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Covering A Falling Knife

There is a constant battle in investing the way I like to invest. That is the battle between catching a falling knife and not being a hero.

I like to buy stocks that are down. It is my personality. I do not have the constitution of a “growth-bro” (the term used on Twitter for folks that like to buy high multiple stocks that are in long-term up-trends).

I can never bring myself to buy something that is up a lot. When I have, one of two things inevitably happens. I sell on the first move down or I sell on the first move up.

My propensity to buy on weakness makes this market to my liking, but also one that is very dangerous for me.

There is SO MUCH opportunity out there. So many stocks are suddenly trading at low and reasonable multiples (or in the case of biotech, trade at significant discounts to the revenue stream they can achieve if their drug is approved).

BUT – just because a stock is cheap, it is not in itself a reason to buy. How many times have I got myself in trouble because I bought something down a lot only to see it go down more?

Too many to count.

I have learned from my mistakes, and in most cases I quickly cut and run. Witness Finance of America – FOA – I bought it, I wrote it up here briefly why. I thought it had merit but I underestimated the impact of interest rates and when it fell another 15%, I cut it. It has fallen further.

But what we have now is a little trickier situation. Why? Because there is not a particularly good reason for some of these stocks to be trading as cheaply as they are. This makes it hard to A. not buy them, and B. sell them when they go down.

I am in that conundrum right now with about half a dozen Biotechs right now: ALDX, CRVS, CKPT, CRBU, CRSP and NTLA as I am with CUBI. I’m down on each of these between 10-20%. This would normally be my punt zone.

But I just can’t do it. In some cases, I’ve tried. I sold NTLA a couple times over the last two weeks only to feel compelled to buy it back.

Sentiment in biotech is just so darn bad and (with the exception of ALDX) nothing in the clinical programs of these companies justifies the move down. By any historical measure we are off-the-charts (see below, and I believe the number trading below cash is actually well over 100 now):

In the case of CKPT, CRBU and (maybe) CRVS the stocks seem to have stopped going down and are now just bouncing around the bottom. Every instinct I have is screaming that this is close to some sort of bottom for the rest. I said two weeks ago how I have to think big Pharma begins to step in soon with acquisitions. This tweet put that into perspective I thought:

Keep in mind they are using market cap here. If you considered the cash in the SMID sector, it would be even more extreme.

This is where having the hedges via inverse indexes and individual shorts has been so helpful. In the margin portfolio where I can short, I’m down just a few percent off the high and that high was only a few weeks ago. I’m down somewhat more than that in the tracking portfolio because I don’t have individual shorts. But the lesson is that hedging helps: even though these biotech names have been painful, the loss has been largely compensated for by the gains on the shorts.

But this is a very tricky time right now. many of the individual short names I had got completely creamed last week. To the point where, just like how I am reluctant to sell the Biotech longs because of such poor sentiment, I was reluctant to hold the shorts any longer out of fear that this must mark the bottom.

As a consequence I covered most of my individual shorts towards the end of the week: AMZN, BIGC, BILL, BLDP, CDLX, CRSR, CVNA, CRM, DPZ, HD, HUBS, IPI, LVS, NVDA, OSPN, TEAM, UPST, VICR, W, XPEL. All gone.

I started covering Thursday and I finished Friday. I have almost no individual shorts now. The exceptions are AAPL – I’m still short AAPL, COOP, and a couple of Canadian banks. But that’s it.

I don’t think we are going to crash. Well… I should phrase that more specifically, because we kinda are crashing: I don’t think we are going to get the big one.

I still have the index shorts, just in case I’m wrong.

If I am wrong, I have to admit, I’m not sure that will be enough.

Which brings me to the crux of the issue. What am I going to do if I’m wrong and we just keep going down? For the first time in a while I am not as fully and completely hedged as I usually am. So if the market continues to go down, I’m probably going to lose some money. I already did lose money on Thursday and Friday.

I’ll have to admit defeat and reduce exposure of my lowest conviction positions. As much as I want to buy the value I see, I won’t accept too many losses. I’ll start by selling CRSP and NTLA, which are by far the biggest under-performers for me and quite honestly, just unhinged because of their wide inclusion in ARK funds and the momentum trade they are part of. I had stayed away from these two names for this reason up until recently and it is looking like I was wrong to think I could pick their bottom.

