Designing A Portfolio

Why am I invested where I am and who to follow to learn more

The past week saw the S&P 500 fall about 4.5% amidst heightened concerns about renewed lockdowns in Europe as well as fears over the potential outcomes of the US elections. To keep some perspective, however, we are still ~42% above the March lows.

This week I made some trades to help push me toward my target allocations - discussed last week - and my updated allocation is shown below. The rest of this post will focus on the “why” behind each of the sectors including the holdings within.

Biotech

Given the stated aims of my portfolio - which is to take risks and “go big or go home” - biotech investing is an obvious choice. There are many binary events which can either send a stock catapulting to new heights - or to zero. It’s up to the investor to try to weight the probabilities of such events and invest accordingly. Done right, biotech investing has a chance to be highly accretive. Done wrong, and one can lose it all. In contrast to other companies (tankers, for example) many times there is not a hard asset (ships) that put some sort of backstop (however low that may be) on the stock price. If a company has a promising drug that is rejected, for whatever reason, the stock price can collapse. A notable example from this week is $TCDA whose stock plunged after a Type A meeting with the FDA delivered unfortunate news.

Currently I have allotted twenty percent of my portfolio toward biotech. That 20% is spread among four holdings at present.

$BMYRT

For the uninitiated, $BMYRT ($BMYr if using TD Ameritrade) is a Contingent Value Right (CVR) that arose as a result of Bristol-Myers Squibb purchase of Celgene. Essentially, as of now, the CVR is worth $9 if two drugs are approved by their deadlines. Liso-cel by 12/31/2020 and Ide-cel by 3/31/2020. Both drugs have PDUFA dates prior to the deadlines, and the CVR is currently trading around $3.25. For those looking for more information, check out Yet Another Value Channel’s podcasts here and here. A write-up that is now slightly out of date can be found here (I’m not going to link around the pay wall, but google cache is your friend).

At 70% of my Biotech allocation and over 10% of my portfolio (at a ~$2.85 cost basis) the ultimate success of failure of the CVR will have a material impact on my portolio in the relative short-run.

I remain in on the CVR for a few key reasons:

  1. There is not a ton of disagreement on the science. Most folks believe both drugs are approvable - it just comes down to potential issues with manufacturing and timing (i.e. Covid delays)

  2. It’s likely challenging for a big player to take too big of a stake, thus depressing the price more than the probability weighted outcomes would suggest it should be trading at.

  3. A bear case is “why would BMY actively try to succeed when doing sso means a $7B payout”. On its face, this is compelling - until you consider the incredible width and depth of the conspiracy necessary to pull this off. Not to mention the legal and reputational risk that would be inherent in trying to do so. Finally, almost every important person working on the filings are owners of the CVR and are thus incented to see it succeed. The first youtube video linked above goes into this very well and I remain a seller on the idea that BMY would somehow sabotage the proceedings.

  4. I think a lot of folks are scared away by the mental fear of it “going to zero” thus compressing the price more than the probability of success indicates it should.

All the above being said, in the next few weeks we should either be 1 drug closer to $9 or we will be at $0. Assuming it is the former, I do plan to take some off. Hopefully we see a pop to the $4.50ish range (the below models $4.75). If so, I intend to take out about $14K and let $10k ride. The highly rigorous analysis can be found below. If we don’t see a pop following lipo-cell approval I will just be holding.

$HGEN

My experience with $CYDY is a post for another day, but they were my introduction into monoclonal antibodies and their potential benefit as a therapeutic against Covid. After making a bunch of money on $CYDY I eventually grew tired of what seems to be incompetent management. $HGEN has a similar drug, but what feels like a more competent and methodical approach. Currently enrolling their phase 3 study as well as the NIH Phase 2 Big Effect study, there is hope positive data can send this soaring. Recent uplisting to the Nasdaq means if there is eventual good news we could be buoyed by the Robinhood effect as well. Shot in the dark, and not a very large position.

$XERS

I am in on this off a recommendation from my brother. Have not done much due diligence which is reflected in position size. That said, everything I can tell indicates sub $5 is quite cheap for this stock and I’d like to buy more. Maybe I should read this.

$UROV

Bull case. Bear case.

Who to Follow

https://twitter.com/Biohazard3737

https://twitter.com/sharkbiotech


Tankers

Exhale. Alright, did I get swept up in the contango madness earlier this year? Yes, sure did. Should I have sold already? Probably. Do I still think they will outperform the $SPY from these levels over the next 4 years? Indeed. Rates are currently awful and sentiment really couldn’t be worse. Seems like the worst time to capitulate. I am not expanding my position (though at these prices it seems reasonable to do so) but also not selling. I have been adjusting my basket a bit to lean toward the stocks that seem most undervalued while at the same time capturing some tax losses.

