I’m feeling refreshed after having finally managed to escape the country and take a quick trip to France. August was a decent month for the markets and my portfolio has been doing pretty well despite a few disappointing reactions to recent results. For now market conditions seem promising – most of the shares in my portfolio and watchlist have strong momentum and look primed to go higher, while overall sentiment seems healthily skeptical. It seems quite likely that we get a bit of a run from here.

There has been a varied response to the trading updates from the businesses on my watchlist, with most performing well but a handful disappointing. There doesn’t seem to be a terribly consistent theme to the disappointments but Covid has of course been a major factor, either in causing continued disruption or in some cases creating a temporary high followed by a savage comedown. Generally speaking, large US tech stocks seem in rude health (and digital advertising has been notably buoyant), while smaller quality businesses and value / recovery plays have been more of a mixed bag.

The same old macro narrative plays on, dominated by fears about when inflation might transform the current low interest rate paradigm. The spread of valuations between growth and value stocks remains relatively high. This continues to make me cautious about being overexposed to ‘long duration’ quality stocks. However, there doesn’t seem to be much reason to believe things are going to change imminently and the valuation premium enjoyed by high quality businesses to me still seems more than justified in most cases. I’m keen on optimising the diversification of my portfolio across longer and shorter duration investments, but without getting too hung up on it. I’m coming more round to the idea that the best way to hedge against a possible future market crash is to just focus on profiting as much as possible on the way up. Well this is a bit flippant and not exactly true, but it is important to bear in mind that the opportunity costs from excessive caution can mount up pretty quickly.

My August trade was to swap Volvere for Maxcyte. I took a small (around 5%) loss on Volvere. I was concerned when I bought Volvere that I might not have the patience to hold on for long enough to justify the trading costs – and unfortunately so it proved. Based on recent noises I don’t have a great deal of confidence that the management are going to be making another killer acquisition with their cash horde any time soon (words I’m likely to regret no doubt) While I still think this is an attractively valued and defensive investment, it comes with a hefty opportunity cost that rises as I get more optimistic about the markets. I find the business interesting and will keep an eye on it but the illiquidity means it probably didn’t fit very well with my somewhat over-active and capricious trading style.

I also sold out of Burford Capital for a 25% profit after its recent trading update and replaced it with Inmode. Aside from the unsurprising confirmation of more Covid-related delays to court proceedings, Burford announced that it is changing its accounting practices as it moves to GAAP accounting. The main point of note was that Burford plans to account for future performance-related employee compensation in advance, as it assesses the fair value of its investments. This doesn’t seem terribly controversial but I was concerned the market might see this as yet another irregularity in Burford’s historic accounting. The initial share price response to the announcement was negative and so I sold out quickly. This appears to have been a mistake as the price rebounded pretty quickly thereafter. I still think Burford looks cheap and I might well be tempted to buy back again before too long. However, I feel I need to tread carefully here – it’s hard to have the conviction necessary to weather volatility in the share price after seeing how the (in my opinion baseless) Muddy Waters short attack trashed it last time.

MaxCyte

Maxcyte is a smallish life sciences company, worth about £1bn. It has developed a form of Flow Electroporation Technology – a technology which uses electrical charges to allow molecules to be inserted into cells. Maxcyte provides this technology via its ExPERT platform (comprising the hardware, software and disposables necessary to implement the technology – looks like a black box) This technology was developed some time ago though it is only more recently becoming clear how wide a variety of potential applications there are in developing drugs and administering cell therapy treatments.

Maxcyte is more of a blue sky story stock than I would typically invest in. It came on my radar as several other investors I follow have been excited by it. It isn’t yet profitable and seems high risk but the odds of a decent return look good to me so I have started a small position. We’ll see how it goes.

