Summary
- These days we hear about shareholder activism almost daily. It is next to impossible to watch CNBC and not hear discussions about some form of activism.
- Watch Carl Icahn, Dan Loeb, Bill Ackman, George Soros or any of other familiar names that have become famous for challenging public companies and board members.
- On a much smaller scale and using his own private funds, David Callan has been no exception to that group.
- He has been successful as an activist in his last four public campaigns to explore strategic alternatives including the sale of the companies.
- For a refreshing change, Callan is on the other side of the table as an investor in a company he feels will yield large returns over time.
The company David Callan has been buying shares for a long-term investment is Identive Group Inc (NASDAQ:INVE), which he considers a well-executed turnaround story in the making.
Identiv is a technology company that focuses on developing products to provide secure identification. These products include radio frequency identification, smart card-based security, cloud-based service delivery, and near-field communication.
Top-Notch Management
Callan has informed us that he is giving his support to the current CEO and board of directors. He personally informed me that "Identiv has the most impressive CEO I have come across in years." Hearing this from Callan is certainly strange for me as he normally deals with poor management and CEOs. Most of the time he successfully ousts or forces these groups to sell their respective companies because of poor execution that costs shareholders a lot of capital and heartache.
Callan has been in contact with Identiv and its new CEO, Jason Hart, watching closely as he orchestrates a major overhaul of Identiv to position the company for future growth and success. While this company is outside of the medical device field that Callan typically focuses on, recognizing strong management and solid growth platforms are commonplace for him.
When it comes to investing in a small-cap company, the first rule we live by is "bet on the jockey before betting on the horse." Like Callan, we are most impressed with Jason Hart, who is the kind of jockey we bet on. In fact, Hart chose not to press release the company's partnerships with Verizon (NYSE:VZ), but rather spoke of this development on Identiv's last earnings call from Quarter One, 2014. The details of the Verizon deal are not fully known. There is a likely reason for this: Many large companies simply do not want potential criminals to know exactly what type of security they are using to protect their infrastructure. Also, Verizon may have requested the details of this deal not to be made public.
Additionally, we were impressed with the call and felt Hart was clear and precise on what his management team has been doing to ensure current and future company success.
Callan Building a Position in Identiv
Callan recently spoke with CEO Jason Hart along with Chief of Staff (COS) Lennart Streibel, and described this conversation as possibly one of the best calls he has ever had with a public company. In fact, he informed us it was the first time in years he actually enjoyed listening to management because of its quality versus the excuses that he hears regularly from companies with poor management.
Hart and his team have been consolidating and integrating what used to be 37 businesses (many from acquisitions) into one elite and streamlined company with a clear focus - a sign of good management. Callan feels that Hart and his team are executing at levels that even exceeded his expectations and stated to us:
What Jason and his dedicated team have accomplished in such a short time is frankly astounding. They are making all the right moves as I see them, and executing without hesitation. The accomplishments to date would have taken most companies two years and yet Identiv has been able to do it in less than half that time. All the while, they are growing segments of the business they see as strategic to the tune of 36% year-over-year in the last quarter. This company has the right products and technology, the experience, the right leadership, and most importantly, all at the right time.
Following his last call with the company, Callan told us he instructed his broker to "keep buying shares until his arm hurt." So, again Callan is amassing a sizable position for himself in a company. This time it's not to apply pressure to get a company to sell, but rather to be a long-term investor.
We have been doing our own research and due diligence on Identiv and we like what we see. It is clear that Opus Bank (NASDAQ:OPB) likes what it sees as well considering it has recently extended a $20M round of financing that carries an interest rate of almost half the previous facility. Mr. Hart has adopted a single-focused strategic initiative in this turnaround and has kept most of the story out of public eye in terms of "promoting" Identiv stock.
Hart has been consolidating Identiv divisions into a more streamlined approach which include, but are not limited to:
- A better liquidity position in lieu of a $20 million credit facility with Opus Bank.
- Selling non-core assets.
- Partnerships with Verizon and, "the largest security distributor in the U.S.," that are centered on a single core business theme, "Trust Your World."
An example of how Hart and his team have been executing the "Trust Your World" theme has been by bringing product awareness to the marketplace and engaging workshops that are designed to educate potential clients on cyber security issues the world is facing today and in the future. This is a cost-effective way for Hart to both land clients and bring name recognition for Identiv. Far too many small-cap public companies give too much weight to stock price over business execution by overemphasis in stock promotion.
Companies with management that engages in stock promotion mainly focused on its price per share often tend to fail in executing its core business initiatives, which is a constant theme we see over and over again. We know that if management has good product and promotes it correctly as we believe Hart has been doing, stock price appreciation will follow suit in time.