Exit strategy: I am looking for a double here. Hopefully when we see rates picking up (either due to resurgent demand or resurgent contango) the stock prices react accordingly and I can sell some as well as sell some covered calls along the way. I remain bullish that over the next 3-5 years the reduction in the overall fleet combined with the low orderbook will be quite positive for tankers. It’s also nice that if Mr. Market decides not to care, I have reasonable confidence the companies in my basket will still deliver value either via buybacks, dividends, or both.

Who to follow (tanker twitter is the best):

https://twitter.com/calvinfroedge

https://twitter.com/hkuppy

https://twitter.com/JHannisdahl

https://twitter.com/mintzmyer

https://twitter.com/2Contango

https://twitter.com/James56487175

https://twitter.com/OriginalBraila


Copper ($OCO)

I was turned on to the importance of copper and to Oroco, specifically, by Mariusz Skonieczny of Classic Value Investors. After reading about it, I spent some time doing my own diligence and eventually jumped in. The macro thesis is that copper remains an incredibly important commodity - especially as we move toward electrification and as infrastructure investments are made globally. As for the specific stock, nothing I write here will compete with what has already been put out there by Mariusz. I would start here and then watch these if still interested.

Right now we are waiting on the results of the 3D IP survey. Hoping the results are good and we can take the next leg up on this journey.

Who to follow

https://twitter.com/calichebahada

https://twitter.com/ClassicValueInv


Unloved Energy

Energy now makes up roughly 2% of the S&P 500. That means, for a general index fund investor - even if there is a rip in energy, most won’t be allocated toward it enough to make a difference. Interestingly, many of the folks I follow on Twitter are incredibly bullish on Energy stocks (especially natural gas) over the next few years. Almost to the point it is difficult to see the bear case. I do think there is still some risk to the sector if we can’t get demand fully back online, but that seems a fairly low risk when considering the entire global economy. I am the first to hope for a green future, but the transition will not be overnight. We are still burning coal in this country - and until we are off coal - natural gas is likely not going anywhere (hat tip to Pinecone Macro for that one).

As for my allocations. Playing a bit of a basket here. Not going to go deep into each one - would recommend searching the tickers on Twitter/StockTwits/Seeking Alpha for more - though be advised everyone on Twitter seems to love natural gas, but hate every company in the space - go figure.

Who to Follow

https://twitter.com/Chasing_Value

https://twitter.com/pineconemacro

https://twitter.com/EnergyMatters3

https://twitter.com/contrarian8888

https://twitter.com/QuisitiveInvest

https://twitter.com/EnergyCynic


Crypto

I’m not a crypto Truther. Generally, the blockchain strikes me as not much more than a fancy list. But, I do believe as investing in cryptocurrencies has become easier (Robinhood & $GBTC) and millennials have more money to put into “alternative” investments - the value will continue to climb. Would you see the average 25-30 year old putting 5% of their portfolio into gold or into crypto? The answer seems obvious. There is a ridiculous amount of crypto content out there and most of it is unpleasant to wade through, but I found this from Kuppy worthwhile and have also enjoyed the content from Real Vision.

Who to Follow

https://twitter.com/RaoulGMI


Land ($JOE)

This is a Kuppy special. Hopefully he is right.

Who to follow (annoying searching for the ticker on Twitter due to its ubiquitousness but alas):

https://twitter.com/hkuppy


Marijuana ($AYR)

I love this company. Led by a former finance professional, Jon Sandelman, AYR Strategies is a multi state operator currently in Nevada and Massachusetts and expanding into Pennsylvania. Covered extensively by @AaronValue in the past, I jumped in after listening to Jon on the Cannabis Investing Podcast. The company is extremely well run and has stated they will continue to be aggressive in expansion now that valuations aren’t so insane. I view this as a long term hold and a great bet on the future of the cannabis industry.

Who to Follow

https://twitter.com/aaronvalue

https://twitter.com/tribefankyle

https://twitter.com/potjock

https://twitter.com/KushDaddyOG101


Other

I have a relatively substantial position in $DS. Essentially, Drive Shack is a smaller Top Golf (which just sold to Callaway for > $2 billion) with four locations and a bunch of golf courses. The traditional golf courses haven't made the company much money historically, but given COVID I think they will have a strong Q3. 3/4 "entertainment" venues will be open for all of Q3 which should bode well. They are shifting their focus to these "puttery" things within urban areas which is basically fancy mini-golf. I generally am not sure I believe these will do that well, but time will tell. Hoping for a solid Q3 then might get out of this. My main investment thesis here is “they are always busy and you can go golfing or to a Drive Shack pretty safely in a pandemic)”.

Who to Follow

https://twitter.com/ericaltm