September portfolio update

It's time for a very belated portfolio update. I'm hoping to continue posting these updates quarterly, as I find the exercise useful, but it's harder to find time lately.

My stocks performed well during the three months to the end of September. My PA was up 9.62% for the quarter, while my SMSF was up 6.33%. Over the same period, the S&P/ASX 200 Franking Credit Adjusted Annual Total Return Index (Tax-Exempt) was up 0.79%.

The two portfolios remained heavily concentrated in three stocks: Cyteir Therapeutics, Aptinyx Inc and CEL Corporation. The first two are biotech companies which are liquidating; CEL is a construction company in Japan that is currently trading well below the value of its cash less total liabilities. 

Cyteir finished the quarter at $2.84 per share. It's now trading about $3.00, which is close to fair value. The company has disclosed a liquidation estimate range of $2.92-$3.31. That number does not include any value from the potential sale of the company's IP, which may or may not be valuable to another company. I see little downside in Cyteir at current prices, but the upside is nearly extinguished, so I may look to take some money off the the table to redeploy into other ideas.

Aptinyx, as I've mentioned in my last update, has not worked out as I imagined. However, I believe there is still some upside. It closed Q3 at 6.74 cents per share versus a disclosed liquidation estimate range of 7-10 cents per share. As Aptinyx is a very small company, the margin for error is small. I underestimated this risk when I put the position on. 

CEL meanwhile continues to perform well. The company recently reported results for the September quarter and upgraded full-year earnings guidance by 24%, which puts it on a P/E of about 12.5x. Importantly, about half of the earnings come from the recurring property management business, which requires little capital and has shown steady growth. The other two parts of the business are lumpy, however, they too have been growing lately. Meanwhile, CEL has cash less liabilities of about ¥4,261 per share versus its current price of  ¥2,874 per share. 

Portfolio changes

During the September quarter, I closed out my position in Arca Biopharma (NASDAQ:ABIO). Arca has been reviewing strategic alternatives, and trades slightly under its cash value. However, there's been no update in months now and the cash is slowly eroding. Meanwhile, it seems like the company could be headed towards a proxy battle, which could further erode the company's cash balance. I sold my shares for roughly the same price as my cost base.

I made a mistake by buying Pasithea Therapeutics on the back of a news release announcing a takeover offer. If I spent five minutes researching the buyer, I wouldn't have bought the shares. Luckily, I was able to sell my shares for about the same price I bought them. I won't always be so lucky with my mistakes. There was an interesting twist to the Pasithea story: when the takeover offer failed, as I expected, the company announced a tender offer for 70 cents per share, which was well above the market price. I had a quick look, but moved on, thinking that the offer would be heavily prorated (if not amended or withdrawn). In the end, the tender went through without any proration, which was a big surprise.

I participated in the Johnson & Johnson/Kenvue split off, but I didn't make any money, as I was greedy. After I received my KVUE shares, I waited for the price to recover, but instead it fell after concerns about KVUE's pending paracetamol litigation. I exited the position at a small loss. This had a negative impact on performance during the quarter, but I would have been worse off if I had held on as Kenvue has continued to fall.

Finally, I made some money on another biotech special situation, Pardes (PRDS). This seemed like a layup, so I probably should have bet a bit more. Besides all that, I added one new position to the portfolio. I'm considering buying more of this stock, so I won't disclose the name just yet.

Notes to self

It helps to learn from mistakes, so here are a few lessons from recent experience:

• When reacting to news about a company you are not familiar with, make sure to do the basic checks first before getting ahead of yourself (see the experience with KTTA);
• Be more prepared to sell out of something like CYT when it is close to fair value if there is something better available. While I know that the returns from here are unlikely to be spectacular, I've been a bit stubborn to sell because there is still a little bit of upside on offer. If I were starting the portfolio from scratch, I wouldn't put the position on in anywhere near the same size as it is today, so that suggests I should be more willing to sell at current prices.
• At times, I've been too quick to dismiss the ideas of others. From a process point of view, when someone else suggests an apparently attractive investment, I should do my own work to find out a) whether the situation is something I can assess with any confidence; b) whether the investment is attractive. I shouldn't dismiss the idea without doing that work.

The benchmark I use for both portfolios is the S&P/ASX 200 Franking Credit Adjusted Annual Total Return Index (Tax-Exempt), which is pre-tax. I do not account for cash in my PA, but I do in my SMSF. Historically, I have nearly always been fully invested in the PA.

	August 3, 2017	September 30, 2023	Since July 1, 2023	Since Inception	Annualised
G&W Portfolio	1.0000	2.4550	9.63%	145.50%	15.69%
Benchmark (SPAX2F0)	61,250.80	105,123.33	0.79%	71.63%	9.16%

N.B. The returns for my SMSF are unaudited and are calculated net of all expenses and realised taxes (but not unrealised taxes). 

	August 4, 2021	September 30, 2023	Since July 1, 2023	Since Inception	Annualised
G&W SMSF	1.0000	1.2203	6.34%	22.03%	9.67%
Benchmark (SPAX2F0)	98,123.18	105,123.33	0.79%	7.14%	3.25%