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Shifting Some (more) Dollars to Biotech

I made a sorta of shift in my portfolio last week. I sold a lot of the commodity stocks that I’ve been holding for the last couple months and used the cash I raised to buy biotechs and a couple of other special situation-y ideas (CALM, PCYO).

This is far from a new foray into biotechs. But until last week I have mostly been buying biotechs that have nearly or more cash on hand than their market cap and that have a low burn rate.

This week I waded into a few more expensive names. I added CRISPR Therapeutics, Intellia Therapeutics and I added back to Caribou Biosciences. All are CRISPR names and all I’ve talked about before. Both CRSP and NTLA are trading far from cash. These are multi-billion market cap companies. So this is a different idea than what I’ve been going after in biotech over the last few months.

Why buy more biotechs? Perhaps I am a degenerate gambler. But there has to be a point where you just say enough is enough. The funny thing is that the biotech names with approved drugs generating revenue are actually doing quite well. I have owned Vertex for a little while here and its been great (I sold it this week). I also owned Incyte for a time and it was doing well too. Others like Bristol Myers, Eli Lilly and Merck have done great and mostly avoided the downdraft in the market.

So it just seems like a real disconnect. If you have a revenue producing drug the market is valuing you highly. If you don’t the market is sending your stock to the trash heap.

That sure seems like the kind of situation that would lead to some takeovers. And that is what led me to buy these CRISPR names. They seem like reasonable takeover targets.

Second, I’ve been following biotechs closely enough to notice a slight change in their trading the last few days. They have gone down but I’d swear they are going down reluctantly. We’ll see.

In addition to these two stocks, I added to a few of the names I already own. I added a new negative enterprise value biotech Graphite Bio. With an EV of negative $120 million I think this might be the most negative EV I’ve seen. It doesn’t seem like a very good company, the drug pipeline keeps running into road bumps, but nevertheless, it only takes a little change in sentiment with these names.

There is the chance with a name like Graphite and a few others I own that a hedge fund steps in and pushes for strategic alternatives. This happened with one name I own already, Arca Biopharma. Arca had some bad COVID trial results a few weeks back and I was like, oh boy here we go, back to $1.50. While the stock did hit $1.50 in after-hours that night it also mysteriously recovered back to flat the next day.

Something was up and that something was that Cable Car Capital stepped in a bought a lot of shares and then pushed for the company to do strategic alternatives.

I wonder if, in the absence of takeovers, we see other hedge funds do this as well?

It just seems like in a crappy market like this, owning stocks that trade at less than cash, especially if there is some sort of readout in the near-ish term that could give the stock some enthusiasm, is not a terrible thing. Biotech also has nothing do to with COVID in China or inflation or the US economy really, so even though the sector has been a disaster, its not really in the middle the maelstrom in most ways.

We’ll see. I’ll keep these purchases on a short leash.

No Market for New Stocks

Yesterday my uncle asked me why I haven’t written in a while. I told him it was because I don’t know what to write about.

That is true. I don’t really know what to write. But there is a more nuanced answer that explains why that is the case.

I’m not writing about individual names because I don’t have much confidence in stocks right now. I feel like I am closer to selling than buying with most. Why put out a new idea when part of me thinks I’ll just end up selling it in a week or two anyway?

The same goes for searching for new ideas. My idea generation has been lethargic. But that is almost a protective stance. New ideas are dangerous is a crappy market.

I mean, remember some of the ideas I have mentioned over the last few months? Finance of America lasted all of a month in my portfolio – I had to dump the stock at $3.20 after buying it at $3.80. Checkpoint Therapeutics made sense given their results but I had to dump it soon after as well (though I bought it back again more recently, a second mistake!). The banks have been a mess as well.

So I don’t know… it isn’t a good market for holding onto stocks (and I won’t hold on if they go down) so why bother making a case for them? You can get lucky like I did with Vidler and Eiger. Or try to pick a bottom like I sort of did by buying Facebook, Google and Vertex when it looked like the market was going all bear market rally-gog on me again. Admittedly, the commodity stocks have been a good idea for a month or so (though this stupid Bioceres just won’t go up). But overall, its just not a great market.

And with the large-cap rentals, what am I going to say anyway? Hey, I got this great idea. Its called Facebook! Oh, and btw, I like it so much I’ll probably sell it the first time it has two down days in a row (which I did). Why bother?

This market, in terms of writing about it, is kind of like the inverse of last Jan-Mar. Early last year there was no point talking about the stocks I was buying because the reasons they were going up were not rational. If you look back to February and March last year, I wrote very little.

At that time, stupid little biotechs or microcaps were going up 50% in pre-market in a single day. There was no rational reason for it. It was ridiculous. If you wrote about why you were buying them it just looked stupid because there was no real reason to buy them other than that they were likely going to go up on someone stupider buying them higher. So you just bought and sold as best you could to capture gains and kept your mouth shut.

Now, the reason to keep your mouth shut is that the stock you buy is likely going to go down even if there is no news or good news. The most interesting stocks to me here are the SaaS stocks and the biotechs, simply because they have been beaten down so much. But they are clearly in between states of equilibrium – investors are still trying to figure out how they are going to value them and so until that is settled there is no point getting into the weeds of writing big dissertations on why I own A and not B.

With the biotechs, as I have been painfully recording, I tried to pick the bottom a couple, 3, 4, too many to count times, to varying degrees of success. Biotech has a unique attribute that has allowed me to go bottom picking here whereas with SaaS I could not. That attribute is that cash is cash and I have almost exclusively bought companies trading at or below cash.

And you know what? Most of my wins in biotech have just been buying stocks that were trading well below cash and watching them trade to slightly above cash (ABIO, ALDX, CFRX, LYRA) while my losers have been buying names that were trading not close enough to cash (CKPT, CRBU, CRVS). Only Eiger has actually gone up on results (btw – this a good podcast interviewing Eiger’s largest investor, Paul Wick and why he thinks the stock is cheap).

So yeah, you can see what I own. I still have a lot of gold stocks and a bunch of small biotech positions (which could be gone in a blink if the bottom falls out again). I own a lot of Vidler but I won’t soon enough (we will see what kind of bidding war we get there, if any). I might buy another water play in its stead. I own some Ag stocks, a bit of energy and I tried buying back a bank (CUBI) but that has not gone well. I have a fairly big index short position and in my real portfolio I remain short a whole pile of individual names that are mostly the darlings of yesteryear. My portfolio still only goes up a little on big up days and is mostly flat on down days. It is kind of boring really.

I don’t expect to be writing a lot until there is an all-clear that this bear market is over. Picking bottoms here is for the gamblers. Until we have such a bottom. then you can follow my portfolio for changes. I’ll try to post it regularly.

PS – I do own a lot of gold stock $’s here but I have learned that to ever talk bullishly about gold stocks is an invitation to embarrassment. So I will hold these stocks quietly and sell them if they start to break down. The #1 precept of gold stock investing is WTFDIK.