Investing in Robotics with Contego Capital's Brian Gahsman - 7investing

Investing in Robotics with Contego Capital’s Brian Gahsman

March 15, 2022

– By Simon Erickson

Investment in robotics is picking up, as companies are finding opportunities to deploy AI-powered robots into new applications.

In this exclusive interview, Brian Gahsman — the Chief Investment Officer of the Contego Capital Groups and the Portfolio Manager of the AlphaCentric Robotics and Automation Fund (GNXIX) — and his colleague Jin Kwon describe how robots are being used to improve global supply chain bottlenecks, to improve the efficiency of e-commerce logistics, and to improve the patient outcomes of surgeries.

Publicly-traded companies mentioned in this interview include Fanuc, GXO Logistics, XPO Logistics, Apple, Procept Biorobotics, Vicarious Surgical, Medtronic, and Stereotaxis. 7investing’s advisors or its guests may have positions in the companies mentioned.

Transcript

Simon Erickson  00:00

Okay Hello everyone and welcome to today’s edition of our 7investing podcast. I’m 7investing founder and CEO Simon Erickson joined by my colleague 7investing lead advisor Steve Symington. We’re gonna be chatting about robotics today. It’s a topic we’ve been following quite a bit in recent years.

Simon Erickson  00:16

And we always like to bring in Brian Gahsman and Jin Kwon to chat about the topic here with us. Brian is the Chief Investment Officer at the Contego Capital Group. And the portfolio manager of the AlphaCentric Robotics and Automation Fund, ticker on that $GNXIX. Brian and Jin, welcome to the 7investing podcast. Thanks for being here.

Brian Gahsman  00:36

Hey, thanks for having us.

Jin Kwon  00:37

Thank you so much.

Simon Erickson  00:38

We always love chatting with you guys. I know that you have a little bit of a different perspective on the robotics industry, you’re not investing in the most obvious largest companies that are out there. You’re looking sometimes for kind of the smaller names or the or the less obvious ones.

Simon Erickson  00:53

But I guess maybe the first question I have for you rise, can you just tell us about what’s going on in robotics at 10,000 foot level? And maybe the strategy you have for your fund?

Brian Gahsman  01:01

Sure. Well, so as I mentioned before, we’re not investing in companies that are using robotics and automation, we’re investing in companies that make the robots and automation. So it’s a pure play, as opposed to getting in the weeds with people that benefit from it, because almost every industry group benefits from using robotics and automation. So it’s typically a pure play.

Brian Gahsman  01:25

And there are larger names that we invest in. Fanuc ADR (OTCMKTS: FANUY) in Japan is a very large company, well known for industrial automation. Intuitive Surgical (NASDAQ: ISRG) is a huge robotics company in the medical field. So it’s not just that we’re looking at smaller micro cap companies. It’s just that we’re specifically focused on pure plays in robotics and automation.

Brian Gahsman  01:51

And I guess, for a grand overview, right now, we’re obviously seeing a lot of turmoil in the marketplace. People are scared of the word innovation. There’s a lot of babies being thrown out with the bathwater here. We’re talking about, oh, maybe a 25 basis point, Fed rate hike here and there, and maybe there’s five, or maybe there’s seven. And that’s just got the market all up in arms about growth.

Brian Gahsman  02:22

But before COVID, when interest rates were normalized, these companies were moving, these companies were performing, it doesn’t matter. And so I just think that the knee jerk reaction recently, the talk about interest rates is way, way, way overblown. But it has created somewhat of a buying opportunity in a lot of these names, we’ll discuss a few of the different names today on the phone.

Brian Gahsman  02:50

But on top of the scares about interest rate hikes, we’re also facing higher inflation than we’ve experienced, and the inflation is increasing faster than it has in decades. And it’s a lot of people are saying that that is due to the Fed’s monetary or the monetary policy easing and interest rates. But I think it’s different this time. In 2008, after 2008, financial collapse, the Fed kind of decreased interest rates and had an easing monetary policy to stimulate, but we did not see inflation spike when the Fed changed the monetary policy in 2008.

Brian Gahsman  03:38

We didn’t see the inflation spike that we’re seeing right now. So what’s different? Well, we also went through COVID. So we had increased stimulus that went out. So we did print more money, obviously, but on top of that with, and I’m not going to get into policy or opinions on this, but we had a lot of COVID mandates and restrictions, and we had social distancing.

Brian Gahsman  04:03

And now we still have vaccine mandates, and some people aren’t very happy with those seen a lot of the the trucker protests recently. So we have a supply chain issue now also on top of that, and I believe that the rapid increase in inflation is actually more related closer to the mandates and the COVID restrictions than it actually is to Feds monetary policy.

