Wade W. Slome, CFA, CFP is President and Founder of Newport
Beach, California based
Sidoxia Capital Management, LLC
. He managed one of the ten largest growth funds in the country
($20 billion in assets under management) at American Century
Investments, and currently manages a hedge fund in addition to
separate customized accounts for a selective client base at his
• • •
What is your highest conviction stock position in your
I don't really have a
, in my fund since I treat all my stocks like children - I love
them all. Having said that,
NVE Corp. (ticker: NVEC)
is a holding of mine that exhibits many of the characteristics I
look for in an investment. The Eden Prairie, Minnesota based
company is named after "Nonvolatile Electronics," which refers to
memory technology that retains data even when power is removed - a
critical attribute for certain applications.
Tell us a bit about the company and what it does.
NVE Corp. is a market leader in nanotechnology sensors, couplers,
and MRAM intellectual property (Magnetoresistive Random Access
Memory). NVE's microscopic technology enables the transmission,
acquisition, and storage of data across a broad array of
applications, including implantable medical devices, mission
critical defense weapons, and industrial robots. Major customers
include St. Jude Medical, Inc. (
), Starkey Laboratories, Inc., and the U.S. Government.
The company's coupler and sensor businesses have been ridiculously
profitable. Even over a period covering one of the worst global
financial crises in decades, NVE managed to increase its operating
margins from an already very respectable 40% range in Fiscal 2007
(ending March) to a stunning 56%+ level in Fiscal 2009.
Beyond sensors and couplers, NVE Corp. is optimistic about the
potential for the MRAM market. However, outside of a few one-time
licensing fees, NVE is currently generating effectively zero
revenues from this nascent storage technology. Rather than produce
the technology, NVE Corp. is looking to leverage their IP portfolio
by licensing out the patents and subsequently receiving royalties
from the MRAM device manufacturers. MRAM technology uses magnetic
fields to record information, but unlike tape recorders in which a
short section of tape holds magnetic information, with MRAM data it
is held by electrons. Believe it or not, this method is highly
reliable and is very power-efficient relative to other storage
technology alternatives. Currently, the problem with MRAM is the
cost prohibitive manufacturing requirements relative to other
memories (such as DRAM, SRAM, and Flash), but costs are expected to
come down over time. For some MRAM believers, the technology is
considered the "Holy Grail" because it may have the potential to
combine the speed of SRAM, the density of DRAM, and the
non-volatility of Flash memory in a universal source.
If the unproven potential of MRAM ever blossoms, the broad
portfolio of NVE Corp.'s MRAM patents should represent a very
sizable profit opportunity. Of course, NVE Corp. must first
establish the validity of its MRAM intellectual property and
appropriately charge and collect royalties for IP usage. How big
can the MRAM market be? Some size the MRAM market in the billions
and Toshiba has stated they expect the MRAM market to surpass the
size of the traditional memory markets by 2015.
No matter how one measures the size of the market, there will be a
substantial revenue opportunity for NVE Corp. if every smart-phone,
gaming device and laptop exclusively uses universal MRAM - rather
than a combination of DRAM, SRAM, and Flash technologies.
Can you talk a bit about the industry/sector? How much is
this an "industry pick" as opposed to a pure bottom-up
Generally speaking, I am a bottom-up investor. I may have concrete
views on a particular industry, but the fundamentals of a company
will be the main determinant of my investment thesis. Overall, I am
looking for market-leading franchises that can sustain
above-average growth rates for extended periods of time. These
traits can come from either a company operating in a mature, sleepy
industry (take for example Google in the advertising world) or from
a more dynamic growth industry like nanotechnology in the case of
I believe the nanotechnology industry is in the very early innings
of an innovation revolution with regard to new applications and
products. Like semiconductors, the economies of scale and
technological advances of NVE Corp.'s "spintronic" technology
should continually allow faster, smaller, more reliable solutions
at lower bit prices. In my view, this snowballing effect will only
increase the penetration of nanotechnology solutions and introduce
an ever increasing list of new applications.
Can you describe the company's competitive environment? How
is this company positioned vis a vis its competitors?
NVE Corp. has competitors along all three of its spintronic
businesses. In their sensor business, most of the competition comes
from the makers of legacy electromechanical magnetic sensors,
including HermeticSwitch, Inc., Meder Electronic AG (Germany), and
Memscap SA (France).
In the coupler space, NVE Corp. faces a larger list of well
capitalized, household semiconductor names, including Avago (
), Fairchild Semiconductor International (
), NEC Corporation, Sharp Corporation, Toshiba Corporation, Vishay
), Analog Devices, Inc. (
), Silicon Laboratories Inc. (
), and Texas Instruments Incorporated (
A different set of competitors are searching for the MRAM holy
grail, including the following companies: Crocus Technology SA
(France), Grandis, Inc., MagSil Corporation, Spintec (France),
Spintron (France), Spintronics Plc ((
)), and IBM.
