Friday File: Annual Review, pt. 1

by Travis Johnson, Stock Gumshoe | January 11, 2019 10:14 pm

Time, once again, for the Annual Review of all of the stocks I hold in the Real Money Portfolio[1]. Many of my positions are built up over many years, and sometimes they’re stocks that don’t generate a lot of news or attention for months at a time, so I promise each January to cover every stock and update my opinion to make sure that I get to an updated analysis of each stock at least once per year.

It takes a while to get through them all, I currently have about 40 equity positions (plus plenty of dumb little speculations, mostly options, and I’ll cover the more meaningful of those as well), so I won’t be looking at all of them today… but I’ll start with a theme that has been interesting me over the past year, 5G, and move on to the positions that have actually changed this week or generated some news that was worthy of comment, and see how much we can get to. As usual, I’ll aim to cover all the stocks in the portfolio by the end of the month. If you want to skim, each stock and the quick summary are in bold, followed by some more detailed comments on my opinion.

So… starting with 5G.

Qualcomm (QCOM) — Buy below $60 for a 4% yield, 5G play with underappreciated growth prospects (mostly because of Apple legal risk) and a strong dividend. Increased my position by about 20% today, it’s now a bit over a 1% allocation.

Qualcomm is a very volatile stock, mostly because of the huge unknown of its legal fight (including a CEO-level pissing match) with Apple… but they are well positioned for 5G and are making more progress than I expected in automotive[2] (without NXPI)… and Apple is perhaps becoming less of a drag, at least in investors’ minds, because iPhone sales volumes are no longer quite as important as they were, and no one other than Warren Buffett loves Apple anymore (at least for the moment) and the companies are bound to come to some kind of settlement to their many legal fights eventually.

Qualcomm will almost certainly be the key modem supplier for 5G phones for at least the first year, which won’t be a huge deal on the revenue line since that market will start small, but it should help them to cement their position as the preferred provider of processors for everyone except Apple. Samsung will probably have a Qualcomm Snapdragon-powered 5G phone a year or more before Apple releases a 5G phone, for example, and while that won’t be a huge revenue driver for Qualcomm it should help them stay in the 5G modem lead. I’m adding to Qualcomm as a continued general bet on ramped up 5G investment over the next two or three years leading to ever more demand for more data, more data, more data — I’m not sure who’s going to win, but my bets in this sector include Qualcomm (QCOM) for mobile chips and modems, Nokia (NOK) and Ericsson (ERIC) for telecom infrastructure buildout, Crown Castle (CCI) for tower and small cell location rental, which should increase with 5G being added to, not replacing, 4G/LTE, and, on the data center side, CoreSite (COR) for their data center locations and dividend growth and Arista Networks (ANET) for their growing market share in ethernet switches and operating systems for current state-of-the-art (100G) and hopefully next generation (400G) “cloud” data center equipment.

The Qualcomm position is still a small one, but I added slightly to it today. I’ll go over the others individually as well… most of these positions were either initiated or bumped up substantially when I decided to increase my 5G allocation in October, so you can see more detail in that article if you like[3].

Nokia (NOK) — Buy around $6 to position for multi-year 5G investment trend, relatively low valuation (forward PE 16) and focus on dividend growth, with a likely yield of ~4%.

Nokia is my largest 5G-focused position, and like Qualcomm it’s a relatively low-downside, high dividend dinosaur that looks like it should be set up well for the next wave of infrastructure investment… though they don’t face the same legal risks as Qualcomm, and their 5G royalties are solid and much lower, so therefore easier to defend.

They certainly face aggressive competition from Huawei, which is possibly being squeezed out in some countries thanks to security concerns, and Samsung and Ericsson. Samsung is probably the most worrisome non-Huawei competitor, but Nokia (and Ericsson, which I also own) are entrenched providers and have worked hard to position themselves for 5G leadership, and are part of most of the test installations of 5G gear that I’ve seen in the US (which, along with Asia, is leading the 5G investment push — Europe, where Nokia and Ericsson are even stronger, is reportedly far behind on 5G implementation).

