The Growth Factor

Needham Funds' Commentary by John Barr

                                                                                                         Vol. 14 - April 7, 2014 
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John Barr
Chris Retzler
Preview of Grant's Spring 2014 Conference & 13th Annual Needham & Company, LLC Healthcare Conference   
It's time for the change of seasons, and spring brings us the 13th Annual Needham & Company, LLC Healthcare Conference and the Grant's Spring 2014 Conference.


Long investment themes at the Grant's conference include Russian oil companies, single family real estate, U.S. bonds and African value stocks; short sale investment themes are Chinese banks, equities, biotech and junk bonds.  


Cliff Asness of AQR Capital Management, a University of Chicago graduate, and Andy Redleaf, a Yale graduate, of Whitebox Advisors will speak on the efficiency of markets.  Eugene Fama of the University of Chicago and Robert Shiller of Yale were two of the three 2013 Nobel laureates in economics for their contradictory work on the efficiency of markets.  


We also preview CONMED Corporation and LeMaitre Vascular Inc., which were holdings of the Needham Funds as of December 31. Both are presenting at the Needham & Company, LLC Healthcare Conference.

2 portfolio companies at the 13th Annual Needham & Company, LLC Healthcare Conference: April 8-9, NYC 

CONMED Corporation (CNMD) is a diversified medical device company. CONMED makes surgical devices for sports medicine and general surgical instruments. They also have advanced energy and patient monitoring devices. CONMED has a number of new products, which we believe could contribute to revenue growth in 2014, including a new 2-D camera and a bipolar RF arthroscopic energy system. We believe revenue growth could bring higher operating margins, leading to accelerated earnings per share growth. 


Joseph Corasanti, CEO, presents on Tuesday, April 8 at 9:20am. The presentation will be webcast.  


The company was founded by Mr. Corasanti's father in 1970 and has grown from its first product, an ECG monitoring electrode, to over 3,500 employees and revenue of $762 million in 2013. CONMED is a long-term holding of the Needham Growth Fund and the Needham Aggressive Growth Fund.

LeMaitre Vascular Inc.'s (LMAT) mission is to be the number one supplier of niche devices to vascular surgeons. The company derives new products from internal R&D and acquisitions. Key products include carotid artery shunts, vessel closure clips, Valvulotome vein cutting devices, vascular grafts, embolectomy catheters and biologic vascular patches. LeMaitre has 85 direct sales representatives. Like CONMED, the company has also seen expanding EBITDA margins as it leverages its operating expenses across higher revenues. 


Dave Roberts, President, is presenting on Wednesday, April 9 at 4:20pm. The company was founded in 1983 by George D. LeMaitre, M.D, inventor of the vavulotome. His son, George W. LeMaitre, is Chairman and CEO. LeMaitre Vascular is a long-term holding of the Needham Aggressive Growth Fund.

Arjun Divecha, GMO, LLC: "Russian oils and Chinese banks: defending the indefensible." 
Mr. Divecha is the head of GMO's Emerging Markets Equity team and Chairman of the GMO Board of Directors. He has been with GMO since 1993.  His presentation will likely be bullish on Russian oils and bearish on
Arjun Divecha, GMO LLC
Chinese banks.  In the September 6, 2013 issue of 
Grant's Interest Rate Observer, Mr. Divecha was a source for an article that made the bullish case for Russian oils, citing valuation of 3-5x EPS growth and disdain from the markets.  The article makes the case that the risks of lawlessness and mismanagement in the Russian energy sector and Russian government are well known.    


On the other hand, GMO has written negatively about the Chinese credit system.  In January 2013, GMO executives Edward Chancellor (author of the great
 Devil Take the Hindmost: A History of Financial Speculation, 1999) and Mike Monnelly wrote "Feeding the Dragon: Why China's Credit System Looks Vulnerable."  They highlighted a litany of issues with the Chinese credit system including credit growth combined with an epic real estate market. 


