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In February, we highlighted a small-cap name with a big history called Real Networks ($RNWK). Yesterday, the company announced an equity raise priced at $2.70 and as of the writing of this update, the share price continued to fall. Since recommending the stock, the price peaked at $6.66 and then began falling in tandem with other small-cap names. However, since the equity raise came up, the fall in price has accelerated. We're convinced the fundamentals of the company that attracted us to it in the first place haven't changed all that much, and have indeed improved. We wanted to provide our subscribers an update on our thinking about this name given the extreme volatility and the recent retreat in price of the shares. There are a lot of additional risks when dealing with small-cap stocks and as we said in our first article and would like to reiterate: there is more risk in small caps so be sure to make sure your positions are appropriately sized! We remain bullish on this company and think part of the problem is that there is NO SELL SIDE coverage of this name. Expanding the float should help address that. The float was also exceptionally small, partially because the CEO, Rob Glaser, has put $10 million of his own money in.  We monitor all of our SFN picks closely and quite literally every single development we have seen on the product side is positive. We’re not thrilled about how the equity raise was handled and think the valuation is low, that being said we do find the current price given the progress on the growth initiatives to be a steal. We’re hoping that the additional shares will help increase participation by a wider cadre of investors and potentially could result in sell-side coverage being initiated. One thing we pointed out in our article was the cultural differences between entrepreneurship culture in Silicon Valley versus Seattle. This is at least part of the problem with Real Networks performance, in our humble opinions, but simultaneously speaks to a very modest management that rarely fields questions on earnings calls. We are thinking that this is significant particularly when taken into account with a pretty significant fact: one of the reasons this equity raise was necessary was because the CEO owned so much of the previous float himself. They recently guided that in 2022 and 2023 there will be “significant double-digit growth” from their AI businesses SAFR and KONTXT. This guidance struck us as bullish. The mobile gaming segment continues to produce solid returns. There is a lot positive occurring on the SAFR side. Recently, the gaming industry in South Australia approved the platform for use. The platform also received a 3rd contract with the US Airforce since last publishing. Again, from our perspective we have only seen positive progress on their growth initiatives and this momentum appears to be building. Another sleeper product that gained traction over the pandemic and allows collaborative watching is being used widely. In our estimation, the SAFR Computer Vision platform will be a very profitable and maybe even ubiquitous product. They are getting new use cases, recently got approval for use in the Gaming Industry and have several ongoing partnerships we view as positive. We view the recent capital raise as causing some short-term pain, however, we think the capital raise was probably made necessary by the rapid price appreciation observed subsequent to our recommending the name (not insinuating causation just that the name recently was trading at $6.66). . In order for the stock to be more stable, they needed to offer more stock and they did it. We view it as a net bullish. As far as the fundamentals and growth story we outlined, our call has not yet changed and we are very optimistic about the fortunes of this company! The company guided for meaningful double-digit growth in their AI businesses (SAFR and KONTXT) and everything we are seeing from the company indicates this is a realistic and attainable goal!

Reiterating Bullish Stance on Real Networks

Maintaining Bullish View; Financials and Energy Upgraded

Is anyone else tired like me after this week’s trading action in the S&P 500?  The market started the week quite strong and rallied up about 2.7% to nicely reverse last’s week down performance.  However, during the middle of the week, fears of rising interest rates began to spill over into equities and caused some down action that pulled the index down nearly 5%, which was disproportionately impacted by even larger declines by in many growthier names within Consumer Discretionary and Tech.  Investors then turned their attention Fed Chairman Powell on Wednesday and his words during an online event did not calm the bond market and further pressured stocks.  After flirting with a bigger selloff, the S&P 500 found energy on Friday from both the positive release of the monthly employment data release and some dovish Fed comments to end the week up for day and slight gain for the week.  Lots of running to make so little progress.  At the beginning of the week, we released the results of our monthly deep dive into our sector (GICS-L-1) work and have updated our FSI Sector Allocation recommendations (please see the sector section of our website).  We wanted to end the week by reiterating the main conclusions that our allocation methodology has been suggesting: 1.      Traditional defensive area (HC, Staples, Utes and RE) will likely continue their underperformance of the S&P 500 and are thus Below Benchmark sectors. 2.      Continue shifting toward Epicenter/Value/Cyclicals/Financials and away from Growth/FAANG 3.      Do not completely abandon Growth/FAANG names, and this week’s severe price corrections with CD/Tech may be creating an opportunity to selectively add some exposure.  Getting more granular, our analysis has resulted in us upgrading the Financials and Energy sectors, which were the third upgrades for both sectors over the past five months. Despite the recent market volatility our tactical indicators are favorable, which has us aligned with our ongoing medium-term bullish stance. Also, we have lowered Consumer Discretionary from Above Benchmark to Tilt Above, however, our work still shows that there are still many favorable individual stocks within the sector.  It should be noted that the sector is being overly impacted by nearly 50% weighing of AMZN, TSLA, and HD. Based on our indicators and read on the macro environment the most important underpinnings for the overall equity market and our continued expectations for even higher highs are still in place. Although there has been some anxiety coming from the bond market, it is our view that the Fed is still likely to hold on for an extended period and the recent upward move in rates was overdone. It is our expectation that a favorable liquidity environment will endure for the foreseeable future. Notwithstanding rumblings from the ‘Bond Vigilantes’, the rate backdrop remains near record lows and supportive of further equity gains. The real rate on the 10-yr when accounting for inflation is near-zero. We continue to reiterate that the earnings revision data for the broad equity market, which is a major part of our investment process (and has proved its worth in adding value over 20 years), is still quite healthy. Our expectations are that this remains the case as analysts and investors start shifting their focus to economic recovery and a powerful corporate profit cycle. Thus, we encourage investors to remain focused on the long-term the; 6 month, 12 month and 18 month time horizon for which readings are still overwhelmingly positive. When looking for risks that are out there and what we watch closely, the first and main potential concern is sudden and sharp increases in interest rates and inflation expectations may remain problematic for the short-term and may return from time to time throughout the year. There are other issues that could obviously cause increased volatility like a fourth wave of COVID-19 or increasing ubiquity of the new viral strains. The bottom line this week is that the current bout of volatility is likely creating an opportunity for investors to raise exposure in areas and specific stocks that may have begun to run away from us and to move further into the most favorable ideas that our research is flagging.  Most preferred sectors: Financials, Industrials, and Materials with Information Technology, Energy and Consumer Discretionary better than neutral Neutral sectors: Communication Services Least preferred sectors: HC, Utilities, Consumer Staples and Real Estate