The risks? They have been naturally losing share to Huawei, and Huawei has reportedly been faster [4]to roll out more advanced products, so if Huawei can keep market share gains coming despite the regulatory backlash against them from the US, that would hurt Nokia. But I expect market share gains and losses to be relatively minimal, most likely, and I think we’ll see a wave of wireless infrastructure investment over the next three years that lifts all of the major players pretty nicely — which is why I’ve invested in both Nokia and Ericsson. I also have some option positions for Nokia that will have a marginal impact on the portfolio, just in case the stock really takes off with a more aggressive Huawei ban (or a faster 5G ramp-up)… that’s a lower probability, I’m mostly just counting on a steady increase in investment and Nokia’s continued restructuring work and focus on 5G and on growing its dividend. The dividend is annual and is typically declared in late March or early April.

Ericsson (ERIC) — hold, this is a better buy if it dips closer to $7-7.50, I think risk is higher than with Nokia, in some similar businesses, and valuation is richer, so this is a smaller position.

Ericsson doesn’t have quite the end-to-end network equipment business that Nokia does, but it’s very similar in most ways — and has had very similar stock performance, though I think Nokia has a stronger market share in the equipment that’s likely to surge most with 5G investment in the coming years, and I think their restructuring is more established. Ericsson just announced a big writeoff in the fourth quarter for restructuring their business services business, which hurt the shares, but the prior quarter was good and gave investors a lot of hope for 5G possibilities in 2019 and future years, so I’d be inclined to wait and see a more meaningful dip before adding to ERIC — the dividend is not as strong (though cash flow supports it better than Nokia’s dividend), and ERIC trades at a higher valuation, so I don’t see much reason to push into it here.

Crown Castle (CCI) — hold, look for a meaningful dip of T-Mobile/Spring merger moves forward.

Crown Castle is my favorite of the tower REITs, which rent space to mobile providers for their antennae and equipment — and they own a lot of small cell locations, too, which will be in demand as 5G begins to supplement 4G. The business should mostly be steady as more demand for locations and space comes from investment in the new frequencies and equipment that 5G requires, particularly because 4G coverage will have to continue to be strong, but all of the tower REITs are also pretty richly valued and are at risk of losing one of their four major (US) customers if Sprint and T-Mobile finally do merge, and that’s likely to change the story for investors.

I don’t think, actually, that it will end up having a huge impact on the financials for Crown Castle — they have long-term contracts, so even though T-Mobile and Sprint have said they plan to cut out some of their redundant towers they will have to support the different frequencies that their legacy customers require, and they’re also simultaneously going to invest in improving coverage and pushing 5G implementation, so to a large degree it should wash out over the next few years.

But I do think it has a very good chance of hitting the stock price — when good news has come out for the potential merger it has generally dragged down all the tower REITs for a while… so if we get closer to formal approval, I’m guessing that I’ll have the chance to buy more CCI shares below $100. Interest rates could also have an impact, as with pretty much all REITs, but that’s what I’m looking for in terms of adding to this position, a dip to the $95-100 range. They report earnings in two weeks.

Arista Networks (ANET) — Nibble at this volatile growth stock slowly, it’s expensive with a trailing PE of 30… but I think the growth and market share gains, with secular growth likely to continue this year and accelerate in two or three years, so I’ve been making small buys on dips and will likely continue.

I started buying Arista late last year when it finally dropped after a gargantuan run in 2017, though I’ve covered it a few times because it has been teased so often by Tom Gardner at the Motley Fool. Here’s what I said a week ago when I covered the latest teaser:

ANET is “Tom Gardner’s top pick for 2019” thanks to growth in the data center business and his admiration for the management team — it’s a stock I’ve been watching for a while but started buying last month when it finally dipped to a more rational price in the growth stock selloff, and I also added a little bit this morning as I was re-researching the stock for this article. Still plenty of risk, even as they’re taking some small share form Cisco and keeping their profit margins nice and high, so this is a position I’m likely to keep buying in very small bites because it will probably be volatile — but I like the growth and think they might grow even a little faster than expectations, thanks in part to investment in the next generation 400-gigabit switching products that should begin to ramp up sales later this year. Next earnings Feb. 15. This is now a ~0.5% position in the Real Money Portfolio, with a cost basis of ~$219/shr.

