6 Keys to Attracting and Nurturing Breakthrough Innovators on Your Own Team

Breakthrough innovation is the dream of every entrepreneur, but it’s still a scarce commodity. Selecting and nurturing people who are likely to help you in this regard is an even more elusive capability, and one that every angel investor, like myself, wishes he could get a lock on.

In fact, every manager and business owner needs this skill just to survive with today’s pace of change. 

We all wish we were the next Steve Jobs, or Elon Musk, or Thomas Edison. If we’re not, then at least we would like to recognize them when they come through the door, or better yet, create a few like them in our own organization.

I wish I understood what makes some people so spectacularly innovative, producing triumph after triumph, while the rest of us merely get by.

I’ve seen a lot of speculation on this challenge over the years, but I was recently impressed with the insights in a new book, Quirky, by Melissa A. Schilling.

From her position as professor at NYU Stern, and recognition as one of the world’s leading experts on innovation, she takes a deep dive into the lives and foibles of eight well-known innovators, including the ones mentioned.

One of her encouraging conclusions is that we all have potential in this regard, which can be brought out naturally by life circumstances and special circumstances, or nurtured by the people and culture around us.

I’ll paraphrase her key recommendations for capitalizing on this potential, for use on yourself and members of your team:

1. Incentivize people to challenge norms and accepted constraints.

Everyone wants to fit in, but most of us have felt a sense of being an outsider, which needs to be nurtured rather than crushed. In business, that means never saying or implying “that’s not the way things are done around here.”

It also means giving people opportunities in areas they have interest, but no track record. Elon Musk, for example, had no experience or training as a rocket scientist when he came up with the idea of reusing rockets, and the innovative idea for SpaceX

2. Give people time to think beyond current job assignments.

When you are looking for breakthroughs, you need time to think outside the box without fear of consequences. Make it clear, as they do at Google, that you are expected to spend some “20 percent time” outside your current job assignment.

The payoff value of a person working alone on side projects, tapping into intrinsic motivation, has been the source of several of Google’s most famous products, including Gmail. 

3. Reinforce people’s belief in their ability to succeed.

One of the most powerful ways to increase creativity, at both the individual and organizational level, is to encourage people to take risks by lowering the price of failure, and even celebrating bold-but-intelligent failures.

Also, creating near-term project milestones, with plenty of opportunities to celebrate early progress, is extremely valuable to reinforce people’s belief in their ability.

4. Inspire ambitions by setting grand goals and purpose.

Driving business goals that have a social component that people can embrace as improving quality of life provides intrinsic motivation to increase creativity and effort in their activities. Steve Jobs was obsessed with revolutionizing personal expression, more than making a computer.

5. Tap into people’s natural interests and favorite activities.

In business, this is called finding the flow. It requires both self-awareness on what you like to do, and a willingness on the part of your manager to personalize work assignments. With most jobs, there are many ways to get to results, so let your employees tell you what steps and tools they prefer.

Thomas Edison loved to solve problems and he designed his own experiments. Thus he was happy to persevere, despite 10,000 of his light bulb filament material tests that didn’t work. 

6. Increase focus on technological and intellectual resources.

With today’s pervasive access to the Internet, with powerful search tools from Google, WolframAlpha, and many others, the Library of Congress is at everyone’s fingertips. They just need the inspiration, time, and training to capitalize on these tools, and the new devices that arrive every day.

Schilling and I do agree that you have to start with people who possess substantial intellect, so the conventional indicators of skill and accomplishments cannot be ignored.

In addition, it’s important to find partners and team members with a high need for achievement, a passionate idealism, and faith in their ability to overcome obstacles, often seen as a level of quirkiness.

We are talking here about finding and nurturing people who can literally help you change the world, because that’s what breakthrough innovation is all about. If your business and personal goals don’t measure up to that standard today, maybe your first focus should be on rethinking your own objectives.

The bar for staying competitive in business keeps going up.

Broke Out Of This Jailhouse REIT

It’s one thing when jails are successful in housing and rehabilitating prisoners, but when those jails themselves become dysfunctional, something has to give. We were originally very positive on the concept of private prison ownership, knowing that the government couldn’t handle or didn’t want to handle the workload. But with its own set of issues and challenges, we are throwing in the towel on this Jailhouse REIT.

CoreCivic Inc. (CXW) (formerly Corrections Corporation of America) is a real estate investment trust company specializing in correctional, detention, and residential reentry facilities and prison operations. It also makes certain healthcare, food, work and recreational programs available to offenders as well as providing a variety of rehabilitation and educational programs like basic education, faith-based services, life skills and employment training, and substance abuse treatment – programs that intend to help reduce recidivism and prepare offenders for their successful reentry into the society upon their release.