Brian Gahsman  04:30

And we believe that some of these robotics and automation companies are really poised to be able to alleviate some of this bottleneck in the supply chain and act as somewhat of a new toolbox, or tool in the toolbox that we have now, besides adjusting interest rates, to actually fight, increasing inflation. And so Jin’s gonna talk about a couple of those companies and how They can actually possibly help bring down inflation. So I guess I’ll toss it to Jin at this point.

Jin Kwon  05:10

Yeah, so we’ve been looking at three companies, specifically Aurora Innovation (NASDAQ: AUR), ticker symbol $AUR and then GXO (NYSE: GXO), which is a spin off of XPO Logistics (NYSE: XPO). The reason why we looked into those three companies is like Brian mentioned as the supply chain issues that we’re facing right now, and the shortage of labor as well.

Jin Kwon  05:34

So Aurora innovation as a self driving AI, they’re transforming how goods are transferred to people and moving around the world. And we see that that’s a leader in the industry, they have two companies Paccar and Volvo. And they’re the two of the four biggest truck manufacturers in the world. And they’re focused on the trucking space, which is a $700 billion market in the United States right now.

Jin Kwon  06:07

And the reason why we want to look at that company is this right now we have about a60,000 driver shortage, and with the protests that are going on up in Canada, and now, there’s going to be about 160,000 person shortage for drivers. And that’s gonna lead into more and more demand for drivers in the future. And we see that automation is going to be important toolbox to alleviate this labor shortage that we have going on.

Jin Kwon  06:45

And also kind of for the fuel as well. So we’re looking at AUR specifically, because we’re really interested in their technology, they not only have partners with Uber and Amazon, they recently acquired Uber’s automation  driving division. And what really excites excites us about that is because of the data that Uber has accumulated within their existence, now they can have an exact crystal ball of the time, location, the best routes for calculating the ROI.

Jin Kwon  07:25

It prints us a very efficient roadmapping system they have. And as well as they have an in house they call it the first LIDAR system that we believe it’s top of the world versus all the competition. I think the technology is really advanced. It’s because of how they measured their LIDARs. So basic LIDAR works as a, they send out like a huge, very bright light impulse that captures the incoming and outbounding lights.

Jin Kwon  08:04

But how Aurora is thinking about it as they measure the interferences and the phase differences between them. And they’re able to estimate distances that are 10 to 20 fold amplifications. So using a less stronger source, they’re able to get more information, and they don’t, that eliminates a lot of like interferences from sunlight or halogen lights, other light sources that are out there.

Jin Kwon  08:30

And couple this with the Doppler shifts it’s something that if an ambulance goes by, you see that you hear the distortions. So they have a sensor that is able to see how fast things are moving towards or away. And also coupling that with cameras, radars, and LIDARs they have a new time sensitive network switch, which incorporates all this data in the millionth of a second. So we’re really excited about the innovations that Aurora innovations are having and they’re very focused on delivering the trucking space.

Jin Kwon  09:11

And moving on to XPO logistics and GXO. They’re the leader in freight moving around the world. They’re focused on less than a truckload. So they’re, they manage inventory, and they’re second in the market right now. DHL is 9%. They capture 9% of market but GSO is capturing 5% of the market and while we’re interested in GXO versus DHL is there’s going to be a huge demand in E commerce. It’s barely 20% penetrated right now. I think it’s about 13.8%.

Jin Kwon  09:51

And this shipping company, as well as a warehouse company. The other sourcing information has been very tied to automation and tech, the when you compare the other competition, only 5% of it is tech enabled by their company is 30% tech enabled.

Jin Kwon  10:14

So they do a lot of interesting things where they have a small order automated packaging, where they scan the sides of the packages and run it through a machine that’s automated and customize these boxes that are perfectly sized. And the shipping label goes out. So they’re able to save the user about 5% to 7% in labor productivity. So looking at these three companies, I feel that it would be really beneficial for investors to help with the supply chain issues that we’re facing today.

Steve Symington  10:54

That’s a lots of interesting points. So means a lot a lot to dig into there. It is interesting that you guys have singled in on the labor shortages and supply chain issues. And it’s funny because I was just reading a press release from a few weeks ago from a company called UiPath. I’m sure you’re familiar there as well like robotic process automation. So software based robots, and they said that I think 78% of executives are likely to invest more in automation to offset the current labor shortage in general.