That’s not as direct a 5G play as the wireless infrastructure stocks, but demand for high speed data center equipment will only increase as more data flows through the networks, which is what 5G promises — 100X faster data, which inevitably means more data will move, particularly more high definition video and low-latency stuff like live distributed video game data. It doesn’t seem likely that data center demand will drop, or that data centers will be able to stop consistently upgrading their equipment to handle more demand.

Which is why I also continue to hold some shares of my favorite data center REIT…

CoreSite (COR) — buy this data center REIT below $92 for a 5% forward yield, probably 6-8% dividend growth.

With my guesses about the next two dividend increases (they have gotten into a pattern of increasing the dividend in both May and December, growth has tapered down from the fantastic 30%+ but still could be above 10%… though I’m counting on less), I think now that buying in the low $90s is a low-risk bet. Their business is steady and customer retention and pricing appears to still be just fine. I stopped out of the majority of my position around $105 when it was clear that the years of dramatic dividend growth were over, but started buying back in again last month with a little nibble at $97 — that was probably too ambitious, but I think buying in the low $90s will work well. They continue to have the best dividend growth in the data center REIT segment (compared to CONE, EQIX, DLR, IRM, QTS), and the best current yield other than the somewhat different Iron Mountain (IRM). Their core business growth (as measured by FFO per share) has not been as dramatic in the past two years as it was, thanks to a lack of new facilities opening (and to the fact that you can only really “lever up” with debt once), but they are still growing and should be able to keep growing the dividend. If diversifying in the sector, I’d look first at CONE for top-line growth that could drip down to an accelerating dividend, and at EQIX for global dominance that gives them some efficiencies and pricing power and a similarly solid 10% dividend growth potential… though the current yield for industry leader EQIX is much lower and they’re probably too big to have much growth “surprise.”

Starbucks (SBUX) — Still a good buy below $65, average cost basis ~$54, 3.5% position. Sold remaining call options to add to equity stake today.

It’s a good time to reassess Starbucks, because the downgrade by Goldman Sachs today[5] (to “neutral,” which in the context of Starbucks might as well be “sell — there are no “sell” ratings on the stock) is just part of a minor wave of news that has washed over the shares in the past week or two. We’ve seen major publications listing Starbucks as one of their top buys of the year (which doesn’t mean anything, of course, but it brings attention), and we’ve also seen rising qualms about Starbucks growth prospects, mostly because they are betting big on China for the next wave of growth. Analysts mostly remain mildly positive on the shares, with price targets averaging just under $60, but the story from Goldman had more impact than most — it’s basically just an extrapolation of the China concerns that Apple and McDonald’s are facing, and that rings fairly true for investors who are panicked about China and believe that Chinese consumers are never going to buy anything American again.

Add on to that the stories about a new competitor spending hundreds of millions of dollars to try to build a Starbucks-beater in China overnight, and you can see why the narrative might shift on this name. Luckin, which has only existed for about two years, is trying to build 4,500 stores by the end of this year — that would take it past Starbucks, which is the biggest premium coffee chain in China right now, by far, and has about 3,600 stores on a base that they’ve built gradually over 20 years. And Luckin is also competing aggressively on price, not worried about burning money as they try to buy customers.

Will that mean Starbucks China strategy is sunk? I doubt it. Starbucks’ goal is to have 6,000 stores in China, and to get there within the next few years, so they’re opening almost two stores a day. I don’t know whether they will sustain their strength as a US-associated brand if the trade war becomes worse or there’s a “buy Chinese” push that hurts them in the future, as some folks say is happening with Apple, but I think that’s most likely to be an exaggerated fear.