Hart is expected to begin meeting with the institutional investment community in the third and fourth quarters, which tells us that this company and stock are ready to hit the radar of many market participants. We want to get out in front of this story and put our reputation out there because we believe Identiv has large potential. With its current valuation, we feel the company offers investors who are willing to take the risk on a small-cap company the opportunity to see Identiv turn into a larger cap company over time.
The corporate changes being made late in 2013 and 2014 are staging the company for significant upside potential in the years to come. Landing a deal with companies like Verizon and focusing on OEM contracts with major players should just be the beginning of success for Identiv.
The Next Big Trend in Tech
The "Internet of Things (IOT)" is as big a buzzword as you can find in tech today. In fact, author John Naughton remarks:
I tell you, this thing is big. Why, only the other day, an outfit called IDC said that the IoT is going to generate a staggering $7.1tn in sales by 2020. No, that's not a misprint: I meant trillions.
Hart is positioning his company to capitalize on the buzz as it is uniquely positioned to deliver "trust" to the Internet of Things with its new "Trust your World" vision that focuses on delivering solutions for the rapidly-expanding connected world.
For instance, Identiv is focusing on such IoT opportunities as near-field communication (NFC) technology. NFC is a set of standards for smartphones and similar devices to establish radio communication with each other by touching them together or bringing them into proximity, usually no more than a few inches.
As CEO Jason Hart remarks in his blog:
NFC offers a low-cost and secure way to allow sensors and inlayed stickers to be connected to the Internet, even if only for a moment. What is key, here, is implementing a trusted identity within those sensors.
As the demand for low-cost sensors in the NFC world continues to grow exponentially, the need to manage, secure and interact with them will only become more challenging. It is absolutely necessary to have a simple, secure, low-cost solution to deploy and manage that identity, while maximizing the value that the IoT can bring to the world.
Such examples would be systems that include a mobile app based on the NFC platform that provides real-time information about a business' inventory. If inventories are running low, a business will know exactly how much inventory is left, and how quickly those inventories are dwindling so that a business can re-order when needed - all in real time.
Identiv is focused on three main areas: Trust Solutions for Premises, Trust Solutions for Information, and Trust Solutions for Everyday Items. Its platform for delivering these solutions is Identiv Trust Services (ITS). Such trust services include UHF and HF RFID tags for use in asset identity-management systems across a broad spectrum of industries, such as retail, logistics and healthcare, to name but a few.
For instance, eBay's (NASDAQ:EBAY) recent data compromise of up to 145M customers, who were then asked to change their passwords as a precautionary measure. While eBay stated that no customer information was compromised, the very thought to hackers being able to potentially access customer critical data is alarming.
The future of IoT will encompass users moving away from simple passwords and toward a more integrated and streamlined identity management system. If such a system was in place for eBay, it's likely this attack and potential data compromise would have not taken place. Identiv seeks to in part provide service toward this end.
The above is just a small fraction of the IoT field, so we can see why some analysts believe the market will be in excess of $7 trillion by 2020. If Identiv can manage a meager 1% market penetration, it could then realize a substantially higher market cap moving forward, potentially in the billions. It's really simple math here. What is not simple is actually getting the job done. We feel that with good management, Identiv can at least realize a modest market penetration.
Apple (NASDAQ:AAPL) most recently came forward with its push into the Internet of Things space by introducing Apple Homekit. Homekit acts as an Internet of Things platform, creating a common interface for developers to securely integrate a wide range of home control functions like lights, thermostats, appliances, locks and other devices through the iPhone or iPad and even with Siri.
We believe "the Internet of Things" is the next trend that investors will take notice of. The big players in the tech industry have already started consolidating assets for this trend. Apple has partnered with Texas Instruments (NASDAQ:TXN) and Philips (NYSE:PHG) to work on in-home automation and security. Google (NASDAQ:GOOGL) also acquired Nest Labs for $3.2B earlier this year. As this trend catches on, we believe Identiv will be attractive to bigger money investors over time.
Due to previous management acquisitions, Identiv has a wide array of products. New management has consolidated and streamlined this profile so that the company can become profitable. As mentioned, large companies like Verizon have signed contracts with Identiv and others are sure to take notice. Although it's very early in its journey, we believe that the new management team is positioning the company correctly for future growth. With a market cap under $100M, there is good room for share appreciation.
Investing in companies before they become a trending topic is how the biggest gains are made in the stock market. We have seen companies in different sectors do well this year as the sectors they are involved in have gained attention.