Cliff Asness, AQR: "The Great Divide: On the split Nobel economics prize."
The 2013 Nobel Prize in Economics was awarded to Eugene F. Fama, Lars Peter Hansen and Robert J. Shiller.  The work of Dr. Fama and Dr. Shiller is contradictory.  Dr. Fama, author of the efficient market theory, said in a 2010 New Yorker interview, "I don't even know what a bubble means. These words have become popular. I don't think they have any meaning."   Dr. Shiller is a critic of Fama and the efficient market theory.  His work has centered on irrational 
Cliff Asness, AQR
and inefficient markets.  The Nobel Committee justified the prizes by saying that markets are influenced by a combination of rational efficiency and irrationality.

While at the University of Chicago, Cliff Asness was "Eugene Fama's student and teaching assistant for two years (so he still feels guilty when trying to beat the market)."  AQR states in their profile that "To beat markets that are nearly efficient, we believe investors must apply a disciplined, thoughtful and economically intuitive approach that creates value at every stage of the investment process. AQR believes that a fundamentally-driven, systematic process is an essential tool ..." AQR has an asset management philosophy combining fundamental and quantitative analysis.

Jonathan Gray, "In conversation with Jim Grant."
Jon Gray, 43, is head of Blackstone Group LP's (BX) real estate business.
Jon Gray, Blackstone
He joined the firm in 1992 out of University of Pennsylvania. Gray is thought to be a leading candidate to someday succeed Blackstone's President, Tony James, and CEO Stephen Schwarzman. Real estate is now Blackstone'slargest business.
Gray's milestone transaction was the 2007 purchase and 2013 IPO of Hilton Hotels. The deal was troubled in 2008 and 2009. More recently, Blackstone has made significant investments in single-family residences. "I've been skeptical about whether it's a business," Sam Zell, veteran real estate investor, says of Blackstone's strategy. "Do I think Jon will make money doing this? Probably."
Gray is rarely in the press.
Jeffrey Gundlach, DoubleLine Capital: "Morse Code: What hath QE wrought."
Jeffrey Gundlach, DoubleLine Capital


Jeffrey Gundlach was the long-time Chief Investment Officer and head of fixed income for TCW.  In 2011, he launched DoubleLine Capital.  Gundlach is a widely honored fixed-income manager.


On March 11, Gundlach gave a webcast with the same title as his Grant's presentation.  He is concerned about slowing growth in China and believes U.S. equities could face a down year in 2014.  He sees 10-year U.S. government bond yields hitting 2.5% from the current 2.7% and potentially lower given a 30% chance of geopolitical troubles.   He is, after all, a bond guy.


Dr. Joseph Lawler, Merus Capital Partners: "Hey Fed - the bubble's in biotech."
Dr. Joseph Lawler, Merus Capital Management

Dr. Lawler is a Co-Founder of Merus Capital Management, where he focuses on biotech investments.


He is on the advisory board of CLINiiLabs, which is a specialty contract-research organization.  His research at Johns Hopkins University School of Medicine was titled, "DNA-Based Computers."


Independent of Dr. Lawler, Grant's has been skeptical of biotech valuations.  On December 13, 2013, Grant's Interest Rate Observer wrote, "Just say no" about the flurry of investor interest in biotech stocks.  

Marty Fridson, Fridson Vision: "You ain't seen nothing yet: the next junk bond implosion."

Marty Fridson is CEO of financial research firm Fridson Vision. He has had a storied career as a fixed income/ high-yield analyst. He has a Fair Value Model, which considers default rates, macroeconomic variables, credit availability and the 5-year Treasury yield, which shows high-yield bonds overvalued.


Martin Fridson, Fridson Vision
On November 13, 2013, Fridson wrote for S&P Capital IQ LCD, "We believe the most likely scenario for the next upsurge in the default rate is that it will begin in 2016 and last for four years. During that period, we project that on a global basis, approximately 700 bond issuers and 1,150 debt issuers in total will default. The face amount of bonds and loans going into default should approximate $1.5 trillion, with the U.S. accounting for $1 trillion of the total. To put these numbers into perspective, the projected number of defaulting debt issuers is triple the number that defaulted in the short but severe upsurge of 2008-2009 and nearly double the number that defaulted in the five-year upsurge that began in 1999."

Fridson is the author of several books:  


Unwarranted Intrusions, The case against government intervention in the marketplace (2006);   


Financial Statement Analysis, A Practioner's Guide, Fourth Edition with NYU Professor Fernando Alvarez (2011).  This book provides a framework for analyzing financial statements, a great read for individual or institutional investors.