Which doesn’t mean that Starbucks will soar from here, the stock is still likely digesting that huge move that it made after Bill Ackman bought in last Fall, but when there are shifts on macro sentiment like this I like to just look at where the financials are… and the financials for Starbucks are not indicating any trouble yet. Yes, as Goldman says, they might “warn” about China on their next earnings call… but they might not, too, the driver in China right now is not the same store sales that wax and wane to some degree, it’s the aggressive pace of new store openings that boost sales immediately. Right now, the shares are trading at about 20X earnings, with a 2.25% dividend yield and a dividend that has grown by at least 20% a year since they initiated the dividend in 2010… and they are still in the midst of a massive multi-year capital return plan that will mean more dividend increases and substantial share buybacks that reduce the share count (and therefore improve the per-share valuation). That’s not cheap, but it’s cheaper than most of the huge and powerful consumer brand/quick service restaurant companies.

I think the risk is limited to about the mid-$50s, absent a complete market crash, and that they should be able to meet their pretty low target of 3% revenue growth and 10% earnings growth, which should be more than enough to support the stock at these levels. I’m buying more, and will effectively roll my SBUX January call options into increasing that share position. I don’t know whether SBUX will be at $60 or $70 in a year, or whether a China shock will drive it further down or a trade deal will send it flying higher, but this is a solid valuation for a world-leading brand in a growing segment, with locked in support from their capital return program that should limit any share price drops in the absence of real calamity. That provides me some comfort today — all I’m counting on is something like a 6-8% return on Starbucks shares thanks to the buybacks and gradual growth, and add on the 2-3% dividend. 10% a year, on average, would be fine, and it would not surprise me if we get returns a little better than that in a decent market, since Starbucks remains quite a bit cheaper than most of its major international restaurant brand or consumer packaged good competitors…. and unlike most of those other companies, Starbucks is just beginning to use its balance sheet to reward shareholders.

Ligand Pharmaceuticals (LGND) — Hold, priced reasonably given current earnings and appeal of the royalty business model, but concentration risk has always been very high and new analysis poses risks of a sentiment shift.

Grant’s Interest Rate Observer published a negative analysis of Ligand Pharmaceuticals (LGND) this week, and that helped the shares to drop considerably yesterday. I subscribe to Grant’s and think it’s an excellent resource, though not necessarily for its stock-picking prowess

The critique by Grant’s reporter Evan Lorenz is a fair one, though — it basically notes that biotech royalties are not perpetual annuities, and Ligand is very richly valued compared to the expected cash flow from those royalties (and milestones) over the next decade (particularly if you discount the value of those future revenues, as is appropriate). They further note that some of the licensees of Ligand compounds are pretty questionable, which is also true (though many of the are also big pharma companies and established biotechs), that half of the licensed programs in development are preclinical and therefore at least a decade away from revenue (and probably more than 90% will never be approved), which is also true… and that there’s some likelihood of declining revenues from Captisol, Promacta and Kyprolis as those compounds begin to lose patent protection (patents start expiring in 2021 for Promacta, 2025 for the others, though there are other longer term patents on them as well). They estimate that the value of future revenues from Captisol and the approved drugs (mostly Promacta and Kyprolis, using analyst estimates from Novartis and Amgen, respectively, which own and market those drugs), plus the stake in partner Viking Therapeutics and Ligand’s net tax loss carryforwards, is worth a net present value of $20 a share. Obviously far below the current $130-140 or so.

It’s hard to argue with any of that, though it’s also worthwhile to note that the same negative assessment would have been accurate for the entire 5-1/2 years that I’ve owned the stock (I first bought in the Summer of 2013 in the $30s, sold 2/3 on a stop loss at $204, and started to nibble back in a few weeks ago in the $140s). I don’t know what’s going to happen to sentiment about Ligand in the near future, and I may trade around some of my shares, but as long as Kyprolis and Promacta sales keep rising and it seems likely that they will maintain some patent protection beyond the next few years, I’m likely to keep holding on to at least a small Ligand position — I don’t like buying biotech stocks, but I do like royalties.

