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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.

13 Comments Post a comment
  1. econyong #

    Biotech is out of my depth, although it’s crazy to see so many trading below cash. Do you care to comment briefly on commodities? I am surprised that you are not into some smallish Canadian oil & gas stocks, when they are printing a ton of cash. I thought commodities are the place to be and you’d be in those names hand over fist. Do you see oil falling in the near term? Would love to hear your perspectives. Appreciate your insight, as always.

    May 7, 2022
    • Well, I did own a lot of oil and natgas a few weeks ago. I had CJ and OBE and VET and AOI for a short time right after the invasion. But like I wrote a couple weeks back, I sold out of pretty much all my commodities, ags, oils, natgas, and copper/gold. Though I did buy a bit of PIPE this week. There have been some reports I read that pointed out that the S/D for oil is not quite as bad as we are making out. I mean even OPEC+ is saying that. These stocks do look very cheap on today’s oil price but when I plug them into my spreadsheet at $70 oil its often 5-6x cf (not free cash flow) and in some cases as much as 10x cf. So I think I would rather be careful. Have you read about how much cheaper it is to charge an electric car at these prices? Its like 10-15x! I’m going to look electric with our next car for sure, and I’m from Alberta. There are also a lot of people on twitter who are suddenly oil bulls and touting that they always have been and this is news to me. That tends to be an indicator that I should be a bit cautious too. I don’t know, oil made sense to me last fall and then right after the invasion but now I’d rather wallow where everyone else is escaping like SaaS, tech, bios.

      May 7, 2022
      • I should add though that I’m not sure about any of this. I mean I added PIPE just a couple days ago so I’m already caving. But I just have this cautious feeling that I’ve been here before where it looks so great for oil or natgas and then all of a sudden it doesn’t.

        May 7, 2022
      • econyong #

        I hear you on the sentiment: all of a sudden, oil bulls are quite visible, which gives me a pause. At the same time, WTI is at $110 now, despite the market turmoil and parts of China under lockdown, and in the past few weeks, we have had Buffet, Elliott Mgmt and Third Point all get into oil and gas. I think barring an economic recession, oil is going higher through the summer, and junior oil stocks will move higher at least in the next few months. Perhaps, I will come to regret this punt, but hey, you gotta take a chance to make money, right? Thanks for your response. I hope your biotech bets work out for you.

        May 7, 2022
      • All th ebest to you as well. And you know me. I change my mind fast. I’ll write again next week if I throw in the towel on bios and get back into energy. OBE IS looking cheap again…

        May 8, 2022
      • I did cave a bit and bought back OBE and also a refiner VTNR. See how that goes.

        May 11, 2022
    • ijw z #

      Some oil and gas royalties still look really interesting here. They have less downside, but despite that have not really rallied nearly as much as you would expect.

      I got a large position in Black Stone Minerals. It is trading below 2019 levels still and will see explosive growth in their Haynesville acreage later this year, and early next year. Yielding at >10% now, but when hedges roll off next year, with higher production could be closer to 20%.

      And natural gas market is constrained by lack of pipelines. Much more interesting set up than oil IMO.

      Falcon minerals also interesting, not as much as BSM though. 75% of production is Permian
      now, and yielding 10% at $70 WTI (FCF yield). 30 years of inventory at $50 WTI.

      Beauty about these things as well is that you get a % of revenue, so they actually benefit from cost inflation of producers. Really the ultimate inflation hedge.

      May 9, 2022
      • econyong #

        Hi Lsigurd. Just wanted to pick your brain again. What do you think of O&G here?

        Canadian O&G stocks are printing cash right now and still very cheap with oil at $120 and likely heading higher near-term. Part of me says they are like the private monoline insurers post-GFC. They are set to moon.

        But, I am terribly worried about the macro. It feels eerily similar to 2008, and oil may be the last man standing, but eventually it will get shot as well.

        I am inclined to hold on for a while longer (I own OBE and BTE), but my inner voice keeps saying “Don’t be greedy. Preservation of capital!!”

        Your thoughts? Thanks a million!

        June 4, 2022
      • I can just say what I did and where I’m at with oil. After we talked last I did buy OBE as well, so I owned both OBE and PIPE. But early last week I sold them again, so I missed this last move up in OBE. I bought PBF in their place so I don’t own any oil producers right now but have two refiners (VTNR being the other).

        I’m not sure why I’m a little more at ease owning the refiners, I know they are probably the same trade. But I guess it puts me at ease to know the PEs are so low.

        If you follow @17thStCap on twitter he has posted on how much these refiners will make a couple of times. He posted a table from BofA a couple days ago. PBF could earn half their market cap this year given where the crack curve is.

        Just more generally though, I don’t know what to say. It does seem like parts of the economy are slowing. Other parts maybe not. I’m really on the fence with so much right now, just trying not to lose too much even if it means I don’t make much either.

        June 7, 2022
  2. Florian Buschek #

    Do you have a stance on gas and coal?
    I think US gas prices could be dragged up by LNG when Europe imports more to replace Russian gas.
    Coal prices seem tricky and will strongly depend on what China does, but with some names at P/E of 1-2 that seems more than priced in.

    May 8, 2022
    • Sure seems like that is the case. Maybe $7 gas is the new norm if pipelines can’t get built and we keep adding to LNG?

      With coal can’t China ramp production if they really want to? Or is that not the case. I don’t know enough about it.

      May 8, 2022
  3. Florian Buschek #

    Great call on EIGR!

    May 10, 2022
    • Thanks. Honestly though, this is either just the start or it is going to come right back down depending on EUA process.

      May 11, 2022

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