As much as all the reasons I gave a week ago to believe that CRSP and NTLA should bottom still hold true, and as hard as is it for me to believe that CRSP could trade much lower given its cash position relative to its burn rate, the status of their lead drug (which we saw from an update from Vertex on Friday is still looking very positive), and the platform of potentially revolutionary cures they can create over the next decade or two, I still can’t have too much hubris.

I am aware that any long dated cash flow stream is being discounted severely right now, so who am I to say what the right number o that present value is? If their CTX-001 program continues as it has, the company will almost assuredly be a $1+ billion revenue company in a few years. However, that likely won’t be immediate. Maybe 4 years when I look at analyst forecasts. It will take that long to ramp up even if Vertex applies for approval late this year as they reiterated they would Friday. So while it is very easy to see CRSP as a $2-$3 billion revenue company (if not more) in, say, 7 years (Credit Suisse has them at $1.3b in 2027, $2b in 2028), that is a long way off and the market does not like things a long way off right now. It is still easier for me to hold a cheaper Biotech trading below cash than it is one trading well above cash, especially given the ARK dynamic.

I will also likely put back on more index shorts in place of the individual names, as reluctant as I might be to do so. I’m not re-shorting the names I covered. Most have been destroyed and it just doesn’t seem prudent to press.

As for CUBI, I don’t think I will sell it. I actually added to it, and added three other banks late this week: First Mid Bancshares, BCB Bancorp (which I owned recently) and The Bancorp (TBBK). The banks are (believe it or not) behaving pretty well these last couple days – especially the large ones – which makes me want to give the names I own a little rope.

The other stocks in small amounts I added to were BIOX and EIGR.

Eiger had their 1st quarter conference call on Thursday night. I was pleasantly surprised with how positive they were about the potential for an EUA for their COVID anti-viral, peg-interferon lambda.

Concurrent with our top line data announcement in March, we submitted a pre-EUA request to FDA, our first opportunity to socialize the study and top line data with the Agency. We have continued to engage positively and are preparing to submit our complete EUA application this quarter. TOGETHER is a large study of almost 2,000 patients, which provides many opportunities for sub-analysis of the patient population. The TOGETHER study team is completing a comprehensive analysis of the full data set, which will include sub-analyses for variants and vaccination status.

If you go on Twitter there are a chorus of Doctors now championing lambda for COVID. The data suggests that this is the best anti-viral out there, better than Paxaloid. Some are even getting ansy that the EUA has not been filed yet.

But this isn’t the fault of Eiger. This was not Eiger’s trial. It was run independently, by a team of physicians, and Eiger is waiting on them to get the data it needs to file the EUA.

Eiger said they will have the EUA filed by the end of Q2. On the call they made it sound like they are basically ready to file as soon as they get the full data set from the TOGETHER team. And based on this tweet from a TOGETHER Trial doctor, it looks like they are just finishing up (see Dr. Brad Wouters Tweet below):

It is worth noting that Eiger was up Friday, recovering all its losses and then some while the rest of Biotech swooned. If the EUA approves, Eiger is on the ready:

In terms of commercial readiness, we have large quantities to support the introduction of Lambda should the FDA grant emergency use authorization, and we are actively planning for expanded production capacity.

I think this is a very good risk/reward right now (Note: I had used best before and I wrote that off the cuff, like a lot of my posts, and I shouldn’t have used such a definitive term. It could be very good if I am right and it may not if I am wrong). If you can stomach a biotech.

Triple Waterfalls Take Time

I managed to avoid the carnage of the market this week, ending up flat in my long only account and actually up some in my margin account, where I can short and short I do.

Decision-wise, it has been a mixed bag. The worst decision I’ve made over the last few weeks has been to expand my Biotech universe to companies not trading at cash – specifically CRSP and NTLA.

My Biotech positions ex-CRSP and NTLA (and ALDX on Friday – sigh) have held up remarkably well, I suspect because most are underpinned by a whole lot of cash. Even though the XBI index goes down every day (EVERY DAY!), most of these stocks only do so reluctantly, are actually bouncing around the bottom more than anything else, and some are even going up.

But these two stocks, CRSP and NTLA, have not worked and do not act well. I am down ~10-15% on both. What to do, what to do.

The reasons I am reluctant to cut a stock like CRSP or NTLA and take the quick loss are as follows.

First, I think it is quite likely that these stocks are being beaten down primarily because it is in just about every Cathie Wood ARK fund in existence.