It earns revenue on an inmate per-day based on actual or minimum guaranteed occupancy levels. In 2016, the company recorded $1.9 billion revenue. It has 13,755 employees and is the largest player in the correctional facilities industry with 34% market share. It owns 57% of all privately owned correctional and detention capacity.

Source: CoreCivic Investor Presentation

If Planning To Visit

As of September 30, 2017, CoreCivic owned 79 real estate assets and manages 7 additional facilities owned by its government partners. It owns 44 correctional facilities with 64,064 bed capacity and manages 7 facilities with total bed capacity of 8,769 beds. It leases 2 correctional facilities with 4,960 beds capacity and leases 7 residential centers with a total of 1,047 beds capacity to other operators and leases another 3 properties with total area of 30,000 sq. ft. to the federal government. It also operates 23 residential reenter centers with total capacity of 4,792 beds.

Aside from its principal executive offices in Nashville, TN, it also owns two corporate office buildings.

Source: CoreCivic Investor Presentation

Customers/Key Buyers

CoreCivic’s customers consist of federal and state correctional and detention authorities. Its key federal customers include the Federal Bureau of Prisons (BOP), the United States Marshals Service (USMS), and U.S. Immigration and Customs Enforcement (ICE).

Contracts from federal correctional and detention authorities account for about 51% of the company’s revenue whereas contracts from state customers account for about 42% of its revenue. Most of these contracts contain clauses allowing the government agency to end the contract at any time without cause. Moreover, these contracts are also subject to annual or biannual legislative appropriation of funds.

Aside from diversifying within federal, state, and local agencies, the risks of ending a contract prematurely is that CoreCivic has staggered contract expirations with most of its customers having multiple contracts. In the past, BOP has tended to let contracts end rather than end them prematurely as it is dependent on private prisons to house low-security inmates – typically undocumented male immigrants.

We knew about the concentration of government dependence when we invested in the stock but have become increasingly concerned with both the lack of inmate growth (see below) and the potential for government decisions that could adversely affect revenues – particularly in a highly polarized political environment that frankly, we find unpredictable.

Source: CoreCivic Investor Presentation

Recent Trends

Because the majority of the company’s revenue come from the federal government, its contracts are susceptible to annual or biannual appropriations, and having short terms of just three to five years, CoreCivic could be largely affected by an impending government shutdown. At present, immigration policy is one of the major issues wherein the Republicans and Democrats have opposing stances. For example, from January 19th to the 22nd, the U.S. entered a government shutdown after the two parties failed to come to an agreement about the funds allocated to immigration issues like the Deferred Action for Childhood Arrivals (DACA).

With the U.S. Immigration and Customs Enforcement being one of the major customers of CoreCivic, the company is directly affected by these shutdowns.

During a shutdown, the government will not be able to pass any short-term spending bills that allow budget allocations to be released to various agencies. Companies like CXW receive fixed monthly payments so the BOP may not be able to release funds or pay CoreCivic for a short period of time, depending on when and how long the shutdown occurs – resulting in cash flow and working capital challenges. Luckily, the government shutdown did not last very long, but the potential for a similar risk in the future is still relevant.

Another trend that is likely to affect CoreCivic’s business is the continuous decline in the number of prisoners. The number of prisoners under state and federal jurisdiction has declined by 7% from 2009 when the U.S. prison population peaked (See the table below). Federal prison makes up 13% of the total U.S. prison population and contributed 34% of the decline in the total prison population in 2016.

Source: U.S. Department of Justice

Accordingly, prisoners being held in private prisons have declined. According to Pew Research, after a period of steady growth, the number of inmates being held in private prisons has declined since 2012 and continues to represent a small share of the nation’s total prison population. We’re not confident this trend will reverse.

Another reason for the declining population in private prisons is the growing government commitment to progressive criminal justice, particularly to nonviolent offenders – low-security prisoners who are catered by private prisons. For example, the recommended mandatory minimum sentencing for nonviolent drug traffickers has been reduced. These progressive trends are likely to lead to further decreases in inmate populations.

Source: Pew Research

In August 18, 2016, the DOJ also issued a memorandum to the BOP directing that as each contract with privately operated prisons expires, BOP should either decline to renew contacts or substantially reduce scope in line with the BOP’s inmate population.

However, despite the said memorandum, BOP did exercise a two-year renewal option for CoreCivic’s McRae Correctional Facility. Moreover, in February 2017, the Department of Justice also reversed the memorandum to phase out private prison. It argues that this policy will impair the government’s ability to meet the future demands of the federal prison system. This decision saves the private prison industry from the risk of being phased out in the near future but may only push that decision out a few years. The uncertainty worries us.

To make matters worse, a class action lawsuit (Grae v. Corrections Corporation of America et al.) was filed against CoreCivic’s current and former offices in the United District Court for the Middle District of Tennessee. The lawsuit alleges that from February 27, 2012 to August 17, 2017, the company made misleading or false information and public statement regarding its operations, programs, and cost-efficiency factors to inflate its stock price. CoreCivic insists that these accusations are without merit but it still puts CXW and private prisons in a negative light.

