The G&W portfolio fell 3.23% in August, while the benchmark fell 2.36%.
*Returns are pre-tax, include franking credits, and assume dividends are reinvested. The SPAX2F0 is simply the total return of the S&P ASX200 Accumulation Index adjusted to include any franking credits received. N.B. I do not account for cash in the portfolio. The net result is that my returns are somewhat overstated (though I am nearly always close to fully invested).
August wasn't a great month for my stocks, particularly my basket of net-nets: they fell by more than 5 per cent for no apparent reason. Generally speaking, these stocks continue to be priced extremely attractively and short-term price movements like those this month amount to little more than noise.
In August, I sold two of my smallest holdings. One, P5 Capital Holdings, was a net-net stock I was interested in some months ago. I was never able to get a full-sized position, so I took the opportunity of a recent price rise to sell my minuscule holding. I also sold my shares in Merchant House International (MHI:ASX) in late August for 7c. I bought MHI in February at 0.09. At the time of my purchase, MHI was selling for significantly less than its net current asset value -- at least according to its most recent financials (for the period ending the previous September). In May, MHI filed its full year financials, which showed the company had spent about $14m in cap-ex, mainly on boosting its American production facilities. As the company no longer trades under NCAV, and I don't feel equipped to judge the likelihood of success of MHI's expansion in the US, I decided to sell my shares. MHI shareholders may end up doing very well as it remains very cheap on a net asset basis, but I felt there were better opportunities available.
It is painful to lose 22% on a stock in a such a short period of time, especially when the loss could so easily have been avoided. (In this case, I should have clearly waited to review more recent financials before my purchase.) Thankfully my position in MHI was less than half my usual sizing for net-nets, simply because there weren't many shares available at my time of purchase.
Unfortunately for me, it's not the only mistake I have made recently. Another of my net-nets, Vical Inc (NASDAQ:VICL), recently merged with another biotech firm in the US called Brickell (the new ticker is BBI). I purchased VICL in January when the shares were trading at 0.93. At the time of my purchase, VICL had no products and was running research programs for two drugs. It had recently announced a review of strategic alternatives, and had retained MTS Health Partners to help with the process. My reason for buying VICL was straightforward enough: at that time, the company had about $45m in cash and other net current assets compared to a market cap of $23.3m. I figured that annual cash burn was about $18m, which meant that even if the company ploughed ahead for another year at the current burn -- which seemed unlikely considering the review -- it would still have cash in excess of its market cap. I figured there was a fair chance that liquidation or some other corporate action could give me a chance to exit before then. About a month later, there was some movement: the company announced it was cancelling its most expensive research program and cutting jobs to conserve cash while it considered "near-term" strategic alternatives. The stock traded higher, but still below its NCAV, so I decided to hold on, hoping for a liquidation or similar event.
In June, the outcome of the strategic review was announced. Management proposed a merger with Brickell, a dermatology drug developer. Brickell's main asset is a drug called sofpironium bromide, which is used to treat excessive armpit sweating. While the drug seems promising, it is still yet to undergo phase-3 trials, which are both costly and complicated. More importantly, I didn't feel confident that I could confidently analyse Brickell's prospects. Following the announcement, VICL was quickly sold down. In hindsight, the best thing I could have done has to have sold the shares on open that day. Instead, I decided to hold on for a more opportune time to sell, which was a mistake.
In August, I was given a good opportunity to sell: the stock traded up close to my purchase price as the merger vote approached. And what did I do? I didn't sell. Currently, I have lost about 40 per cent. (The merger vote was successful and the stock dropped again once the merger was consummated.) It's impossible to get every stock pick right, and I think my initial thinking on VICL was sound. It's disappointing I didn't take either to the two opportunities I had to reduce my loss. I am currently reviewing the position, but it's highly likely I will take my medicine and sell. I can only hope the lessons from the experience can help me in the future.
In other news, at OneMarket's annual meeting, it was announced the board "has been reviewing options to maximise value for shareholders and to proactively manage the discount to cash backing at which OneMarket trades". The stock traded up on the announcement, but is still trading slightly below net asset value. OneMarket (ASX:OMN) has a complex two-tiered capital structure. The assets are held in OneMarket Holdings, Inc. At the time of its demerger from Westfield, OneMarket Limited (the company I have shares in) had a 90% stake in OneMarket Holdings with Westfield owning the rest. Management are incentivised with RSUs that dilute at the OneMarket Holdings level. Consequently, OMN's share in the net assets continue to be diluted as the RSUs vest. At March 31, OMN's share of OMN Holdings had fallen to 89.2% and there has been further dilution since then.
There was approximately $US100m in net assets in OneMarket Holdings at June 30. Assuming monthly cash burn of $3 million, net assets should be about $US90.8m by the end of September. If we take into account all of the RSUs, including those that haven't yet vested, OneMarket Limited's share of those assets is 76.46%. On that basis, OneMarket Limited's net assets are about $US70m or $102.3m AUD at current rates. OMN's current market cap is $86.78m: a discount of about 18 per cent. It's not a great discount, especially considering the burn and dilution, but if it is maintained about this level, I suspect I will continue to hold the stock until the outcome of the review is announced. If you are interested in OMN, I suggest you read this post from the Hidden Value blog.