This is a good reason for a stock to be down but a less-good reason for it to stay down. Cathie Wood’s ARK funds are down because she picked overvalued stocks and stocks that have a business that is not performing well in this re-opening/inflationary environment. She invested in a new paradigm that is now under question. But that does not mean that every stock that ARK owns must necessarily be a basket case. Just that they all trade like one now.

The malign-ment of ARK on Twitter is reaching a fevered pitch. Sentiment against ARK seems rather extreme to me. They are being maligned by folks that, in my opinion, should be maligned themselves. CRSP and NTLA to me are, as much as anything, contrary bets that this has gone to far for now and we are due for a reversion to the mean.

Second. CRSP, to take as an example, is not all that expensive IMO. In some ways it looks quite cheap. It was expensive last year at this time, when the stock was 4x higher, no question about that. But at $50 CRSP has an market cap of $3.8 billion. They have cash of almost $2.5 billion, which means the EV is only a little under $1.4 billion.

Last year Vertex bought 10% of CRISPR’s SCD cure for $900 million + an extra $200 million to be paid in the future at approval. So…. a year ago Vertex said that 10% of one drug that CRSP now owns 40% of was worth $1.1 billion to them. Forget the rest of CRSP’s pipeline and platform.

Vertex just so happens to be trading near 52-week highs. While CRSP’s currency is depressed, Vertex’s is not.

There are folks on Twitter now saying CRSP is going to $30. Do they realize that CRSP would have a negative EV at $30? Because of the cash position, another $10 move down in CRSP from here would put the EV of roughly ~$600 million, or more than 50% less than VRTX paid for 10% of one of their drugs last year.

It is easy to say it is a new paradigm for stocks, that valuations were silly and that time is over. It is all true. It is why I have been short the momo-trade for months, when it was not nearly so fashionable. I am far from a growth-bro. But if you think CRSP is worth today’s price, then you should short VRTX, because their stock is at its highs and they are clearly run by idiots for paying what they did – and this for a drug they KNEW VERY WELL because they already owned the other 50% of it.

I don’t think that’s the case.

It is not just Vertex that among big-pharma holds highly valued currency. In fact, the same could be said for much of big-pharma. Merck is at its highs. Bristol Myers close to its highs. Eli Lilly is close to its highs. Abbvie was at its highs until they made a bad announcement last week. Even smaller big-pharma wanna-be’s like Neurocrine are not breaking down like the market as a whole.

Does that not seem like a ripe environment for takeovers?

There is some patent stuff going on between CRSP, NTLA and other gene editing companies that hasn’t been super-favorable to the two I own, but no one I’ve read seems to think this is a problem. It will get sorted out with new agreements and licenses.

Really, the only way I could see CRSP or NTLA having their value permanently impaired from this level is if news came out from one of them or some other CRISPR editing company that off-target editing has resulted in a really bad outcome for a patient.

That is a legitimate risk with these companies. But it has been a known legitimate risk for like the last 5 years. It is not new. Youse take yours chances…

So that is enough about CRSP and NTLA, which is a bit more expensive but a better pipeline and probably better opportunity to the upside.

On to some things that have gone right. What I have done right over the last few weeks has been to:

  1. Keep my shorts on
  2. Keep BIOX even when I sold most of the rest of my commodity stocks
  3. Don’t buy anything outside of these Biotech names
  4. Keep my shorts on

This market is a gong show but it kinda seems like we are getting to the crux of the issue now and 1 of 2 things is going to happen shortly. We are either going to have a crash or we are not.

When sentiment gets really bad, it seems to most often portend to a rally or, and this is kind of the black swan option, if it doesn’t rally things get much, much worse. When things get worse then bad, that’s when you have a crash.

I don’t think it ever really makes sense to “bet” on the latter because crashes very rarely happen. We had it during COVID. We had a bit of one in December 2018. We had bigger versions if you go back further.

But I’m not really convinced we are going to get one here. It would be too easy of a way out. I would say those hoping for a crash are just evidence that there is much more work to be done.

This is really more like the internet bubble of 2000-2002, which was targeted and specific and drawn-out but without a sort of big capitulation-like event that you see in a crisis-sort-of-general-bear market. The internet bear market was more of a rolling bear market, with troughs of massive negative sentiment, bear market rallies, and then another leg down. We could be on our way through the next leg down, but that is different than a crash.

