Interview with Thomas Garrity
Most Attractive Sectors Right Now
Example of Small-Cap Pick: Questor Pharmaceuticals (
This is the third in a series of interviews with Thomas Garrity,
Analyst and Editor of the limited-subscription newsletter,
Cabot Small-Cap Confidential
Click here to read part two
A lifelong investor, Tom has been a stockbroker, stock
analyst, venture capitalist and portfolio manager. His long
career and varied experiences taught him to make investments only
when the odds of winning significantly outweigh the risks, and he
applies this philosophy to every stock he recommends in
Cabot Small-Cap Confidentia
Tom's disciplined investment methodology uses a series of
qualitative and quantitative metrics that are evaluated for each
company under his investment consideration. The company's
products must target large markets, the science or technology
must be proven, the balance sheet must be strong enough to
support research or investment activity, and the idea must be
strong enough to attract future institutional investment.
Tom's analysis results in a portfolio of stocks of companies
that are pioneers in their areas of business. In most cases,
these companies are creating whole new micro-industries,
providing essential tools for an entire industry's growth.
What small-cap sectors are particularly attractive right now?
At the moment, I'm focusing on software and hardware/information
technology, health care and natural resources.
In hardware and software, I'm particularly interested in
mobile payment transactions, digital content distribution and
delivery and Cloud-based computing.
I expect that in the future mobile phones equipped with near
field communications (NFC) technologies will allow a phone to be
used as a payment tool for making purchases. NFC uses
electromagnetic radio fields for securing contactless mobile
payment between a smartphone user and another device such as a
point of sale terminal. With an NFC-enabled phone, a person just
waves or taps the device to establish a connection with the
device reader and the transaction is complete.
As NFC applications grow, you and I won't need to carry around
credit cards or driver's licenses-the phone will become a mobile
wallet. Irrespective of how the economy is doing, consumers will
want to access movies, games, TV, streaming news and other
entertainment from their communication devices.
The consumption of digital content in a mobile world is
growing uncontrollably. Today, video can be accessed from
desktops, notebooks, TV, e-readers, tablets and smartphones with
multi-touch capabilities. Hence, cable system operators, mobile
carriers and other content providers want to deliver over-the-top
services personalized just for their subscribers. In addition,
just about every media company on the planet has plans to launch
new products and services catalyzed by the metamorphosis from
print publishing to online.
So I think the investment opportunities surrounding the trend
away from print to digital delivery of interactive content will
be found in companies that own the actual digital content rights,
develop and publish content, provide tools for content creation
or readying content for distribution, secure the content and/or
provide the infrastructure involved in its delivery.
Businesses are adopting Cloud computing (formerly called
software-as-a-service) as a way to eliminate hardware
infrastructure needs and do away with the cost of maintaining
host applications. Instead, with Cloud-based computing, all the
software applications/hardware that business and consumers
normally use to allow many applications to run are stored
remotely on a dedicated server. Users can access applications on
demand by using a simple browser on their mobile device over the
To remain competitive, all types of businesses will likely
chose Internet-based storage and access of applications and
shared services. I think companies that provide the tools to
facilitate businesses transforming their services to a virtual
Cloud platform will be favored investments.
Some other themes I'm incubating in the technology space
include voice recognition software, Wi-Fi (entities with large
coverage footprints) and M2M (machine to machine) solutions
(remotely managing fixed-mobile assets).
In health care, I'm looking at stocks of companies in the
fields of targeted medicine, healthcare information or record
management. Gene sequencing has opened up a wealth of techniques
for finding out how normal and defective genes (and the
associated proteins they make) play a role in a person's health.
Today, diagnostic tools can detect the presence of some diseases
based on a person's DNA and/or the presence of wrongly-encoded
proteins. With this information, more effective pharmaceutical
intervention is possible resulting in better patient treatment
In pharmaceutical research, drug compounds can be formulated
based on a person's DNA signature. In this way, when medicines
are administered they are targeting the right patient populations
where the drugs actually work and can be most useful. I have a
keen interest in companies involved in genomic and protein
testing as well as biotechnology companies that have proven
methods to suppress or activate genes.
With respect to health care information, I'm interested in
companies that assist healthcare providers in converting
paper-based medical records to electronic form. When you go to
your doctor's office, the receptionist reaches deep into a filing
cabinet to retrieve your medical information. But it's not always
that easy to obtain your medical records; sometimes one
institution has to call another to have your medical records
mailed to the hospital or doctor's office.
The HITECH Act passed in 2009 was intended to eliminate the
need for searching round and about to obtain patients' medical
records. This legislation allocated $19.2 billion towards
improving healthcare by digitizing patients' complete medical
records. I'm on the lookout for companies that are offering
software tools to manage the automation of digital medical
records or companies that ensure the flow/delivery of this
information in a manner that adheres to HIPAA privacy and
Another area that plagues medical practices is keeping track
of patient billing and submitting insurance claims for
reimbursement of services rendered. Staying informed about payer
changes, reimbursement coding and building reimbursement models
is a challenge to healthcare providers. Companies that provide
software that takes over back-office medical billing will be in
high demand. So I'm looking at companies with the right
algorithmically-driven solutions that cover both billing and
reimbursement so that all claims are tracked and more get paid in
a timely fashion.
Among natural resource stocks, I like water and shale
(oil/gas). The owners of water land rights or pick and shovel
companies that convert seawater or other liquids to water appeal
to my investment sense. I'm also interested in shale oil/gas
companies working in production and exploration capacities and
suppliers of equipment to this industry.
What's an example of a successful stock you recommended in Cabot
A great stock I recommended to my subscribers in 2010 was
Questcor Pharmaceuticals (
. Questcor manufactures an injectable drug called Acthar, which
targets Multiple Sclerosis (
) flares, Nephrotic Syndrome (
) and Infantile Spasms (
). I got on board with Questcor because ownership of this
proprietary drug gives the company enormous pricing power, with
little to no competition (alternative therapy) and a large dollar
Questcor's Acthar is extracted from the pituitary of a pig,
and its processing is a trade secret. The porcine
adrenocorticotropic hormone (ACTH) differs from humans' by one
amino acid. The composition of Acthar is further distinguished
from either human or porcine in terms of its number of active
peptides involved. Whereas active peptides in the pituitary
exceed 100, the multiple peptides in Acthar are not fully
charted. However, these peptides with multiple pharmacological
properties would be most difficult to duplicate by even the most
impressive pharmaceutical company.
The pricing for Acthar is $25,000 a vial, and for other
indications where more vials are needed the pricing is
significantly higher. While the total addressable market for
Acthar for use in approved indications is large (a couple of
billion dollars), off-label use such as rheumatology and Lupus
carry the dollar value to even greater heights.
We bought QCOR at 9.38 in July 2010 and sold it when the stock
hit our stop-loss of 40 in August 2012, for a profit of 326% in
All the best,
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