Lastly, CoreCivic has also been receiving criticisms about its services. Complaints were received from Trousdale Turner Correctional Center in Hartsville after allegedly failing to address the concerns of prisoners and their families, including the healthcare needs to diabetic inmates. The scabies outbreak in its Metro-Davidson County Detention Facility is also cited as an example of its negligence to protect the wellbeing of prisoners. These lawsuits do not help CoreCivic’s image especially after it has laid off 500 employees after losing three jail contracts in Rusk, Jack, and Willacy counties.

Outlook

According to IBISWorld, the correctional facilities industry revenue is expected to grow minimally at an annual rate of 0.1% to reach $5.3 billion from 2017 to 2022, but industry profit is not expected to rise significantly. The trend in the number of prisoners will slow down the growth of the industry despite the overcrowding problem in the state prisons, which may or may not compensate for decreased demand for its services at the federal level.

Overall, we do not view the company’s prospects favorably in light of industry trends, governmental risks, and reputational image that can affect fundamentals and create unwanted headline risk. For this reason, we are selling CXW out of the REIT Portfolio.

America is the land of the second chance – and when the gates of the prison open, the path ahead should lead to a better life. – George Bush

Disclaimer: Please note, this article is meant to identify an idea for further research and analysis and should not be taken as a recommendation to invest. It is intended only to provide information to interested parties. Readers should carefully consider their own investment objectives, risk tolerance, time horizon, tax situation, liquidity needs, and concentration levels, or contact their advisor to determine if any ideas presented here are appropriate for their unique circumstances.

  • Past performance is not an indicator of future performance.
  • Investing in any security has risks and readers should ensure they understand these risks before investing.
  • Real Estate Investment Trusts are subject to decreases in value, adverse economic conditions, overbuilding, competition, fluctuations in rental income, and fluctuations in property taxes and operating expenses.
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  • Information presented is not believed to be exhaustive nor are all the risks associated with the topic of each article explicitly mentioned. Readers are cautioned to perform their own analysis or seek the advice of their financial advisor before making any investment decisions based on this information.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Beware of Pranksters Crashing Apple iPhones Using Twitter

If you’re an Apple iPhone user who also enjoys Twitter, listen up.

Pranksters on the social media service have been sharing a character from the Indian Telugu language that causes iPhones to crash, according to Mashable. The offending users have been putting the character into their Twitter usernames and tweets and encouraging people to share them with their friends. If the character lands in a user’s Twitter feed, it will cause the social app to crash. The app will continue to crash after users try to boot it back up, ultimately stopping victims from accessing the service on their iPhones.

Last week, reports surfaced saying that a single Telugu character was enough to wreak havoc on iPhones. When the character is sent via any messaging or social networking app, the affected user’s app will crash. While it’s an obscure bug that only affects Apple’s iOS 11, it’s one that pranksters and those trying to cause harm are exploiting across the Internet. Worst of all, there’s no fix at the moment and unsuspecting victims needn’t do anything to be affected.

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Apple acknowledged the Telugu bug last week and has promised a fix. The company hasn’t yet delivered, though, and it’s impossible to say when it’ll be released.

According to Mashable, which tested the bug on Twitter, the only way for affected users to regain access to the app is to log in via Safari and block the person that shared the character. At that point, the character won’t show up in their feeds and Twitter will be accessible.

Here's Why You Shouldn't Pay $1.10 For A Dollar Of Investment Grade Bond Assets

I’ve received questions from prospective subscribers about the types of trade alerts that we issue to the members section of the Cambridge Income Laboratory. One type of trade is CEF arbitrage, or more specifically a pairs trade, where we simultaneously identify an overvalued CEF and an undervalued CEF in the same sector. The strategy then entails selling or selling short the overvalued fund while simultaneously buying the undervalued fund.

The advantage of a CEF pairs trade is that because both the sold and bought funds are from the same sector, we aren’t making a directional bet on the performance on the underlying assets. Instead, we’re simply relying on the powerful concept of reversion of CEF premium/discount values (see Reflections On Chemist’s CEF Report Pick Performance In 2017 for how this has worked well for us in the Chemist’s monthly CEF picks).

There are two main limitations of the CEF arbitrage strategy. The first is that the magnitude of the gains are unlikely to be very large, simply because it is by nature a hedged strategy. That’s the trade-off for the strategy being relatively low risk. The second limitation is that unless you already own the overvalued CEF identified in the pairs trade, you would have to locate shares of the overvalued CEF to sell short. With some of the smaller, less liquid CEFs, this can range from expensive to downright impossible. The most optimal set-up is therefore already owning the overvalued CEF, and then locking in profits by selling the fund and then replacing it with the undervalued CEF in the same sector.