How to Be a Billionaire (1999). Called "A textbook for the really ambitious" by Luke Johnson of The Sunday Telegraph, this book profiles 14 billionaires.


It Was a Very Good Year (1998) is a history of the 10 best years in the market starting with 1908, 1915, 1927, 1928, 1932, 1935, 1954, 1958, 1975 and 1996. And finally, Investment Illusions (1996) tells fifty tales of fools and their money.


I hope that one of Fridson's books is included in the Grant's book goody bag.

Francis Daniels, Africa Opportunity Fund: "African refugees in the Yellen era."

Francis Daniels,
Africa Opportunity Fund

Francis Daniels was raised and educated in Ghana and earned two masters degrees in law from NYU. He is a self-taught value investor based in Johannesburg managing the Africa Opportunity Fund, a closed-end fund trading on the AIM of the London Stock Exchange. I heard Francis present at Grant's Fall 2010 Conference. He is a compelling speaker and makes a strong case for opportunities in Africa.


As of December 31, his largest holdings were Enterprise Group Ltd., a Ghana-based insurance company, Sonatel, dominant Sengalese mobile carrier and Shoprite Holdings Ltd., the largest South African food retailer also operating in 15 other countries.

Andy Redleaf, Whitebox Advisors: "A little arithmetic and a little sociology, and you've got yourself a trade."

Andy Redleaf is founder of Whitebox Advisors. He's a deep value, special situations, sometimes activist investor.

Andy Redleaf,
Whitebox Advisors
He gave a guest lecture at Yale on November 19, 2008, in a Financial Markets Economics course taught by Robert Shiller. He spoke his views of the inefficiency of markets and the role of mathematical modeling and behavioral finance.

He sees the Investment world as segmented into coupon clippers and security resellers, who hope to resell at a higher price. The best venture capitalists are great resellers. Andy likes cash flow and is a coupon clipper. Bonds come with a known coupon. Equities come with an unknown coupon, which may be realized through dividends or earnings growth from internal investment.

He says that risk is figuring the worst thing that can happen, not the moderately probable. Few people in the history of world get paid for taking risk. They get paid for eliminating risk. A tight rope walker gets paid for practicing a lot on a low wire, which eliminates his risk of falling.
 James Grant, "Ruminations on my new book - "The Depression that Cured Itself."

Jim's new book is Lessons from the Recovery of 1921, which will be released November 11, 2014, and is available for pre-order.


In 1920, unemployment was 12% and GNP was down 17%. President Harding did not respond with fiscal stimulus and the Federal Reserve was holding to its original mandate of furnishing an elastic currency, to afford means of discounting commercial paper and to establish a more effective supervision of banking in the United States, and for other purposes.  


Harding cut government spending in half by 1922 and cut all tax rates. By August 1921, the economy had started to turn and by 1923, unemployment was down to 2.4%.
*The Needham Funds aggregate ownership as a percentage of net assets in the stated securities as of 12/31/13:  CNMD, 0.84%; LMAT, 0.18%.

The information presented in this commentary is not intended as personalized investment advice and does not constitute a recommendation to buy or sell a particular security or other investments.
This message is not an offer of the Needham Growth Fund, the Needham Aggressive Growth Fund or the Needham Small Cap Growth Fund. Shares are sold only through the currently effective prospectus. Please read the prospectus and consider the investment objectives, risks, and charges and expenses of the Fund carefully before you invest. The prospectus contains this and other information about the Fund.


Investment returns and principal value will fluctuate, and when redeemed, shares may be worth more or less than their original cost. Shares held 60 days or less are subject to a short-term redemption fee of 2%. Past performance does not guarantee future results and current performance may be higher or lower than these results.  Current month-end performance and a copy of the prospectus is available at or by contacting the Fund's transfer agent, U.S. Bancorp Fund Services, LLC at 1-800-625-7071.


Funds holding smaller capitalized companies are subject to greater price fluctuation than those of larger companies. Also, the Fund's use of short sales, options, futures strategies and leverage may result in significant capital loss. Total return figures include reinvestment of all dividends and capital gains. Needham & Company, LLC, member FINRA/ SIPC, is the distributor of The Needham Funds, Inc.

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