I always come back to Donald Coxe and his book “The New Reality of Wall Street”. In his first chapter, The Taxonomy of the Bear, he described the different type of bear markets. It is important to distinguish because as he says, just as “it can be a matter of life and death for hikers to know which species of bear territory they are invading. Similarly, investors should learn to distinguish the kinds of bear attacks the market faces”.

He outlines 5 bears: the Teddy, the Baby, the Papa, and the Mama. The Mama is broken up into two types – the mini-Mama and the Big Mamas.

I suspect, or am at least willing to use as a working thesis, that what we are in now is a mini-Mama. The mini-Mama “only appears at the advent of Triple Waterfall crashes”. The Triple Waterfall is what Coxe’s book is about, as it was written at the time of the internet-bubble collapse.

I’ve used that term a number of times in the blog and this is where it comes from.

The Triple Waterfall is the “avenging bear who keep killing and devouring until an entire belief system has been destroyed”. That sounds a lot like what has been happening for the last year.

But most importantly I think is what Coxe notes about the nature of the Triple Waterfall: “Triple Waterfalls aren’t mere bubbles. They are financial pandemics that take not months, not years, but decades to run their course.”

To me, the important takeaway from this is that what we are experiencing now is not about some one day “crash” that flushes away excess, cures the system of its malaise, and allows us to buy TDOC, SE and PTON again with reckless abandon. If this is a Triple Waterfall, which I think it could very well be, we will not be let off so easy. This will be drawn out for a few years more (I don’t know if I agree with the decades he describes) until the last of hope of the past belief has been vanquished.

But you never know. So I’ll stay in the cautious camp, my two CRISPR bets notwithstanding.

A few tidbits from other stocks I own.

Vidler – they released their acquisition documents this week and, quite honestly, I am somewhat less inclined to believe we get a better offer now. They really did do a lot of DD and they only received one offer that was for the whole company. However, there were other interested parties, which gives a glimmer of hope. The other glimmer of hope is that the water crisis at Mead and Powell is getting more and more attention. It is too bad that the deal closes in May, I think the news cycle on the drought could reach a fevered pitch this summer as the levels in these lakes continue to decline. Oh well, I bought some PCYO, which owns water rights in Denver, as an alternative. Its not quite the idea VWTR was, but it could benefit from that news ramp.

Eiger – There was some news from Eiger of a successful trial with their drug avexitide for protein-induced hypoglycemia in patients with congenital hyperinsulinism. But the bigger news for me comes from the DEF 14A form they released, where it looks like they completed their $50 million ATM already. They managed to sell 6-7 million shares into the market, in a TERRIBLE Biotech bear market, and now the stock is surprisingly resilient as the XBI index continues to fade.

Makes you go hmmm – as does the announcement this weekend that Pfizer’s Paxlovid is resulting in delayed infection from those that take it AND the news Pfizer snuck out last week that their new trial of Paxlovid in Omicron would now remove all vaccinated patients from target group (Eiger’s trial was primarily on vaccinated patients). Kinda sounds like we need another anti-viral.

While I know COVID is over for many, I also suspect that governments around the world will want to stockpile COVID treatments, especially those targeting the most at risk, just in case we see a more dangerous variant arise, especially if that treatment is variant-agnostic (Peginterferon lambda is) and is simple (Peginterferon lambda is a single shot that can be given as much as 7 days after infection).

And with Eiger, with its modest EV of under $150 million, it wouldn’t take much stockpiling at $1,000 per dose to basically surpass the market cap on this indication alone.

All this without even mentioning Eiger’s main event, HepD.

Bioceres – Bioceres got approval of HB4 soy from China, which is a genetically modified drought tolerant soy bean. Now China will be allowed to buy soybeans grown from this HB4 seed. This is pretty important because HB4 soy is already approved in the growing regions of Brazil and Argentina (the US too) but those regions sell so much into China that they can’t grow HB4 without China approval. Now they can.

Soy revenue has been pegged at $82/ha. So that’s a cool $1.5 -$2 billion TAM to target.

I think Bioceres is overlooked because its in Argentina, has a complicated share structure, has a fair bit of debt and doesn’t really have any comps. There is no legit brokerage coverage. But the more I look at the company, the more it looks to me like a legit agri-tech firm. That is even more the case with the acquisition of Marrone-Bio.