Quality

• Business economics: Maxcyte is as yet unprofitable but it seems to have the bare bones of a capital light and very profitable business model. Maxcyte makes money partly from the sale of its equipment but predominantly from license agreements to use its technology in specific development projects. These agreements include both fixed elements where Maxcyte is paid when certain milestones are reached and a revenue share if and when the partner is ultimately successful in monetising the treatment. Maxcyte’s costs are largely fixed and front-loaded in R&D and gross margins are very high, meaning that it should become very profitable as it scales up.
• Track record: there is not a great deal of track record to speak of – the business has been around a little while but the investment case doesn’t just rely on extrapolating Maxcyte’s track record into the future but for rather more explosive growth as the technology is adopted and monetised. Inherently this makes this a more uncertain investment than a ‘steady compounder’.
• Competitive advantage: it is very difficult for existing partners to switch away once Maxcyte technology is chosen to develop a drug or treatment. Similar to one of my favourite businesses, Bioventix, this should create a strong moat around Maxcyte’s existing pipeline of business once it comes online. Over the longer term there is some possibly competition from rival technologies. Maxcyte seems to be the clear market leader in electroporation and is used widely by most of the big pharmaceutical companies, though it does have a couple of rivals in Lonza and ThermoFisher. More broadly the emergence of a better rival technology is the main risk (see links a and b to get an idea of what this might be). I don’t think this risk looks especially high given the traction Maxcyte seems to be getting and the more reliant partners become on Maxcyte technology the more this risk diminishes.
• Growth prospects: these are obviously the main draw. At the moment Maxcyte’s revenues are small and growing slowly and steadily as it is still in early stages of signing up partners as its technology is being adopted. There is a huge amount of potential still in pipeline and the chances of a lot of this being realised seems high. Maxcyte already claims to have agreed pre-commercial milestones of up to £1bn in total and the lucrative royalty payments should come later on. At a high level the growth prospects are exciting. The possible long term applications of the technology seem wide-ranging and promising, with applications in valuable fields such as oncology and gene-editing.

Price

Momentum is excellent. The share price has performed very strongly over the past year and is near its highs. The valuation is hard to judge given Maxcyte is in an early stage of its growth trajectory. I’m conscious that the base rate return for this sort of early stage investment is not that great but I still think the reward to risk here looks promising in spite of this.

Inmode

Inmode is a £3.5bn Israeli company that makes medical devices for use in cosmetic treatments to reduce or remodel fat and tighten skin etc. Its radio-wave based technology is a much less invasive alternative to plastic surgery. It supplies its technology to doctors in the form of a ‘box’ with additional modular handheld units used to perform different procedures. It then supplies consumables, product upgrades and servicing on an ongoing basis.

Inmode originally came to my attention as its excellent financials resulted in it showing up in a number of my screens. I originally discounted it as an Israeli business (I’ve had a couple of run ins with some rather dodgy Israeli businesses in the past) but changed my mind after a closer look.

Quality

• Business economics: Inmode appears to have excellent economics. It is highly profitable with operating margins of around 40% and returns of capital consistently above 30%. It has low capital expenditure and converts all its profits into cash. On the downside, while a growing proportion of revenues are recurring from consumables, upgrades and servicing, Inmode makes a substantial proportion of its revenues from the initial sales of its equipment. There is some risk that its reliance on capital equipment sales makes revenue growth harder to maintain once the addressable market is well-penetrated.
• Track record: Inmode is a young business without much of a track record, only being founded in 2008, but it has been successful in growing revenues and profits very rapidly over the past five years or so.
• Competitive advantage: at a high level competition for cosmetic treatments is much more about quality, reputation and marketing to doctors than price. This means there is plenty of scope for the winners to enjoy strong competitive advantage and high margins. Inmode’s technology is protected by IP and the need for regulatory clearance. This means barriers to entry are fairly high but there are some existing alternative competitors such as Venus Concept, Apyx, and Cutera. Inmode seems to be a market leader with higher market share, relatively high ratings in consumer reviews and much faster growth than rivals – all of which suggests it has an edge. This is a dynamic market in which the key to long term success is a combination of constant innovation and building strong relationships with doctors. Inmode appears to be on the right track but there is some risk here from the emergence of better new technologies in the future.
• Growth prospects: the growth prospects look very promising. Inmode is growing very quickly at the moment and seems to have a very large addressable market that is likely to grow considerably over time. There also seem to be plenty of opportunities for Inmode to apply its technology to new applications. Demand should be fairly defensive. As mentioned above there is a risk of slowdown in capital equipment sales at some point but I think this should be some way off.

Price

Momentum is very strong indeed with the business firing on all cylinders and the share price up more than 300% over the past year. The valuation seems cheap given the growth profile. It seems to imply a drastic slow down that in my view seems overly pessimistic.