Steve Symington  11:26

So, I mean, yeah, definitely backing up kind of some of the research that you’re doing and singling in on those companies. You mentioned other stocks, there was a couple that you mentioned last time around them, and kind of curious if you could hand us an update on those. And I guess not everybody can be Apple, right? And have this supply chain mastery that sort of commands attention and supply in order to fill your products because you’re the big guy. But these smaller companies that are struggling.

Steve Symington  12:02

Yeah, it’s interesting. I like that you’re focusing on the pure play. But as far as those other companies that you mentioned before Accuray (NASDAQ: ARAY) and Stereotaxis (NYSEAMERICAN: STXS) I think we talked about on our last podcast, I think they both seen a bit of a pullback in general, just along with while everything that’s been happening in the markets right now. Any updates, maybe shifting toward the surgical robotics space that you can provide?

Brian Gahsman  12:25

Sure, sure. So yes, I mean, everything in actually in the whole medical device arena, altogether has has kind of taken a bit of a hit. I mean, I personally feel that space in general, especially with surgical robotics, now is a really great entry point. I think that we’ve gone for pretty much as low as we can possibly go some of these companies are trading underneath below their book value.

Steve Symington  12:54

Yeah.

Brian Gahsman  12:55

So it’s kind of ridiculous. But with Stereotaxis, for example, they had their earnings release on third of March. But so for 2022, they’re expected, the revenue growth expected to be up by 30% year over year. In 2023, up by 41%, with revenues of over 62 million next year. They’re also looking to have their proprietary catheter FDA approved early next year, which will cut down on some cost because they’re currently outsourcing their catheter.

Brian Gahsman  13:35

But on top of that, they had an investor presentation back in August. And they’ve announced their system, the Genesis System, which we’ve talked about and to no end multiple times. But they’re going to be focusing on other other procedures now. They’re going to be going in neurovascular, aortic aneurisms, peripheral artery disease, multiple different procedures besides the heart ablation itself.

Brian Gahsman  14:07

So that’s a huge marketplace. It’s a $30 billion TAM right there. So I mean, the 12month price target on this thing is or the average like $11.25 It’s like 142% increase over what it’s trading at right now. And whether it’s this conference call or the next one, it’s going to be probably the first time that Stereotaxis actually has earnings. So we talked about before some of the companies I invest in, they have revenues but they don’t necessarily have earnings yet, but Stereotaxis is about to actually have positive earnings.

Brian Gahsman  14:45

And so just lumping all these companies together and just throwing them out is ridiculous right now. There’s there’s also suitors looking at Stereotaxis right now. We keep hearing ‘Stereotaxis is the Intuitive Surgical of the cardiac arena,’ we’ve heard that a lot lately. And there’s somebody from Intuitive Surgical has joined Stereotaxis board. And we know Intuitive is looking at them, Johnson Johnson is looking at them, right?

Brian Gahsman  15:18

I don’t know if there’s ever going to be an acquisition candidate on my radar, on my list. I would have to say that that’s the case of this. So I’ve actually been adding to Stereotaxis recently, it’s a great price to come in at and lower some cost basis. On top of that.

Brian Gahsman  15:40

There’s another company that’s come out recently, it’s called Procept Biorobotics (NASDAQ: PRCT) ticker is $PRCT. And so what they focused on is aquablation therapy for prosthetic hyperplasia. I’m not going to go into what that teaser is, but I’ll just say that it deals with enlarged prostate, and urinary surgeries. But they have the Aqua beam robotic system, which is the first and only image guided robotic system that focuses on prosthetic hyperplasia.

Brian Gahsman  16:15

And it removes tissue around the prostate, we’re talking about benign prostatic hyperplasia, not not cancerous. So. But anyway, so Procept is the first company, and the only company that has a robotic system that specifically focuses on on prosthetic hyperplasion. And that’s surprising because Intuitive Surgical’s claim to fame is urinary and that’s where they really got started.

Brian Gahsman  16:48

So Procept they IPO’d back in September, around 35 bucks, I think the average price target on the Street forum is 43 bucks, it’s trading at $21. Right now. They do have earnings. It wasn’t a SPACE, it was an IPO. It’s a legitimate company that has FDA approval, making sales. But once again, has been taken out with everything else that is innovative. And I mean, I personally believe that Procept should be trading at around $50 a share.

Brian Gahsman  17:26

But they don’t have any competition. So there’s another there’s some synergy there. I guess there’s another takeout candidate, because it’s kind of embarrassing to Intuitive to let Procept come out and walk right in their space, and just kind of destroy it. So that’s another interesting one.