There is undoubtedly a ton of competition in the spintronics space,
but as of October 2009, NVE Corp. has 52 issued U.S. patents and
over 100 patents worldwide (either issued, pending, or licensed
from others) - many focused on the potentially lucrative MRAM
field. Although NVE Corp. has many competitors, they have dominant
share in the coupler/sensor market when it comes to high-end,
merchant supplied solutions. Moreover, on the MRAM side of the
business, the company has already licensed its intellectual
property to several companies, including Cypress Semiconductor (
), Honeywell International Inc. (
), and Motorola, Inc. (
Can you talk about valuation? How does valuation compare to
Valuation is a key component for all my stock investments. In my
valuation work I pore over the income statement, balance sheet and
cash flow statement in deriving my price targets.
One area helping NVE Corp.'s valuation case is its improving
trend-line of profitability. Over the last 5 years alone, gross
margins have gone from 40% to over 70% - not a bad business model
if you can execute it. The company also has a pristine balance
sheet. Not only does NVE Corp. have no debt, but it also is sitting
on a growing mound of cash/investments (over $43 million),
representing more than 20% of the company's market capitalization.
Finally, the company in my view is attractively priced on a free
cash flow basis (cash from operations minus capital expenditures),
yielding around 6% of the total company value.
What is the current sentiment on the stock? How does your
view differ from the consensus?
With small cap stocks like NVE Corp., sentiment and lack of
liquidity can create gut-wrenching volatility. Unlike many growth
investors who pay more attention to positive momentum factors
(price direction), I welcome volatility as it allows me to find
more attractive entry and exit points.
That said, NVE Corp. hit a peak stock price north of $63 per share
in early September fueled by 41% revenue growth in their June
quarter (fiscal Q1). Subsequently, in fiscal Q2 (ending September
30th), revenue growth decelerated to +14% causing momentum
investors to take NVE Corp.'s shares to the woodshed. With the
stock down about -35% from its recent crest, I find the valuation
only that much more attractive.
Wall Street estimates are calling for further slowing in revenue
growth in the coming quarter, so the short term sentiment may or
may not continue to sour. Timing bottoms is inherently dangerous
and not something I consider myself an expert at. Absent a major
deterioration in fundamentals, I stand ready to add to my position
if NVE Corp.'s share price falls and valuation metrics improve.
I would argue the typical consensus view advocates selling shares
when revenue growth slows. Many of my best performing stocks have
been purchased during transitory periods of slowing or cyclical
downturns. Let's hope that's the case with NVE Corp.
Does the company's management play a role in your
Absolutely. There is a continual debate over what is more
important, the jockey or the horse. My investment philosophy puts
more weight on the jockey than the horse. Obviously, I'm looking
for the combination of a talented management team and a solid
When it comes to NVE Corp., Daniel Baker, Ph.D. has done a
phenomenal job managing the hyper-growth profile of the company,
while preserving prudent and conservative financial values. For the
third year in a row, Dr. Baker was also recognized as one of the
best U.S. CEOs in the semiconductors and semiconductor equipment
industry by investment research and financial consulting firm
At the end of the day, it's difficult to argue with a track record
of success. Since Dr. Baker took over, revenues have more than
tripled, and earnings have grown from $0.01 in Fiscal 2001 to $2.04
in Fiscal 2009.
What catalysts do you see that could move the
Since I hold a longer term investment horizon, catalysts are not a
driving aspect to my investment process. But clearly, any
additional evidence unearthed in the marketplace validating the
growth in the MRAM market, or announcements confirming the value of
NVE Corp.'s MRAM intellectual property, should provide support to
the stock price.
Beyond that, given where the stock is trading now, I believe merely
continuing the execution on their sensor and coupler business
provides adequate upside prospects.
What could go wrong with NVE Corp as a holding?
Investing in small cap technology stocks comes with a whole host of
risks. Although I don't believe the positive scenario of critical
mass MRAM commercialization is baked into the current stock price,
I nevertheless understand any setbacks announced relative to NVE
Corp.'s MRAM prospects or the industry's MRAM expectations will
likely result in stock price pressure.
NVE also has significant customer concentration, therefore a loss
or cutback in sales from a lead customer will probably contribute
to price volatility.
From a macro perspective, the company has battled successfully
through the economic crisis and proven itself somewhat recession
resistant. Nonetheless, the company has sizeable exposure to the
industrial segment and would not be immune from the "double-dip"
economic recession scenario.
Surely there are additional hazards to this investment, however
these are some of the risks I am currently focused on.
Any closing thoughts?
NVE Corp. is not a stock for the faint of heart. However, for those
who can stomach the volatility, I encourage you to do some more
homework on NVE Corp. Not only will you learn about a phenomenally
managed, very profitable, attractively priced nanotechnology
company, but you will also gain insight into a leading force behind
the eyes, nerves, and brains powering the electronic systems of our
Thank you, Wade.
Intel Upside Is Far Greater than Downside