I don’t know that the sentiment will shift positive again at any point soon, but it certainly could given the general fondness for royalties and the likely strong and steady (though not necessarily growing fast) earnings next year… though with story stocks, the risk is in a change to the narrative and a respected and well-done piece like this from Grant’s could shift the narrative and send the stock far lower, that’s the risk for stocks which trade at elevated valuations relative to their earnings or cash flow: There’s not a natural place where the stock has to stop going down. With Ligand there’s a natural stopping point here at $130-140, given that’s about 25X earnings, a rational valuation given recent growth, but if they stop growing earnings, as is possible if Promacta or Kyprolis fails to have another record year in 2019 or they don’t get any milestone payments of substance, it would not be shocking to see them drop down to a “low growth” or “no growth” market multiple of 12-15X earnings — that would be the $70-90 neighborhood. A follow-on dip from this Grant’s would give me some concern that the narrative is really changing and people are looking at 2022-2025 numbers and not imagining growth, and if that’s the case and the downside risk is something near $80 then it’s possible that I’ll sell again if weakness persists… if the narrative doesn’t really change, which is obviously a subjective judgement call to make, I might be willing to add a little more at these prices. We’ll see. It’s a fairly small position, and the profits I already took on this stock were huge, so my default position here is patience.

MGM Resorts (MGM) — buy below $30, I added to the position this week. Would have been “buy below $27 or so,” but with new confirmation of Starboard Value actually building a position now, and pushing the board for faster change, I’m willing to push the price a bit.

The US/Macau casino operator has been a rumored target of Starboard Value, an activist hedge fund manager… this isn’t new, the rumor was circulating back in September[6] as well, but I don’t know if those rumors were true then or are true now. The story was that Starboard wanted some big shakeup, including perhaps selling their share of the joint venture casinos in Macau or merging their REIT with Caesar’s, but MGM is also already pressing forward with a fairly aggressive shakeup of its own in the “MGM 2020” restructuring plan that is expected to speed up their digital transformation and accelerate revenue growth and “improve efficiencies” (which mostly probably just means “cutting staff”).

I added a bit to the position, which I intend to build slowly but also keep pretty limited in size (my current thinking is that I wouldn’t want more than ~2% in MGM, given the fairly high risk levels from the Macau renewal uncertainty in a couple years and the concentration in Vegas if a recession brings traffic down quickly). I don’t know whether a meaningful “pop” will come from Starboard, if they are indeed involved (the Bloomberg story confirming the recent purchase is here[7], which is said to be “a small position”), but they’ve been pretty good at pushing for change at some of their targets in the past five years or so (Darden, Macy’s, Yahoo, etc.), but we’ll see — this is now roughly a 0.5% position. MGM has a great international casino brand, dominates Las Vegas, and might have an inside track on building casino resorts in Japan, which is the next hoped-for growth market… and should be in prime position to get some incremental gains from sports gambling in the US with their sports league deals.

Safety, Income & Growth (SAFE) — nibble below $17 for a 3.5% yield that’s likely to keep up with inflation, but there are longer-term interest rate risks.

Safety, Income & Growth is, quite intentionally, one of the more boring holdings in my portfolio… and a fairly new one that I’m still a little leery of, as I was when I first added a position last Fall[8], but they are trying to ramp up a little bit, and the price has come back down to a more reasonable level.

SAFE is trying to accelerate the “growth” part of its name, announcing a substantial new investment from founding partner and manager iStar this week that will let them come close to doubling their asset base (assuming they can find the right ground lease deals at the right price, of course). That financing comes with some substantial future cost, though — iStar overpaid at $20 a share, but in return they get a much higher management fee as the company grows instead of a lower fee as it grows (it was 1% of total equity per year, dropping to 0.75% for total equity above $2.5 billion… now it will be 1% of total equity rising to 1.25% once above $1.5 billion, then 1.375% above $3 billion and 1.5% for incremental equity over $5 billion).