Brian Gahsman  17:45

But the technology that Vicarious has it’s I mean, it’s mind blowing, it’s better than a lot of the other anything else we’ve really seen, I mean, with the VR headsets, along with the increased amount of I mean, just sub millimeters, their tools can actually perform in comparison with Intuitive or anybody else. It’s fascinating.

Brian Gahsman  17:45

And then finally, I think we talked about we I think we mentioned Vicarious Surgical (NYSE: RBOT) last time we talked, but it was trading at $15 a share. And they didn’t have FDA approval. And they didn’t have obviously revenue sales or anything. And so I said, there’s no way, there’s no way that’s worth $15. I said, if it goes down around five bucks, I might be interested. Well, it did. And I am.

Brian Gahsman  18:38

And it’s really, it’s really groundbreaking and I’ve actually talked to some doctors that are very excited about the Vicarious system. And that’s really who you want to talk to when it comes to which of these equipment are the best? So yeah, so I do like Vicarious now, it did go where I said it was gonna go. And that is actually part of our portfolio now.

Steve Symington  19:02

Interesting. That’s, I’m glad you mentioned Vicarious just to sort of contrast it some of those that are FDA approved. I mean, to be clear, they receive breakthrough designation right by the FDA, but it still hasn’t even filed its first 510 K I think that’s expected by like the end of next year. So long way to go there but yeah, really interesting company in Vicarious and I agree. It popped back up onto my radar at current levels just recently.

Steve Symington  19:31

And yeah, and I’m glad you mentioned the others we’re gonna put a pin in Stereotaxis and Procept as potential acquisition candidates and if they do get acquired by Mako Surgical or Mazor robotics, then we’ll give you an extra nod. I think maybe Stryker or Medtronic will step out and do that as well. But yeah, I agree. Some m&a in the space especially with this as depressed as so many of these names are.

Steve Symington  19:59

And Simon and I I’ve talked about that a bit on our own as well, just in general, some some m&a activity that probably needs to happen or will if it hasn’t already. So yeah, very, very interesting and lots of good names to jot down. If you’re listening for at least for your watch list, if not for a startup position especially. Simon, you look like you’re

Simon Erickson  20:25

I did want to change gears and talk about one other topic too. We know that Wall Street has seen a lot of volatility, and they’re going to pay whatever multiples they want to on tech companies right now, they’ve certainly been compressed, and you brought up some great points there. We can’t do anything about that.

Simon Erickson  20:41

But I wanted to ask about the fundamentals the growth rates that you’re seeing for a lot of these companies, you said that a lot of them were up even triple digits. We are in the middle of a semiconductor chip shortage globally. And I’m certain that this is impacting at least in some way, small robotics companies.

Simon Erickson  20:59

But are you seeing in the companies that you cover this being a long term factor to their growth, just the supply of chips that they’re able to get for the products that they’re developing? Or do you think that this is perhaps a lot of those pressures, and the shortages are easing a little bit lately?

Brian Gahsman  21:18

I mean, I definitely, even when you look at some of the reports, like some of the big names, Fanuc, in Japan, and Yaskawa, they are actually seeing the bottleneck freeing up a little bit as far as semiconductors, but they also, for some reason, had the foresight to back stock, a whole lot of semiconductors and production materials themselves.

Brian Gahsman  21:47

And they were able to actually withstand and continue production and growth during this period of the semiconductor shortage and supply chain issues, because they actually backstock those materials, which, which was kind of brilliant.

Brian Gahsman  22:02

But we are seeing, I mean, the growth, the growth numbers still on those large companies are, 40%, year over year, even during COVID in this semiconductor shortage, so those continue to perform very well. China has the largest demand right now for robotics, just over the United States. And, but China has had some or actually a lot more stringent COVID restrictions over the past six months to a year or so.

Brian Gahsman  22:40

So that is the only I guess hinderance more than any supply chain issues. But just China’s demand, because their manufacturing has been kind of slow due to their their mandates. But as COVID and Omicron kind of start to fade, I mean, we’re never going to get rid of COVID, it’ll always be some variant out there, which is fine, because we all have, we have the flu every year. And that never goes away either.

Brian Gahsman  23:07

But it seems as case loads are decreasing, and China’s revamping up their manufacturing. That’s only adding to what I said 30 or 40% year over year growth that’s already been going on during COVID. So with the strategic back stocking of materials, supplies, semiconductors that these companies are doing. Yeah, they’re, they’re thriving right now.