With the introductory blurb out of the way, let’s see how this has played out for one of the more recent CEF pairs trade that we identified in the members section of the Cambridge Income Laboratory.

About 4.5 months ago (see Sell This Investment Grade Income CEF Now), we noticed the premium of Western Asset Income Fund (PAI), an investment grade bond CEF, suddenly spiking up to +10.16%. The 1-year z-score was +3.6, indicating that this fund was significantly more expensive than its recent history. My comments from the initial article are reproduced below:

I was looking through the CEF database today and noticed the Western Asset Income Fund (PAI) trading at an exceptionally high z-score of +3.6.

Its current premium of +10.16% is at a 5-year high.

(Source: CEFConnect)

A 1-year z-score of +3.6 tells us that the premium/discount is trading 3.6 standard deviations above its 1-year historical value. Statistically speaking, this would be a 0.02% probability of occurrence, assuming that the distribution of values is normally distributed (which it isn’t, but the point is that such a high z-score is a rare occurrence).

The 5-year chart above showed that the fund traded at quite substantial discounts over the past 5 years, sometimes exceeding even -10%. This makes the current premium of +10.16% even more unusual than the 1-year z-score of +3.6 would indicate.

At this juncture, I wanted to look at the entire history of the CEF since inception. Perhaps the past 5 years was just an anomaly, and that the CEF has commanded a consistent premium in the past? It turns out that was not so.

Going back to inception, only during a brief period in 2009 did the fund’s premium exceed 10%. An unusually high premium for an investment grade fund might be understood during the immediate recovery period after the financial crisis…but why now? I can’t think of a fundamental reason why someone would pay $1.10 for a dollar of investment grade debt.

(Source: CEFConnect)

I then check out the premium/discount values of the peer group. Maybe investment grade bond CEFs are for some reason on a tear thus accounting for PAI’s unusual premium? Nope, that’s not it.

The premium of PAI is 3rd-highest out of the 15 CEFs in the “investment grade” category of CEFConnect. But I don’t consider PIMCO Corporate & Income Strategy Fund (PCN) and PIMCO Corporate & Income Opportunity Fund (PTY) to be traditional investment grade income CEFs, so not counting those two funds PAI has the highest premium in the peer group.

(Source: Stanford Chemist, CEFConnect)

OK, so PAI is a pretty good sell or short candidate. What did I pair my short PAI position with?

What did I pair my short PAI position with? I chose the BlackRock Credit Allocation Income Trust (BTZ). I wanted to choose a fund with a negative z-score, but rather amazingly all 15 investment grade CEFs had z-scores 0 or greater. BTZ’s z-score of +0.8 wasn’t the lowest, but its discount of -9.04% was the widest in the peer group, as you can see from the chart above.

Next, I wanted to see compare the price and NAV returns of these two investment grade bond CEFs to check if there were signs of deteriorating portfolio values in the undervalued CEF, which might cause me to consider BTZ as the long partner in this pairs trade.

The opportunity for the pairs trade comes from the fact that PAI’s price return is significantly outpacing its NAV return, whereas that is not the case with BTZ. We can see from the chart below that PAI appears to be blowing BTZ out of the paper with a +19.29% YTD return compared to only +8.94% for BTZ.

Chart

However, their YTD NAV returns are nearly identical.

Chart

No warning signs there. That leads me to the conclusion that:

In summary, if you own PAI, now would be a great time to sell!

Let’s see how the thesis played out 4.5 months later. BTZ had a total return loss of -3.88% over this time frame. That’s bad, of course, but still relatively much better than PAI’s loss of -14.1% over the same period. In other words, BTZ outperformed PAI by 10.22 percentage points in only 4.5 months, or about 27% annualized.

Did PAI’s portfolio do much worse than BTZ’s? No, and in fact the reverse was true. PAI’s net asset value [NAV] fell by -2.10% over this time period, but BTZ’s was even worse at -3.24%.

If BTZ’s portfolio did worse than PAI’s, why was its total return (much) better? My regular readers will have already guessed at the answer: premium/discount mean reversion! Over the last 4.5 months, PAI’s premium of +10.16% has sank to a discount of -4.82%, while BTZ’s discount of -9.04% has widened slightly, to -11.9%. Therefore, the majority of the outperformance of the long BTZ/short PAI pairs trade was due to the contraction of PAI’s discount.

Chart
PAI Discount or Premium to NAV data by YCharts

Summary

This article hopefully conveys our thought process in recommending a pairs trade to our members. Anyone who owned PAI and swapped to BTZ to would have profited to the tune of ~10% in only 4.5 months (~27% annualized), which is equivalent to about 2.5 years worth of distributions from PAI!