That’s not going to make a difference in the near future unless they grow shockingly fast or do some massive non-iStar fundraising, the total equity will probably be a little over $500 million once they incorporate this fundraising and get their acquisitions rolling over the next few months… and the risk is countered by the fact that all this new capital will let them grow the portfolio and probably increase the returns incrementally, so I’m not particularly worried. The fact that iStar overpaid is probably a good thing for shareholders in the near term, but that higher expense ratio will probably color my thinking about whether to hold SAFE a year or few into the future as we see how the business matures and whether they can grow the dividend.

The management fee is paid in equity, which basically means a long and slow dilution akin to stock options — and the per-share metrics probably won’t grow quickly like most stock option-paying companies do, and though they can pretty easily cover the cash dividend now they have not yet begun to increase the dividend. The combination of no dividend increase at the one-year anniversary of their first dividend, and the big equity investment from iStar, mean that there’s not likely to be any rush to buy… my thesis is that this could be a very long-term value because of the underlying stability of cash flow and asset values, and that management fee covers most of the overhead of the company so it’s not like it’s wasted, but there’s no rush to build a position quickly and there is meaningful risk.

They own the land beneath buildings and lease it out, mostly on 99 year terms with gradual rent increases, giving a very low cap rate of something like 3-4%, and borrow money to leverage those returns to provide a decent dividend to investors (and good asset safety, since they have first call on the buildings and improvements in a default, too). The risk is primarily interest rates, a risk that’s managed by owner and manager iStar but still could be an issue because they’re committing to 99 year leases but their cost of capital changes as debt matures and has to be refinanced — that’s the same risk any bank or mortgage REIT takes in “borrowing short and lending long”, but the impact of changing sentiment about future rates should be smaller because the time frame is much longer and they’re not likely to have immediate refinancing risks. (They’re refinancing a 99-year asset every 10 years instead of refinancing a 10-year asset every few weeks or months like a mortgage REIT might, for example — that’s just an illustration, the numbers are not accurate). SAFE pitches its shares as akin to an inflation-protected bond, with slightly better returns (and a little more risk), and that’s probably a fair way to think about it… fixed rate bonds have interest-rate risk, too, even if they’re inflation protected.

Largo Resources (LGO.TO, LGORF) — Buy below $3 for continuing elevated vanadium demand, high risk.

I sold out of my more speculative position in Prophecy Development, the prospective junior vanadium explorer, but am holding this much larger company, an actual vanadium producer, because of a belief that demand for that metal will remain high and vanadium prices will solidify or rise from the current $12-17 neighborhood, rewarding Largo’s mine expansion efforts.

Here’s what the forecast looks like from Largo Resources, as they work on expanding their vanadium mine processing capacity this year: They guide to 10-11,000 tonnes of production of Vanadium pentoxide, with cash operating costs of $3.45-3.65 per pound excluding royalties. A tonne is about 2,200 pounds, so if vanadium prices stay at $15 (the company says they have “recently receded to $15.50-16.00”), that’s potential net revenue of $249.7 million, though there are probably other costs like shipping that mightn’t be included in those operating costs (I’m using $15/lb and the lowest production and highest operating cost they offer… so, fairly conservative but still a guess… Vanadium spiked into the $30s last year, but was also at $5 in 2017).

That’s lower than the revenue was last year, the past four quarters (we don’t know the Q4 number yet, so that goes back to Q4 of 2017) brought in operating revenue of $277 million and gross profit of $211 million. So unless vanadium prices rise again, which they might or might not (a lot depends on Chinese steel/rebar demand, which in turn depends on Chinese construction activity and the stringency of their enforcement of the new higher-vanadium-content rules for their rebar, though there’s also some potential for demand to rise from other steel customers and, perhaps in a very minor way, from vanadium battery businesses). They also guide to $10-14 million of sustainaining capital expenditures and another $10-14 million of expansion capex, so if you take $28 million off the top that gets you down to about $220 million in possible cash generated. I’m not sure whether their actual mining costs are really included in that operating expense, because the “cost of goods sold” in past income statements has been a lot higher than $3.50 per pound produced, and has been pretty consistent (so they were losing a lot of money in 2016 when prices were much lower), but it seems to me that they’re guiding for a year that’s slightly worse than last year.