Brian Gahsman  23:32

Especially with I brought up before, during COVID with six feet of separation and, and issues of manufacturing. A lot of companies have adopted a robot that’s in the middle of those six feet of separation between the two people. And these companies are leasing out robots now for search, they’re search bots, I guess, basically.

Brian Gahsman  23:59

So if you’re a company and you’ve got this whole distribution facility, and you’re full of product, you don’t have enough labor to process you can actually lease some of these robots called Search robotic leasing. And they’ve seen a 30% increase in companies that do lease these robots that actually keep them and buy out the lease. And so that’s happening a lot right now as well. And so that’s an additional revenue stream for many of these robotics companies.

Simon Erickson  24:30

That makes a lot of sense. I know. Steve you and I’ve chatted about that as a service opportunity before and Jin I wanted to get one more question for you too, about the logistics. I wanted to ask if you have assumptions on these logistical carriers, what percentage of their fleet do you think that will eventually be autonomous rather than than human drivers?

Simon Erickson  24:52

And you have an idea of kind of what timelines we’d start seeing those rolled out by I know, there’s a lot of chatter about the AI the autonomous that’s certainly been going on for years. But when how long until we start seeing self driving truck fleets and kind of what percentage of the overall fleet do you think that would be?

Jin Kwon  25:10

Yeah, that’s a really good question, I think it’s going to be really dependent upon demand as well. And the issues regarding such, if we are still are experiencing this exponential increase of labor shortages, someone has to step in, because we can’t really have the supply chain issues for such a long time.

Jin Kwon  25:34

So I think that’s gonna focus more policymakers and investors to start really looking at AI self driving, because that’s going to be the obvious solution there. So I think it will really depend on how much need there is for the drivers.

Jin Kwon  25:54

And there’s an increasing need every year because of this, such a shortage. So I’m not really sure about the exact timeline, but significantly, it’s been growing exponentially, I would say because just the demand and the problems that we’re facing right now.

Simon Erickson  26:12

It makes a lot of sense. Steve, that checks off the list of questions. I had anything else that you want to ask Brian and Jin before we close out?

Steve Symington  26:19

Oh, maybe just we talked about this just a little bit in the beginning, but where can they find you? To reiterate how do people find you guys if they want to?

Brian Gahsman  26:31

Ah, they can go to my website, they can watch an episode of 7investing. I’m really easy to connect to. My numbers out there on multiple websites. I’m open to phone calls with potential investors, anybody anytime. And I try to always make myself available if anybody has any questions. I mean, email give me a phone call. And yeah, yeah.

Simon Erickson  27:05

I like the 7investing episode answer the most I think that’s the way for people to get in touch with you

Steve Symington  27:13

That’s a solid answer. And again, the ticker on that AlphaCentric Robotics and Automation Fund is $GNXIX correct.

Brian Gahsman  27:19

Yep.

Steve Symington  27:20

And, and I love again, to reiterate that it’s a pure play. This isn’t like, a couple prominent, like space ETFs that were launched recently, for example, where you have Netflix and Deer in there because they benefit from space. And, and no, this is a pure play robotics fund.

Steve Symington  27:41

And I love the way you’ve kind of approached that. The company is actually making them rather than maybe sort of your peripheral. Alright, this benefits from robotics kind of play. Really, really neat approach and go into pure play ground.

Simon Erickson  27:55

Absolutely. And a reminder for anyone who’s tuning in Brian Gahsman and Jin Kwon are both with the Contego Capital Group. Brian’s a portfolio manager. The fund we’ve been chatting about is the AlphaCentric Robotics and Automation Fund again, $GNXIX was the ticker on that one, Brian and Jin. Always a pleasure. Thanks for being with us on the 7investing podcast.

Brian Gahsman  28:16

Thanks, guys.

Jin Kwon  28:16

Thanks, guys.

Brian Gahsman  28:17

Always fun.

Simon Erickson  28:18

And stay warm up north whether you’re in Minnesota or Montana. We don’t have the problem down here in Texas, but wishing everyone a speedy spring to offset a negative 40 windchill that Steve was going through.

Simon Erickson  28:30

We appreciate you tuning in for this episode of our 7investing podcasts. We’re here to empower you to invest in your future. We’ll see you next time.

Simon Erickson  28:30

Fanuc ADR (OTCMKTS: FANUY) Intuitive Surgical (NASDAQ: ISRG) Aurora Innovation (NASDAQ: AUR) GXO Logistics (NYSE: GXO) XPO Logistics (NYSE: XPO) Accuray (NASDAQ: ARAY) Stereotaxis (NYSEAMERICAN: STXS) Vicarious Surgical (NYSE: RBOT)

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