Gold rising to $4,000 an ounce ‘would not be an unreasonable move,’ fund manager says


Stocks and bonds may be in an asset bubble, as record-low interest rates and a tremendous increase in the money supply have sent prices soaring this year.

Add gold, which has risen 35% to $2,049 an ounce Aug. 5, to the list.

But Michael Cuggino, CEO of the Permanent Portfolio Family of Funds, says gold can move a lot higher. It would “not be an unreasonable move” for gold to breach $4,000, he said in an interview.

Cuggino manages the Permanent Portfolio
US:PRPFX,
a $1.9 billion mutual fund that is conservatively run and rated four stars by Morningstar in the fund-research firm’s “U.S. Fund Allocation — 30% to 50% Equity” category.

A long wait for a big move

First, take a look at this chart showing how monthly prices for an ounce of gold
US:GC00
(per continuous gold contracts on the New York Mercantile Exchange) have moved over the past 30 years:


FactSet

You can see the triple bottom from the end of 2015 through November 2018.

“Ever since then, it has been gradual move up, then some down. It moves sometimes in big chunks, gives some back, sits around and does nothing, reacts to stimulus, inflation, the value of dollar and euro … but it has had an aggressive move this year,” Cuggino said.

Gold may extend gains as money is being pumped into the U.S. economy, the dollar is declining, and investors are fearful that inflation may return, he said.

Cuggino warned of sharp pullbacks even during a long-term move up, as did Nigam Arora, who wrote that gold is an appropriate hedge against stocks. Still, “gold is a very small market, and it can be easily manipulated by the governments,” Arora wrote on MarketWatch.

The case for gold being relatively cheap

When looking back at how gold and stock prices have moved over the very long term, Cuggino said gold is still trading at an inexpensive level when compared with stocks. This chart shows monthly prices of gold divided by closing levels for the S&P 500 Index
US:SPX
over the past 30 years:

The S&P 500 was up 3% for 2020 through Aug. 5, but it was also up 49% from its closing low March 23.

Despite that action, and this year’s 35% climb for gold, the metal was trading at 0.6 times the level of the S&P 500. It hasn’t been above 0.7 since 2014, and you can see looking further back that it was close to 1.7 times the S&P 500 in August 2011.

Different crisis, different response

Cuggino said the quick and tremendous reaction to the COVID-19 pandemic by the federal government and the Federal Reserve was completely different from the actions taken during and after the 2008 credit crisis.

“In 2008, the fiscal policies didn’t matter much for economic gain. GDP didn’t grow because of stimuli. Monetary assistance from the Fed basically stayed in the banking system,” he said.

But now, because of programs meant to help small business, the payments made to individuals and families through the CARES Act and the loan payment deferral programs, stimulus is “much more targeted to get money out to consumers,” Cuggino said.

This points to a long-term concern and bullish possibilities for gold.

“Even though we have deflation now, [eventually] with excess raw materials, in a growing economy, the velocity of all that money can produce inflation risk,” he concluded.

Permanent Portfolio

The Permanent Portfolio
US:PRPFX
is designed to provide good long-term performance regardless of the economic environment, and to complement (and partially hedge) a broad portfolio by bouncing back more quickly during periods of market turmoil.

Here’s the fund’s broad asset allocation as of June 30:

Gold and silver made up more than 27% of the portfolio. Equities made up about 21%, with top holdings in that bucket including Texas Pacific Land Trust
US:TPL,
Freeport-McMoRan Inc.
US:FCX,
Facebook Inc.
US:FB
and Twilio Inc.
US:TWLO.

So the fund cannot be expected to outperform the S&P 500 over long periods. But because it bounces back more quickly, and because of the nature of the portfolio, it has outperformed the index so far this year:


FactSet

From a closing peak Feb. 21 through its trough March 20, the fund was down 21%. From its record closing high Feb. 19 through its closing low March 23, the S&P 500 was down 34%.

Here are long-term returns for the fund, compared with those of the S&P 500 — you’ll have to scroll to the right to see all the data:

Total return – 2020 through Aug. 5

Average return – 3 years

Average return – 5 years

Average return – 10 years

Average return – 15 years

Average return – 20 years

Permanent Portfolio Class I

11.7%

8.5%

7.9%

5.3%

6.6%

7.7%

S&P 500

3.0%

12.5%

11.9%

13.8%

9.1%

6.3%

Source: FactSet

So the fund didn’t capture the S&P 500’s extraordinary gains, led by the large tech companies that make up a major portion of its market capitalization. But if you go back 20 years, its average return has beaten that of the index.

