Tonight's focus will be our speculative 'pick of the year' for 2018. As hinted recently, there was a good possibility of continuing the prior year's selection for a very good reason: the fruition of LightPath's (LPTH) efforts was barely developing.

Sensing the Future

A year ago, we returned to a 10-fold winner of an earlier era that we simply thought evaporated (it almost did); as we learned they were making money and just completed a promising strategic acquisition: ISP Optics. Our entry was between 1.40-1.60 per share; and the stock doubled by summertime.

As that developed, along with realization by a few analysts that LPTH had made not only a transformative acquisition in the infrared optical sensor as well as expanded facilities to accommodate a coming 5G roll-out in China; our focus remained: a speculative investment holding; not a trading stock.

Later in 2017, a peer discovered LightPath 'after' it had already doubled for us. That set-up a noted 'possible' double-top when it popped to the 4 level. Hindsight suggested it be sold short-term; although we didn't (at least did not chase the run up there; although believed that in the long-run the other chap who joined-in would be right: that it was a bargain 'up to the 4 area').

Now the shares have fallen back to the low 2's; primarily because of sales by the very buyers near the 4 level who came into the move late; and from the exercise of Warrants, which expired at the end of 2017 (done with that) thinking some holders may not have retained the shares after exercising.

Although it's hard to say at what point in the new year revenue will perk up from the telecom optical sector in China (where they have expanded too); the progress and ability to serve numerous customers (mostly well-known names in automotive, telecommunications, military, aerospace, medical as well as tools and measurement); it's notable they expanded and integrated facilities in Latvia as well as the primary Orlando facility during later 2017, in anticipation of growing demand upon their production capacity ahead.

Why continue LightPath as 'pick of the year' for 2018? Not only because of the promise that is not yet fully appreciated by investors; but because most stocks these days do not have a decent risk/reward profile after the market run-up of the past year that we forecast as a "Monster Bull" if Trump won; totally based on policies, tax cuts, capital repatriation etc.; not persona.

Perhaps embedded in LightPath is a subtle silence about projects they are working on; probably due to competitive concerns too; given how patents are routinely worked-around; and reverse-engineering not uncommon. It's actually a plus that LightPath sells to most of the known product makers; a supply relationship which allows them to fill demand no matter who wins in certain areas; like new key 'autonomous driving' and 'vehicle sensor' fields.

We have pointed out in the past the overlapping relationship ('colleagues' is the term they use) with a leading-edge company (California and Florida) in the 'space'; details of which our members have heard about previously. I think here the exploration into proprietary free-form optics or spectrometry have not even been acknowledged as having a role in existing products. If this relates to AR and AI is also something that's unclear; but indirectly for sure is; as most all such technologies incorporate optical and/or infrared.

Bottom line: LightPath is consolidating, after a washout that followed it having more than doubled from initial selection a year ago. The potential of the stock doubling from current levels 'again' seems fairly clear, regardless of any rocky behavior that may exist very short-term as a degree of focus (perhaps overemphasis) is placed on China 5G roll-outs.

There are few companies at the moment trading at a low PE that are also growing at a steady clip like this. And that's without considering tax benefit or the ability to repatriate money from China now at a lower tax rate too. It wasn't widely noticed; but the CEO (Gaynor) exercised an option for more shares (15,000 at $3) in November; and there continues to be only insider buying, with no sales that we're aware of. That's a positive sign too. Plus it is now in the Russell (small-micro) Index; reflecting it not being so tiny as it was during the transition years that preceded.

LightPath has outpaced its industry growth rates; and expanded its bases in preparation for more growth. With modernization and integration of staff of the ISP Optics key acquisition of a year earlier complete, LPTH should be in position to capitalize with sales and growth progressively ahead.

In an odd sense a pullback from an excessive thrust (short-covering was a part of the thrust between 3 and 4) several months back, led into late year tax-loss selling (presumably by those who chased the 'other guy' adding it as a favored bargain), and then the Warrant Expiration. Aside the transitory 5G telecom shift in China occurs well during calendar 2018, the Company looks positioned to resume forward progress. I would not get excited if the most recent Quarter is unimpressive; and in fact add to positions should it sell off on such a report (although there's no indication if it will be 'flattish', just a suspicion that it's another Quarter or so before things roll favorably, but again the shares may discount that by advancing ahead of that time). 

Conclusion: a year ago we suggested a target of 3 for LightPath at the 1.50 +/- recommendation as a highly speculative pick-of-the-year. In 2018 we suggest a target of 3 short-term (after the first Quarter perhaps); follow by a challenge of the preceding high of 4 ideally around midyear if they execute as postulated by the firm. After some churning around prior highs, and even consolidation, we suspect it moves considerably higher in the Fiscal 2019 area; and we're thinking in terms of 6 or more depending on the 'light' speed at which new technologies ramp and come to market.

In that manner, there are few stocks with a 50% or better upside prospect with less risk out there that we can identify now; hence we'll not only stick with LPTH; but for aggressive investors consider it more than a tiny stock speculation; but a little bit more of a normal (albeit volatile) investment. It's an opportunity (especially during purges should there be any) for members who have more recently joined, or early members at the mid 1's; to enter or increase (within reason) positions. We'll continue covering it regularly. 

Marketwise .. aside the consistent optimism for the 2017 and 2018 'pick-of-the-year' selection, we see a market that is front-end loaded for growth and recovery. Simply put; a great deal of expected progress for the nation as a whole is priced in; though not in the ultimate if things really execute, without being disrupted either by financial failures or exogenous events.

A problem in that regard happens to be exogenous events, as little 'Rocket Man' would not have sent new year's 'greetings' in the form of a warning of his ability to 'push the button' anytime; thus confident the US will not dare to attack or attempt to denuclearize the Korean Peninsula. It's a challenge unlikely to be ignored by Washington; regardless of feelings on the issue.

If I had to point to another crucial challenge; it's Iranian efforts to join with the Russians and solidify the Shia Crescent across the Middle East. That's almost achieved already; although (perhaps wishful thinking) the growing if not powerful opposition to the cleric-led theocracy in Tehran would shift the dynamics in a very constructive way should they overthrow the mullahs. If (for instance) the United States would announce support of even a current President (Rohani) if he would ditch the ayatollahs, that might empower at least enough of an upheaval (or voluntary policy shift) to start Iran moving in a more normal manner towards reconciliation and away from the version of doctrinaire Islam (quite different but nearly equally strict) as Islamism.

In sum: for 2018 we continue the 2017 overall upward pattern projected at the launch of the Trump victory; and which many money managers found themselves chasing months later, after first believing it couldn't lift stocks. I thought from the get-go his win would lift the regulatory foot of the jugular of the private sector in the U.S.; and actually enhance foreign relationships despite the initial resistance from those who were too comfy with old ways.

Bottom line: the tax cuts will be useful, if front-loaded. So long as interest rates aren't too firm (certainly not yet at levels that impede business); most will believe that the U.S. can service the rising debt costs of higher deficits.

After a rocky first few weeks of 2018, seasonal fund-flows may well lift the S&P even higher; but tenaciously given serious longer-term serious risks, that lie ahead. Protectionism itself is a risk; but (like with China) the US is trying to work things out more 'fairly' without resorting to trade warfare.

The first half is really best chance for market action 'not' to completely fall apart as well; we'll navigate the pattern as this year evolves; and caution it will not be a duplicate of 2017; during which we were core long throughout and didn't do a single short-sale. This will likely not be 12 consecutive 'up' months without a single down-month during the year. So stay nimble and have a terrific New Year.