Note that I did not need to do a deep dive analysis of either PAI or BTZ to initiate this pairs trade. This was based almost entirely on premium/discount mean reversion, or as my fellow SA author Arbitrage Trader likes to say, “simple statistics”.

Taking stock of the situation today, the long BTZ/short PAI trade has to be considered to be largely completed, as PAI is now trading with a discount of -4.82% and a 1-year z-score of -1.5, indicating that is now cheaper than its historical average. Although BTZ’s z-score of -2.5 is even lower, as is its discount (-11.9%), the gap in valuation is no longer there.

Are there any current opportunities? The following table shows the 12 CEFs in the database that currently have z-scores greater or equal to +2.5. If you own ones of these funds, if might be a good idea to seek out another fund in the same category that is trading with a more attractive valuation, particularly if the fund that you own is also trading at a premium. Don’t let mean reversion catch you out!

Name Ticker Yield Discount z-score
MS Income Securities (ICB) 2.71% -1.47% 3.9
BlackRock Science and Technolo (BST) 5.32% 3.05% 3.2
Tortoise MLP Fund (NTG) 8.61% 9.26% 3.2
ClearBridge Energy MLP (CEM) 8.85% 5.53% 3.1
Gabelli Utility Trust (GUT) 8.50% 44.95% 3.1
Templeton Emerging Mkts Income (TEI) 3.79% -8.17% 3.1
Sprott Focus Trust (FUND) 4.97% -8.86% 3.0
Nuveen S&P Dynamic Overwrite (SPXX) 5.58% 9.54% 2.9
RiverNorth Opportunities Fund (RIV) 12.09% 6.83% 2.7
Deutsche High Income Oppos (DHG) 5.42% -0.60% 2.6
First Trust New Opps MLP & En (FPL) 10.52% 6.67% 2.5

Western/Claymore Infl-Lnk Opps

(WIW) 3.79% -9.71% 2.5

(Source: CEFConnect, Stanford Chemist)

We’re currently offering a limited time only free trial for the Cambridge Income Laboratory. Prices are going up on March 1, 2018, so please join us and lock in a lower rate for life by clicking on the following link: Cambridge Income Laboratory.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am long the portfolio securities.

Public Service Enterprise Group: Once The Plant Closures Are Done, An Attractive Utility

Out of 29 diversified utilities, Public Service Enterprise Group (NYSE:PEG) is the 3rd largest. It has a very high PE – 47.47 (which I’ll explain below). This makes it the 6th most expensive in the diversified utility sector. The forward PE of 15.69 is far more reasonable (this makes it the 8th cheapest). The company has the 10th highest dividend in the sector.

Like most other utilities, the stock has had a difficult quarter and month; it’s down 6.01% and 3.30%, respectively. This is part and parcel of the rest of this industry.

PEG is divided into two segments.

1.) PSE&G is responsible for power transmission and distribution. It has 2.2 million customers across NJ.

2.) Power holds the generating facilities (obviously), most of which are located in NJ:

The company uses nuclear, coal and natural gas for power generation.

The company has a weighted average cost of capital of 2.56%; FERC has allowed the company to use an ROE return assumption of between 10.3% and 11.1%.

Let’s turn to the financials, starting with the relevant information from the income statement (data from Morningstar; author’s calculations):

This is a decidedly mixed statement. On the plus side, we have a very positive interest and debt picture. EBITDA/gross margin has returned to 2012 levels and interest/EBITDA has declined. But the company has taken two hits to revenue. There were losses related to Superstorm Sandy and an overall decline in demand. Some of the loss, however, is related to a one-time event: closing two plants with 1,838 MW of generating capacity. These were coal plants which are now uncompetitive compared to natural gas generation (Pennsylvania which is right next door produces a large amount). The company wrote this in its latest 10-Q regarding the accounting impact:

As of June 1, 2017, Power recognized total D&A of $964 million for the Hudson and Mercer units to reflect the end of their economic useful lives in 2017. In the three and nine months ended September 30, 2017, Power recognized pre-tax charges in Energy Costs of $1 million and $10 million, respectively, primarily for coal inventory lower of cost or market adjustments. For the three and nine months ended September 30, 2017, Power also recognized pre-tax charges in O&M of $8 million and $12 million, respectively, of shut down costs and an increase in the Asset Retirement Obligation due to settlements and changes in cash flow estimates, partially offset by changes in employee-related severance costs.

The low FPE shows that the write-down is almost over. The company has several other plants that use natural gas instead of coal under various stages of construction which will help to control costs going forward.

Finally, we have the relevant numbers from the cash flow statement:

Dividend investors will like that, even when the company took a major loss, it still paid its dividend from existing earnings. And while it’s issued debt, it has done so conservatively (refer back to the balance sheet discussion with the low debt/asset ratio).

Finally, the stock has recently rebounded from its 200-day moving average and is moving higher.