Don’t miss:This $20 billion bond fund produced outsized returns by capitalizing on market turmoil, and is set to do it again



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These 2 stocks will profit from transformative tech trends


The information technology sector has soared this year as the stock market has recovered from the doldrums of March, aided by massive government and central-bank stimulus. But the long-term cloud technology trend that has fed so much success for the largest tech companies can no longer be considered new and transformative.

Gerry Frigon, the chief investment officer at Taylor Frigon Capital Management, pointed to distributed computing as a critically important area for investors to think about. Another trend is probably already on your mind: the boom in working from home and the communication systems that make it possible.

He has two stock picks that he believes will capitalize on these trends: Tower Semiconductor
US:TSEM
and AudioCodes
US:AUDC.

Taylor Frigon Capital Management, based in San Luis Obispo, Calif., has about $280 million in assets under management. The firm’s Core Growth Strategy has performed very well against the broad market, as you can see below. The strategy focuses on finding innovative companies with excellent growth prospects that are “not yet well-recognized or fully valued.” Technology stocks made up 54% of the portfolio as of June 30, and five of the 10 largest holdings had market capitalizations of less than $5 billion.

Distributed computing, or the mobile edge cloud

The traditional cloud model of having computing done on a server run by Alphabet
US:GOOG
US:GOOGL
unit Google, Amazon.com
US:AMZN
or Microsoft
US:MSFT
won’t work quickly enough for the new array of hands-free devices, the Internet of Things (IoT) and automated vehicles, Frigon said during an interview.

He also said that the development of 5G networks is really about “the movement of the cloud to the edge.”

”The paradigm of the past 15 years will start to break down,” he said, citing George Guilder, the author of the book “Life after Google.”

With every automated vehicle becoming a mobile cloud, computing speed will be critical.

“The laws of physics limit what can be done at a distance because of latency problems — the speed of light,” Frigon said. Automated cars provide a perfect example of the need for distributed computing: “If a deer runs in front of your car, the processing has to be done instantaneously, or close to it. You don’t have time to go into the cloud to a Google data center.”

The same holds true for automated manufacturing.

Frigon named Tower Semiconductor as an example of a stock held within accounts that follows Taylor Frigon’s Core Growth Strategy. The Israeli-based company has a market capitalization of $2.4 billion and trades on the Nasdaq exchange.

Tower Semiconductor specializes in analog microchips, which can translate binary data (the ones and zeros processed by digital chips) into wave forms (including language) that people can understand. Frigon said the stock is a diversified way to play the mobile edge cloud trend.

Four of the five sell-side analysts covering Tower Semiconductor rate the shares a buy or the equivalent, with a consensus price target of $25.03, according to FactSet. That implies 14% upside potential over the next 12 months, based on the closing price of $22.01 on July 21. Analysts expect the company’s sales this year to increase only 3% from 2019, but for 2021, they expect sales to rise by 8%. The company earned a dollar a share in 2019. Analysts expect earnings per share to increase to $1.03 in 2020 and to shoot up to $1.49 in 2021.

Work and communicate at home

It’s understandable if you think first of Zoom Video Communications
US:ZM
as the play for this trend. After all the stock has risen 314% this year, and sales during its fiscal first quarter ended April 30 were up 169% from a year earlier.

But Frigon suggests AudioCodes. The company provides equipment and services used in voice and video communications over the internet, and counts Zoom Video Communications and Microsoft among its customers. It, too, is based in Israel, is traded on Nasdaq and has a market cap of $1.2 billion.

The company hasn’t yet reported its second-quarter results. For the first quarter, sales were up 12% from a year earlier.

Frigon said he had been holding AudioCodes shares for some time before the COVID-19 crisis because he thought remote working would be a growing trend. “Now it’s on steroids,” he said, adding that AudioCodes’ shares are still “reasonably priced.”