Which is fine, because I think there’s still a decent chance for vanadium to stay at a much more elevated price for years, and given the expected long life and the basic profitability of this mine at anything over $8-10 per pound I’m willing to ride it for the possible gains if vanadium reaches new highs again. It’s still a small commodity speculation, but it’s an established company (and a pretty big one, with a $1.2 billion market cap), and the only really stable pure-play vanadium producer that you can invest in, which is likely to draw a lot of attention if we see some more vanadium mania… and it won’t go bankrupt if prices drop for a while (they’re even paying down debt, and have filed a shelf offering to possibly raise equity cash in the future, which likely spooked investors, as potential dilution always does, but they have and generate a lot of cash at this point, so I’m not particularly worried). I wouldn’t make this a large position, but vanadium is one metal that should have strong embedded demand growth even if the global economy slows a bit, and there isn’t a lot of excess capacity that can quickly come on line.

And I noted in the Quick Take that there’s now also a new long/short position in the portfolio — I’m short Adial Pharmaceuticals (ADIL), long the $6.25 2023 ADIL warrants. Here’s what I sent out about that as a Trade Note earlier in the week, in case you missed it:

1/10 — A couple trade notes for you:

I sold the small vanadium speculation Prophecy Development (PCY.TO, PRPCF) when it hit a 50% stop loss for me (that’s not the Tradestops VQ% stop loss, just my personal “don’t want to risk more than half on a dumb speculation” limit for this one).

And I entered into another long/short trade, with a short position on Adial Pharmaceuticals (ADIL) that’s protected by a position in the July 2023 warrants (ADILW). This is not a fundamental short where I’m sure that Adial’s anti-alcohol addiction drug will fail, but it’s an opportunity to short a very risky microcap biotech without risking much (the cost of the short is fairly low, and the $6.25 warrants keep my losses very limited even if the stock soars on a takeover or something… unless I get forced out of the short at an inopportune time (always possible with an illiquid stock, so position sizing is important), this position should be profitable as long as Adial either drops below $5.20 or so or rises above $7 — if it takes a long time, the cost of holding the short widens that range a little, but otherwise the long time to warrant expiration gives me a lot of flexibility. The biggest risk is the illiquidity causing the shorts to be called in by my broker at the wrong time, since there might easily not be any additional shares available for shorting at that time, but the likely possible loss is still quite low.

This may well not be a trade anyone else could follow, given the inconsistent availability of shares for shorting — and it could even get closed out within days if my broker fails to actually deliver the borrowed shares. Just an FYI on the kinds of things that I’m spending (perhaps wasting) time looking at these days — reasonable shorts with limited downside, and esoteric situations. If you want to peruse the list of available shorts on any given day, InteractiveBrokers makes their list public here, There are some other recent SPAC conversions that I’d like to short, like Phunware (my short was mostly pulled away before conversion), but there aren’t any shortable shares out there just yet (Phunware is an odd situation, the shares are trading at ludicrous levels but only in a few shares per day because there’s no liquidity, so the much more liquid warrants arguably more fairly represent the price… the stock should very likely be in the $9-11 range, not the $150-250 that’s sometimes quoted on mostly 200-300 shares traded per day, and the $11.50 strike price warrants pricing at 50-75 cents indicate that). Sadly, warrant conversion to try to take advantage of that isn’t available just yet because the shares aren’t registered properly with the SEC yet… mostly because of the government shutdown. One more casualty of inane leadership, in case you’re looking for another 🙂

And that’s all I’ve got for you this week — that’s about a quarter of the portfolio, and I’ll gather some steam and cover the rest for you starting next week. Enjoy your weekend, and thanks for reading!

Disclosure:

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