The accounting issues related to plant closures should be over soon. Once done, PEG’s earnings will return to more normal levels. Despite the high current PE, the forward valuation is attractive as is the dividend. This is a stock to consider.

This post is not an offer to buy or sell this security. It is also not specific investment advice for a recommendation for any specific person. Please see our disclaimer for additional information.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Gold Medalist Chloe Kim Tweets That She's Hungry and Savvy Businesses Jump at the Opportunity to Get Her Something to Eat

When you’re an Olympic gold medalist, people treat you…just a bit different. Whenever I say out loud that I’m getting hungry, I’m the one who has to march into the kitchen to make myself something to eat. But when Chloe Kim — 2018 Olympic snowboarding gold medalist for the USA — says she’s getting hungry (actually, she said she was “getting hangry”), then restaurants and food companies from all around the world will trip all over themselves to get her something to eat.

In a tweet a couple days ago, Chloe said:

“Wish I finished my breakfast sandwich but my stubborn self decided not to and now I’m getting hangry” 

According to a recent article in the Washington Post, a long list of companies were quick to respond, including Roy Rogers Restaurants, California Pizza Kitchen, Oreo, Vermont Smoke & Cure (which offered Chloe its meat sticks), and even Durham, North Carolina’s Cocoa Cinnamon coffee shop which responded, “Turn that hangry to happy with these digital churros and chocolate.”

Chloe’s tweet definitely attracted a lot of attention — as of right now, 102,000 people have liked her tweet and 11,000 have retweeted it. I suspect she could tweet about most anything right now and get a similar response.

Says Jay Curley, marketing manager of Ben & Jerry’s (which responded to a different tweet by Chloe this week expressing her desire for ice cream), “It was pretty straightforward. We pay attention to what people are saying online, and we like to send out ice cream to our fans, whether they’re regular folks or celebrities.”

Of course, most regular Ben & Jerry’s fans aren’t going to get the big cooler filled with an assortment of ice cream flavors that the company sent to Chloe free of charge.

When it comes to marketing their products and services, savvy companies know that they can leverage their brands by linking themselves to the social media of popular athletes, celebrities, and others people who are in the public eye. It doesn’t cost the company anything, and who knows? Maybe they’ll sell an extra pizza, bag of cookies, pint of ice cream, or meat stick as a result.

It certainly doesn’t hurt to try.

Synergy Pharmaceuticals: New CEO Aims For Reset

On February 15th, Synergy Pharmaceuticals (SGYP) CEO Troy Hamilton presented at the Leerink Partners 7th Global Healthcare Conference. It marked the first serious outing by Hamilton since he took over as CEO from company co-founder Gary S. Jacob.

Donning the mantle of chief executive after the market responded brutally to a surprise secondary offering in November 2017, Hamilton faces a market and shareholder base that is wary of Synergy’s management. He struck a conciliatory and upbeat tone during his presentation and subsequent Q&A session, and strove to draw a line under the past year and to chart a course for 2018 that is distinct from the Jacob era.

With shares still trading around $2, the market is clearly deeply skeptical. But that may well present a great opportunity for investors willing to invest in the growth of this company over the next year.

Let’s take a look at the latest news from Synergy, and what it means for our investment thesis in 2018.

The Promise of Change

When Troy Hamilton was named CEO on December 19th, it marked the end of an era. Gary Jacob had led Synergy for many years and never seemed to quite get that it was a public company. He was willing to dilute or destroy shareholder value in order to pursue his own ambitions and vision. The November secondary offering, which was not telegraphed and appeared unnecessary given the company’s access to a large debt facility, proved to be the long-time chief executive’s undoing. Jacob is not gone entirely, having been named Executive Chairman upon his resignation, which has caused some investors and commentators to wonder if the real power continues to rest with the ousted CEO.

Upon his appointment as CEO, Hamilton immediately worked to distinguish himself from his predecessor, on paper at least. He made that desire clear in his initial statement of priorities:

One of my initial areas of focus will be to work with our CFO, Gary Gemignani, and the Synergy management team to continue to refine our business plan and focus on achieving cost efficiencies throughout the company while prioritizing investments that will drive significant TRULANCE growth. As we move into 2018, we will continue to evaluate all strategic and business development opportunities to maximize the value of TRULANCE and leverage our commercial infrastructure, remaining focused on delivering long-term value for patients, healthcare providers and our shareholders.”

In his presentation at the Leerink conference, Hamilton made it clear that he is the man in charge, stating that, “Things are gonna change under my leadership.” What exactly those changes will be was not quite as clear, though he did lay out his priorities.

Hamilton promised that, “Everyone at Synergy will be looking at these three key business priorities.” Optimizing the value of Trulance is obviously the most important thing. It is what will ultimately determine the value of the company. Investors are still waiting to see if Trulance can really seize significant market share. The new CEO has set solid goals, but execution is what counts.