August 3, 2017
|
August 31, 2019
|
Since July 1, 2019
|
Since Inception
|
Annualised
| |
G&W Portfolio*
|
1.0000
|
1.3869
|
-2.56%
|
38.69%
|
17.06%
|
Benchmark (SPAX2F0)
|
61,250.80
|
79,692.68
|
2.06%
|
30.11%
|
13.51%
|
*Returns are pre-tax, include franking credits, and assume dividends are reinvested. The SPAX2F0 is simply the total return of the S&P ASX200 Accumulation Index adjusted to include any franking credits received. N.B. I do not account for cash in the portfolio. The net result is that my returns are somewhat overstated (though I am nearly always close to fully invested).
August wasn't a great month for my stocks, particularly my basket of net-nets: they fell by more than 5 per cent for no apparent reason. Generally speaking, these stocks continue to be priced extremely attractively and short-term price movements like those this month amount to little more than noise.
In August, I sold two of my smallest holdings. One, P5 Capital Holdings, was a net-net stock I was interested in some months ago. I was never able to get a full-sized position, so I took the opportunity of a recent price rise to sell my minuscule holding. I also sold my shares in Merchant House International (MHI:ASX) in late August for 7c. I bought MHI in February at 0.09. At the time of my purchase, MHI was selling for significantly less than its net current asset value -- at least according to its most recent financials (for the period ending the previous September). In May, MHI filed its full year financials, which showed the company had spent about $14m in cap-ex, mainly on boosting its American production facilities. As the company no longer trades under NCAV, and I don't feel equipped to judge the likelihood of success of MHI's expansion in the US, I decided to sell my shares. MHI shareholders may end up doing very well as it remains very cheap on a net asset basis, but I felt there were better opportunities available.
It is painful to lose 22% on a stock in a such a short period of time, especially when the loss could so easily have been avoided. (In this case, I should have clearly waited to review more recent financials before my purchase.) Thankfully my position in MHI was less than half my usual sizing for net-nets, simply because there weren't many shares available at my time of purchase.
Unfortunately for me, it's not the only mistake I have made recently. Another of my net-nets, Vical Inc (NASDAQ:VICL), recently merged with another biotech firm in the US called Brickell (the new ticker is BBI). I purchased VICL in January when the shares were trading at 0.93. At the time of my purchase, VICL had no products and was running research programs for two drugs. It had recently announced a review of strategic alternatives, and had retained MTS Health Partners to help with the process. My reason for buying VICL was straightforward enough: at that time, the company had about $45m in cash and other net current assets compared to a market cap of $23.3m. I figured that annual cash burn was about $18m, which meant that even if the company ploughed ahead for another year at the current burn -- which seemed unlikely considering the review -- it would still have cash in excess of its market cap. I figured there was a fair chance that liquidation or some other corporate action could give me a chance to exit before then. About a month later, there was some movement: the company announced it was cancelling its most expensive research program and cutting jobs to conserve cash while it considered "near-term" strategic alternatives. The stock traded higher, but still below its NCAV, so I decided to hold on, hoping for a liquidation or similar event.
In June, the outcome of the strategic review was announced. Management proposed a merger with Brickell, a dermatology drug developer. Brickell's main asset is a drug called sofpironium bromide, which is used to treat excessive armpit sweating. While the drug seems promising, it is still yet to undergo phase-3 trials, which are both costly and complicated. More importantly, I didn't feel confident that I could confidently analyse Brickell's prospects. Following the announcement, VICL was quickly sold down. In hindsight, the best thing I could have done has to have sold the shares on open that day. Instead, I decided to hold on for a more opportune time to sell, which was a mistake.
In August, I was given a good opportunity to sell: the stock traded up close to my purchase price as the merger vote approached. And what did I do? I didn't sell. Currently, I have lost about 40 per cent. (The merger vote was successful and the stock dropped again once the merger was consummated.) It's impossible to get every stock pick right, and I think my initial thinking on VICL was sound. It's disappointing I didn't take either to the two opportunities I had to reduce my loss. I am currently reviewing the position, but it's highly likely I will take my medicine and sell. I can only hope the lessons from the experience can help me in the future.
In other news, at OneMarket's annual meeting, it was announced the board "has been reviewing options to maximise value for shareholders and to proactively manage the discount to cash backing at which OneMarket trades". The stock traded up on the announcement, but is still trading slightly below net asset value. OneMarket (ASX:OMN) has a complex two-tiered capital structure. The assets are held in OneMarket Holdings, Inc. At the time of its demerger from Westfield, OneMarket Limited (the company I have shares in) had a 90% stake in OneMarket Holdings with Westfield owning the rest. Management are incentivised with RSUs that dilute at the OneMarket Holdings level. Consequently, OMN's share in the net assets continue to be diluted as the RSUs vest. At March 31, OMN's share of OMN Holdings had fallen to 89.2% and there has been further dilution since then.
There was approximately $US100m in net assets in OneMarket Holdings at June 30. Assuming monthly cash burn of $3 million, net assets should be about $US90.8m by the end of September. If we take into account all of the RSUs, including those that haven't yet vested, OneMarket Limited's share of those assets is 76.46%. On that basis, OneMarket Limited's net assets are about $US70m or $102.3m AUD at current rates. OMN's current market cap is $86.78m: a discount of about 18 per cent. It's not a great discount, especially considering the burn and dilution, but if it is maintained about this level, I suspect I will continue to hold the stock until the outcome of the review is announced. If you are interested in OMN, I suggest you read this post from the Hidden Value blog.