Four Wall Street analysts cover AudioCodes, according to FactSet, with three “buy” ratings and a consensus price target of $41.50 — 6% above the closing price of $39.01 on July 21. Analysts expect a 9% increase in sales this year, followed by a 10% increase in 2021. EPS are expected to increase from 89 cents in 2019 to $1.05 this year and $1.28 in 2021.

Revisiting two stock picks from 2019

Back in February 2019, Frigon named Nvidia
US:NVDA
and QuickLogic as good long-term investments in the semiconductor sector. Here’s how the two stocks have performed since that article was published:


FactSet

That’s an incredible disparity.

Nvidia has been tremendously successful, and Frigon believes the company will remain a key player as much of the mobile cloud will be “driven by its technology.” He also pointed to its market value in excess of $250 billion — unusually large for the firm’s Core Growth Strategy. “To say we still own it gives you some idea of how highly we think of Nvidia,” he said.

Analysts still love Nvidia, with 31 out of 40 rating the shares a “buy.” However, the consensus price target of $406.82 is below the closing price of $413.14 at the close on July 21. The analysts expect Nvidia’s sales to increase by 34% this fiscal year (which ends in January 2021), followed by a 17% increase in the following fiscal year. Per-share earnings are expected to increase from $5.79 last fiscal year to $8.17 in the fiscal year and $9.86 in the following fiscal year.

Frigon called QuikLogic “a real hard-luck story,” because its suppliers in China were affected by the trade disagreement with the U.S. and hurt by the COVID-19 pandemic. The company said it completed an $8.1 million offering of common shares on July 21. Its market capitalization is now only $37 million, but Frigon believes the company is still “right in the sweet spot with respect to what is happening with IoT and low power, high efficiency chips that make possible hands-free and voice-enabled devices.”

“We are very patient with our companies, as long as we think the are on the right side of the paradigm shift. For us to wait years for things to happen is not necessarily a problem. It is one of the reasons we have been able to do what we do.”

Two out of three analysts polled by FactSet agree with Frigon, with “buy” ratings and a consensus price target of $6.17, pointing to 75% upside potential from the closing price of $3.52 on July 21. Sales are expected to increase 23% this year, followed by an expected 80% increase in 2021. The company lost $1.60 a share last year. For 2020, the analysts expect a loss of 79 cents a share, followed by a loss of 1 cent a share in 2021.

Biggest holdings

Here are the 10 largest holdings (out of 47) in accounts following the Taylor Frigon Core Growth Strategy, as of June 30:

Company

Ticker

Industry

% of portfolio

Total return – 2020 through July 21

Vapotherm Inc.

US:VAPO Medical Specialties

5.1%

294%

Compugen Ltd.

US:CGEN Biotechnology

4.7%

169%

Kornit Digital Ltd.

US:KRNT Industrial Machinery

4.0%

61%

Fiverr International Ltd.

US:FVRR Data Processing Services

3.0%

260%

Nvidia Corporation

US:NVDA Semiconductors

3.0%

76%

Carvana Co. Class A

US:CVNA Specialty Stores

3.0%

58%

Repay Holdings Corp. Class A

US:RPAY Commercial Services

2.9%

62%

Wix.com Ltd.

US:WIX Information Technology Services

2.9%

125%

Twilio Inc. Class A

US:TWLO Software

2.7%

165%

Monolithic Power Systems Inc.

US:MPWR Semiconductors

2.6%

40%

 Sources: Taylor Frigon Capital Management, FactSet

Strategy performance

Here’s how the Taylor Frigon Core Growth Strategy has performed, after fees, against the S&P 500 index
US:SPX
and two other S&P indexes over various periods through June 30:

Total return – 2020

Average return – 3 years

Average return – 5 years

Average return – 10 years

Since inception (Jan. 19, 2007)

Taylor Frigon Core Growth Strategy

23.6%

20.7%

16.8%

15.3%

11.2%

S&P 500 index

-3.1%

10.7%

10.7%

14.0%

8.2%

S&P 400 Mid Cap Index

-12.8%

2.4%

5.2%

11.3%

7.7%

S&P Small Cap 600 Index

-17.9%

0.6%

4.5%

11.2%

7.1%

Source: Taylor Frigon Capital Management, verified by Ashland Partners LP from inception through 12/31/2015 and ACA Performance Services LLC from 1/1/2016 though 12/31/2019.

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