For example, in 2014, the energy sector has been receiving a lot of attention. One company that has been in the headlines quite a bit lately has been FuelCell Energy (NASDAQ:FCEL). FuelCell is working to develop alternative energies that are economically and environmentally friendly. The technological basis here is the fuel cell. A fuel cell uses chemical energy and converts it into an electrical output. The advantage to these fuel cells is that they are supposed to produce more sustainable energy and reduce our carbon footprint.
FuelCell Energy installs and operates fuel cell plants. It manufactures several variations of the batteries and claims its solution is more efficient and ultra clean. FuelCell is highly speculative, but there is no denying that it has gained major investor attention. FuelCell Energy traded as low as $1.30 early this year and rallied to $4.74 in early March. The company may or may not be successful in the long term, but those who identified the energy and alternative energy trend early made huge returns.
We get many emails on a daily basis asking us to check out companies that they claim is the "next big thing." Just about every company brought to our attention either has poor management, poor financial structure, poor product, and other variables that do not inspire our interest.
Identiv is clearly under the radar and is just beginning to capitalize on the IoT trend. We see similar upside for Identiv that FuelCell Energy had earlier this year in terms of stock appreciation, but with stronger appreciation over the long term.
Undervalued and Under the Radar
As it stands today, Identiv trades at a market cap below this year's projected sales of $80-90M which we feel is too low of a valuation. Typically, valuations are low because growth is declining, management is failing, or the sector is being phased out. We see the exact opposite with Identiv. The company is well positioned, the market is emerging, and is well managed by Hart and his management team.
Risk/Reward Profile For Long-Term Investors Is Favorable
Obviously, as with any small cap company, Identiv can fail. But, with Hart captaining the ship, we feel the company will be largely successful in time. Additionally, we feel it's likely that when Hart meets with Wall Street firms in the 3rd and 4th quarter of this year, the company will gain support from many of them.
We aren't looking at Identiv as simply a short-term or mid-term trade. We have taken a long-term position in the stock and plan to see it through, unless something much unexpected happens.
However, nothing is guaranteed, especially when it comes to small-cap companies. Hart could misstep and get too aggressive with cuts and not focus on enough growth. The company can also get irresponsible with its cash position, and it also may not focus enough on making sure its products are up to industry standard compliance.
While we do not believe this will happen, we feel we must point out this possibility as other companies in the past who have had a lot of promise simply blew it and failed.
Conclusion
We, along with Dave Callan, hope to enjoy the ride in the years to come from Identiv because we believe IoT is where the largest potential will be realized while CEO Hart agrees. The company is in a good position to gain partnerships with some of the biggest players in the business. It ultimately would not surprise us if one of the industry giants would acquire Identiv down the road as to avoid its supply chain from being interrupted or as a strategy to disrupt competitors' dependence on the same technology. However, we do not see an acquisition any time soon. When and if an acquisition does occur, it would likely be at least a couple of years down the road.
With David Callan on board, we have to believe that if company management ever engages in activity that is not beneficial to the shareholders, he and his attorneys will be there, demanding the exploration of strategic alternatives. For now, he is extremely content to sit back and not make it his job managing those who run the company. Callan thinks Jason Hart and his management team will take this company and its shareholders to extreme prosperity in time and as indicated to us, he is in Identiv for the long haul.
As CEO Hart remarks on the company's Q1 2014 earnings call, "It's going to take a few quarters," meaning new management will need a bit of time to undo the mess the former team left behind. So far, Hart and his associates are ahead of schedule.
The new senior management team came into place late last year, replacing all of Identiv's prior senior management along with the laying off 140 employees designed to "cut the fat." We like the initial moves Hart has implemented with Identiv, and even more so, we like his vision of consolidating the company's assets into a one-core business model under the premise of IoT.
As we mentioned prior, we also like the fact that Hart is not engaged in stock promotion. This is evident by the company not press releasing key partnerships, most notably the Verizon one mentioned on the Q1 2014 earnings call.
We see far too many small-cap companies promoting their stock with a lot of hyped up expectations. These companies oftentimes become addicted to the hype, and frequently lose focus on actually executing core business fundamentals properly to realize these expectations.
Identiv's Hart is focusing on execution and results, versus hyped up stock promotion. Bigger and smarter money investors want to see this first and foremost, so we believe Hart will be successful in his meetings with bigger firms come the 3rd and 4th quarter of this year.
IoT is projected to be a 7 trillion-plus market by 2020, and all Identiv needs is a tiny percentage of this market to eventually achieve a multi-billion dollar market cap over time. The company has the right products to capitalize on IoT, but more importantly, we feel it has the right management to get the job done.
We believe patient investors with vision and perseverance will be handsomely rewarded here in the long term.
Written by Scott Matusow and Kyle Dennis