Data Says S&P 500 Index Set Up for A Monster 2H19 Rally

Writing about what might happen in the market’s future isn’t without risk. Nobody gives you a magical crystal ball when you become a strategist. But here’s the thing. There are signals—based on empirical data—that, when interpreted properly, give investors a useable roadmap to what the future will likely hold for stocks, for example. We’re all about the data. I’m going to give you five of them here which together point to a gain of about 12% over the next six months for equities. I believe investors should be more aggressive buyers right now and here’s why, followed by some 15 “asset light” stock ideas. The S&P 500 index fell a breathtaking 7% in the 4 days following the July 31 FOMC meeting and the plunge in the US 10-year note yield to below 1.70%. Indeed, it triggered a global market sell-off (panic?). For more on this, see page 6. As they always do after such big moves down, the doom prophets emerged from their bear caves, some pointing to 2019 as approaching its own “Lehman moment.” The plunge in US bond rates is certainly not welcome (sign of disinflation, and even credibility issues for Fed); the 10-yr was 1.32% in 2016 after the surprise Brexit vote, so this is not ‘new ground.’ However, investors ignore at their own peril the following five bullish signs that were generated in the past week. These signals have dependably generated an average gain of 12% in the following six months, 3.3 times above the 3.6% average gain over 90 years seen in the rolling average of any six months. Source: FS Insight, Bloomberg Here’s why I’m bullish: 1. Fed made its first rate cut in July, and since 1971 such a move, when leading indicators are positive, as they are now, resulted in an average 14.4% gain; (See chart.) 2. The VIX term structure (1 month-4 months) inverted. The last five of seven times was the bottom, followed by a mean six months gain of 8.9%; 3. A 3% one-day drop is sign of panic. Since 2009, there followed a mean 15.3% gain in the next six months; 4. The daily relative strength index (RSI) fell below 30. Six of the last six instances saw the market gain sharply, with average six months gain of 11.1%; 5. The American Association of Individual Investors (AAII) measure of the percentage of bulls less bears is about -26. Since 1987, when it has been that negative, the market followed up with a mean 9.3% gain in the next six months. So maybe this is our crystal ball. Source: FS Insight, Bloomberg We are not ignoring the negative signal of a plunge in interest rates, nor saying that a full-blown trade war is negative for the world. But we believe the trifecta of strong US corporates; a positive White House (towards business) and a dovish Fed are major supports for U.S. equities. Moreover, whether investors are convinced of it or not, 2019 is tracking 2009 closely (something I’ve been saying since the start of this year). My view remains that 2009 is the best analog for 2019 and that equities are seeing their best year since before 2006. The larger question remains: why does the Street seem to view every 5% pullback as the start of Armageddon? This old bull market has endured multiple 5%-10% drawdowns and managed new highs—yet, investors seem to believe this expansion’s structure is built on straw (though, actually, it makes sense if one sees this as purely central bank driven). What could go wrong? There are so many things that could go wrong. Deflation. A badly managed Brexit. Trump and China go to threat level 10. The Democrats surge in the polls. Russia interferes in the next election. North Korea. Deutsche Bank. Too many. Bottom line: I believe that investors need to stick with the four winning strategies I have pointed out: (i) US over RoW; (ii) “asset light” over “asset heavy”; (iii) Large-cap over small, (iv) and cyclicals. The following 15 stocks tickers represent the top decile of “asset light” + Doctor Quant Model ranked 1, and 11 underweights which are “asset heavy” and DQM ranked 5. OW tickers are: ROK, VRSN, LRCX, MXIM, QCOM, XLNX, MSFT, CL, MNST, MO, PM, AMGN, BIIB, GILD, BMY UW tickers are: WAB, CRM, WDC, ICE, CB, L, STI, HCP, WELL, NI, AP Figure: Comparative matrix of risk/reward drivers in 2019 Per FS insight Figure: FS Insight Portfolio Strategy Summary – Relative to S&P 500 ** Performance is calculated since strategy introduction, 1/10/2019

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