash flow. CEO Jim Miller has said the company will be cash flow positive by year end.  The partnerships the company has assembled over the past few years deserve to be noted: Fujitsu, IBM, Deutsche Telecom, CA, General Dynamics, Lockheed, HP, Microsoft, United Technologies to name a handful.  The issues of capitalization to achieve full realization of the company's potential were resolved earlier this year, as the company raised $12 million in a direct convertible preferred offering with largest shareholder Neal Goldman of Goldman Capital Management. Avoiding Wall Street institutions to act as a middle man for the transaction caused a bit of a rebellion by these institutions as they summarily downgraded IWSY following the capital raise.  The recent announcement of the Lockheed Martin contract is a substantial development for the company, acting as a conduit for adapting IWSY's technology into Federal Government projects. Here is the key line from that press release: " Lockheed Martin will offer the identity service to the federal government and other customers through its FedRAMP approved government community cloud – SolaS®." There is also the issue of...

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JUNE CLIENT LETTER: OBSESSION & A NEAR PERFECT MARKET
Jul06

JUNE CLIENT LETTER: OBSESSION & A NEAR PERFECT MARKET

What follows is a section from the “Thoughts & Analysis” portion of my monthly letter to investors at T11 Capital.  Obsession An obsession with endings is something deeply rooted in human psychology. We fear endings to such a great degree that we forget to recognize what is occurring here and now. The fear creates an impetus to agonize, slowly dissolving into a misery-inducing, melancholy study of psychological frailty and worry. The fear of a relationship ending. The fear of a prosperous period coming to a close. The fear of health suddenly disappearing. But most of all, the fear of death. The ultimate ending, I suppose. Reluctance to participate in a bull market because it will one day end is akin to not getting out of bed in the morning because one day you will die. There is a whole generation of current investors who are refusing to get out of bed because they see death as being the inevitable destination of the current march upwards. Much as the man who refuses to get out of bed because of the inevitability of life ending, investors who refuse to participate in the current bull market are missing out on all the creation occurring around them. The fact that investors have been scorned with great repetition over the past 15 years has created a psychological aversion with respect to equities to the point where the specter of an eventual ending supersedes the benefits gained in the meantime. That aversion shows no signs of abating as the ever faithful long-term moving average of the put/call ratio is just now beginning to drop off of 3 year highs. Meaning that investors, as a whole, have been prone to put buying in order to either hedge their portfolios or outright speculation on the downside at a pace not seen in 3 years. Then there is the AAII survey which seems to be populated with investors who prefer not to get out of bed in the morning. AAII is a survey of investor opinion about the direction of the stock market and economy. In a recent June survey, investor's bullish sentiment remained below the historical average of 30% for a seventh consecutive week. You have to go back 12 years to January-February of 2003 to find a similar stretch. But you know what the difference was between January-February of 2003 and now? In the 3 years prior from 2000-2003 the S&P 500 had fallen 39%. Investors had every right to be bearish. Their hopes of Pets.com and JDS Uniphase providing for retirement in Bordeaux, France had been replaced with the reality of having their jet-skis repossessed while worrying...

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