Trulance Performance Update

Hamilton’s presentation dedicated significant time to an update on Trulance prescription numbers. This is what really counts in the end, after all. The latest prescription data is fairly encouraging.

There has been steady growth in the number of prescriptions, as well as in the number of pills per prescription. The growth is not yet setting the world on fire, but Trulance is still fighting to win over market share against the incumbent, Linzess. Importantly, in 2018 Trulance will have two distinct advantages over its first year on the market: It will have much wider formulary access and is approved for a second indication, irritable bowel syndrome with constipation, or IBS-C.

Hamilton described the overall market as growing at “a double-digit clip” and that Trulance has “tremendous opportunity for continued growth.” He also stated that he did not intend to grow the salesforce, which speaks well of cost-control but may cause worries about marketing coverage.

The question now is whether Synergy can seize the new market opportunity and leverage its salesforce more effectively to gain access to a wider number of patients. Trulance is cutting into Linzess, but the incumbent remains the dominant force.

Pursuing New Opportunities

The day after Hamilton’s promotion was announced, I wrote a piece in which I asked whether he would be a truly distinctive leader or just more of the same. In that article I argued that the new CEO could deliver material improvement to Synergy’s growth prospects:

Hamilton is untested as a CEO, but as an expert in commercialization he has the knowledge Synergy needs right now as it continues its fitful growing pains as a commercial-stage business…

We must consider some of the opportunities the new leadership could offer in addition to an improved go-it-alone commercialization strategy. One is the prospect of a partnership or outright buyout. The new CEO is well connected in Big Pharma, including Johnson & Johnson (JNJ) where he spent a decade in a number of roles.

The Jacob era was fixated on maintaining Synergy’s independence. For Hamilton, who has few emotional ties to the company he joined just two years ago, other options may seem more appealing.”

It is clear that, for now, Synergy is going to continue its own commercialization work for Trulance in the domestic market. However, Hamilton was eager to point out a number of opportunities that he is exploring actively. Selling ex-US rights is one, and that could bring in significant income in one-off payments and royalties.

Co-promotion with other products is also something Synergy will be pursuing this year. Hamilton stated that accessing these other marketing channels could bring Trulance sales to “the next level.” In-licensing opportunities are also on the table for consideration. All of this is good news for Synergy’s growth prospects and its financial outlook.

Charting the Way Forward

The first material result since Hamilton took over as CEO has been the meeting of a cash balance requirement that will allow Synergy to access the second tranche of its debt facility, worth $100 million. The company needed to have $128 million in the bank at the end of January to qualify, and several analysts and commentators thought it could not achieve that cash position. In the end, Synergy did have enough cash. What particular role Hamilton had in ensuring that is unclear, but it is a solid sign that financial control is possible for a company that has spent several quarters burning through vital cash reserves. It has also removed much of the near-term financial worries, though the market has yet to reward Synergy’s share price accordingly.

2018 will be an important year for Synergy. With more than $200 million in cash readily accessible, the recent high cash burn rate is sustainable for well over a year. But that should be expected to drop precipitously as Trulance gains more market share and matures as a product in the marketplace.

Synergy still has a lot of work to do to prove it can succeed in making Trulance a mass-market success. At the current share price, the market is clearly discounting the company’s prospects. I would argue that the outlook is stronger than it has been in the past few months, with Synergy representing a remarkable value opportunity. We can expect the fourth-quarter results to be reported on March 1st. That will help provide some further insight as to whether Synergy can deliver on its significant promise.

Disclosure: I am/we are long SGYP.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Swiss watchdog to treat some coin offerings as securities

ZURICH (Reuters) – Switzerland’s financial watchdog will regulate some digital currency fundraisers, known as initial coin offerings (ICOs), either under anti-money laundering laws or as securities, it said on Friday.

The guidelines provide more clarity on the country’s stance toward the hot fundraising method in which Switzerland has become a global leader but whose regulators had not yet weighed in significantly.

ICOs skyrocketed in 2017, reaching nearly $3 billion through September, with Switzerland attracting around a quarter of the money, according to data compiled by cryptocurrency research firm Smith + Crown.

Groups based in Switzerland have launched many of the world’s biggest ICOs.

Regulation has become a hot button issue since the U.S. Securities and Exchange Commission deemed last year that some ICOs could count as securities. Many other global authorities followed suit.

“Blockchain-based projects conducted analogously to regulated activities cannot simply circumvent the tried and tested regulatory framework,” Financial Market Supervisory Authority (FINMA) chief Mark Branson said in a statement.

“Our balanced approach to handling ICO projects and enquiries allows legitimate innovators to navigate the regulatory landscape and so launch their projects in a way consistent with our laws protecting investors and the integrity of the financial system.”

FINMA said regulation would be based both on the purpose digital tokens served as well as whether the tokens were already tradeable or transferable when the ICO took place.

Fundraisers launching digital currencies intended to function as a means of payment, and which could already be transferred, would be subject to anti-money laundering regulations but would not be treated as securities, FINMA said.

Fundraisers launching digital tokens intended to provide access to an application or service would be treated as securities if they functioned as an economic investment.

Access — or “utility” — tokens that didn’t function as an investment and could already be used to access the application at the time they were issued wouldn’t be considered securities.

Fundraisers launching digital tokens that represented assets — like a share in a company, earnings or underlying physical goods — would also be regarded as securities, subject to trading laws and prospectus requirements.

Editing by Michael Shields

Number of crypto hedge funds doubles in four months: Autonomous NEXT data

LONDON (Reuters) – Hedge funds focused on trading cryptocurrencies more than doubled in the four months to Feb. 15, hitting a record high of 226, showed new data from fintech research house Autonomous NEXT on Thursday.

The firm had recorded just 110 global hedge funds with a similar strategy as of Oct. 18, up from 55 funds at Aug. 29 and just 37 at the start of 2017.

Assets under management hit between $3.5 and $5 billion, according to the firm.

Reporting by Maiya Keidan and Jemima Kelly

Hyperinflation meets tech: Cash-scarce Venezuela sees boom in payment apps

CARACAS (Reuters) – Widerven Villegas and his brother wash some 30 cars a day at a parking lot in Caracas. Despite charging less than 50 cents, nobody pays them in cash.

In tech hubs from San Francisco to Tokyo, payment is conveniently made through software on phones and watches on a routine basis. Amid a dire economic crisis in Venezuela a similar innovation is taking hold, though for very different reasons.

People from vegetable sellers to taxi drivers have registered to use mobile payment applications to attract customers who do not have enough paper money, which is in short supply due to soaring prices. The maximum daily amount Venezuelans can withdraw from cash machines is around 10,000 bolivars, around 4 cents at the black market exchange rate.

    Venezuela’s hyperinflation, one of the first of the digital era, is producing surprise winners in a tough business climate: small technology companies based in the crisis-stricken country.

    “I accept transfers. I have Tpago, Vippo and almost all the applications out there!” said Villegas, 35, as he clutched a worn-out tablet and a basic cellphone.

   “We don’t handle cash because our clients don’t have it,” he added. “With the applications I use, I’ve got their money before they’ve even left the parking lot.”

Without these apps, even simple transactions like tipping a waiter or paying for parking become nightmares. Still, banking websites and mobile apps often crash, as the outdated telecoms infrastructure cannot cope with surging demand.

‘MIRACLES’

Requests for a taxi on the Nekso application, somewhat similar to Uber, doubled last year, according to its head of strategy Leonardo Salazar, speaking at the company offices that boast a Playstation console and ping pong table.

Vippo, a Caracas-based payment app, saw a more than thirty-fold increase in the number of people registering last year. Citywallet, born as a pilot project for online parking payments at a private university, was extended to several shopping centers.

“The cash crisis is getting worse every day but is giving us the opportunity to capture more and more transactions with our solution,” said Citywallet co-founder Atilana Pinon, 29.

She and two partners set up the app which is now expanding to Chile, after winning a scholarship from its government.

Creating an app in Venezuela usually requires little capital, given low salary expectations from coders and near-free electricity and data costs.

Developers were surprised by the rapid adoption of the applications and are betting on further growth in 2018.

“There are times when the point of sale machine stops working,” said Maria Lozada, selling cleaning products at a market stall in the wealthier Caracas district of Chacao. “This is the way to solve the cash crisis,” she says, pointing to a Vippo sign.

Venezuela’s central bank inadvertently buttressed the boom by slowing cash production just as inflation was spiralling into quadruple digits.

At the end of 2017, the volume of banknotes increased by only 14 percent, less than half from a year earlier. That coincided with price rises of more than 2,500 percent, according to National Assembly figures.

Some 18 private Venezuelan banks last year launched an electronic payment app for consumers. MercadoLibre, one of the largest online commerce companies in Latin America, also offers a local payment solution.

Even leftist President Nicolas Maduro is getting in on the act, although critics blame him for the root problem.

“With the digital wallet we are going to perform miracles at all levels,” Maduro said recently, announcing a QR code to be included on the government’s social welfare identification card.

Despite some of the world’s lowest internet speeds and a significant fraction of the population without bank accounts and cellphones, cash is falling out of favor in Venezuela.

“Perhaps our economy will be cash-less before Denmark,” quipped Miguel Leon, an electronic engineer leading Vippo, in his open office featuring hammocks.

Writing by Girish Gupta; Editing by Alexandra Ulmer and Chizu Nomiyama

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