mardi 27 juin 2017

The horse or the jockey?

There's a guy writing me on my email  about once a month. He seems to believe that I have things to say about Knight Therapeutics (GUD.TO). Each time, I don't know what to answer. Man, I know jack shit about internal affairs at that company or at any other company.  And he comes back with a question to which I can't answer: "Should I keep my GUD shares or not?".

He'll probably be happy to read that post because the only fucking thing he seems to care about is Knight Therapeutics.

First thing, I'm a little bored about GUD. The stock is by far my highest PE/Lowest ROE stock. And with GUD, I have 21 stocks in my portfolio, 1 stock beyond my psychological limit of 20 stocks. 
The temptation to sell is there. But, what about the stock, exactly? 

Knight Therapeutics is the new creature of Jonathan Goodman. Some say the stock was/is dead money. I’m not sure. But it’s surely a speculative stock given the low income it gets from some investment and the massive cash on hand. Selling at about 55 times earnings, the stock is pretty expensive, but may have a lot of potential if the money is used wisely. 

What you should ask yourself right now is the question: I chose the horse or the jockey? Which is, by the way, another expression like "brick and mortar" so abundant in the Sequoia Fund's reports. 

If you invest in GUD, you clearly invest on the jockey, because there's not really a horse there. It's more a poney. Or a donkey. The jockey should definitely pimp his donkey.

Enough of these fucking metaphores. What about GUD's numbers?

Market cap: 1,5B$
Cash on hand (last march): 764M$

So, if you're buying GUD shares, you pay a little less than 2$ for 1$ on hand. Well, they have some assets and some income, but that's not the main reason you're buying the stock. 

OK, you pay for the potential. For the name « Goodman », because that guy did something great with Paladin. I made a lot of money with that stock and I admit that the guy has been one of our best entrepreneurs in Canada. But nothing proves that he will do something great two times in a row.

What could GUD do with all that cash? They could buy another company. But which company? Which size of company? And we shouldn't forget that they could borrow money and go for something bigger than a 764M$ acquisition. What about a 2B$ acquisition with some debt or some dilution?

Man, I’m on total speculative ground here. Because GUD could buy great or bad assets. It’s not because they buy a 2B$ company that this company makes money. Many pharma stocks have products in the pipeline but not any on the market.

But, for the sake of writing something substantial, let's continue with United Therapeutics, a 6B$ stock. They have about 2,5B$ assets and they should generate earnings of about 750M$ this year.
If GUD doesn’t issue shares and buy one third of United Therapeutics (note that this stock has a very high ROE in the 30’s), they'd get one third of UTHR income (750M$ divided by 3 = 250M$). Then, 250M$ divided by 144M shares equals 1,74$ EPS. 

That’s crazy. That fucking analysis makes no sense. If it makes sense, just buy GUD right now because it’s selling at about 6 times earnings with the acquisition of 33% of UTHR. 


Well, GUD will probably never buy 33% of UTHR. So, you've just read something that has no value at all. The value of cash is what you do with it and GUD has done nothing yet. I really don't know what to say because it's so speculative.

With something like 3 or 4% of my portfolio on that stock, I'm willing to wait even if I'd like to own only 20 stocks. You know, round numbers is something very important to become a successful investor. You'll agree with me, every clever investor has read "The round numbers investor".

Those who haven't suck cocks.

And every single of these fuckers will fail.

7 commentaires:

  1. The horse-or-jockey argument around GUD is too simplistic. GUD has articulated a pretty unique model for growth and profitability --- three different ways to make money. And while they cannot hold the cash indefinitely, it is pretty easy math to model out over 10 to 20 years a much higher stock price.

  2. They may have an innovative model, they don't get that much cash from it.

    Please share your math with us.

  3. Penetrator is right, the bet is on the jockey and he has already fell from his horse and got hurt seriously. I am always worry about the jockey's health, more than the stock price. I hope investing in Flat tummy tea is not the way to make money. Maybe they will raise some capital again to caress more money, just like Seraphin did. If the plan is to invest small, please stop doing equity rising or else jump on opportunity, just like Dutch Norgine did with Canadian Merus Labs for $1.65/share. I would have expected quite a better execution at this stage from such an experienced team.

  4. Penetrator, you make no sense on this one. You know their three-tiered model is 1) product rights 2) equity investment 3) lending.

    With 3) it's 15-20% return, with 2) it's variable but so far there are indications of strong returns with at least a few and then the tack-on product rights and with in-kind they are just getting started. You eventually put that cash to work by a) buying Paladin back 2) buying assets back from a soon-to-be defunct Concordia or a Valeant etc..and GUD will be a 5-bagger plus.

    1. "Eventually"... that's the most important word you've used.

      Which brings you back to "speculative" which was my word.

      Don't believe too much in anything, that's my advice.

      But I bet you don't give a fuck.

  5. I believe in this company and it is one of the core holdings in my investment portfolio. What I like about the CEO is that he has a track record of disciplined capital allocation and a healthy regard for the long term value of his shareholders. He is a long term thinker and planner. The stock market emphasizes the short term to such a degree that almost everyone partaking in it suffers from recency bias. If the stock an investor holds hasn’t gone up in a year he questions his reasons for buying it in the first place. I’ve done this myself. But experience has taught me to focus on the long term and that means focusing on management teams who think in the long term…like Jonathan Goodman.

    But as we are dealing with an unknowable future anything can happen and things might not work out. So we have to deal in probabilities. My thinking is the probability of this Knight Therapeutics working out is better than average and if an investor invests in a number of these stocks with good probabilities of succeeding and buys them at a decent price he should be okay…in the long run.

  6. I sold my shares in Knight. I have very mixed feelings. At first, it seemed like I was paying $2 to buy $1. Then I learned about the jockey and his previous huge success. Then I learned that he has brain damage from an accident. It does limit him to a degree or slow him down a bit or force him to take breaks during the work day. Ultimately, I don't think he will have as much success allocating about a billion (or $750 Million) in capital as he did starting with a much smaller amount of capital. I would need to see a huge catalyst or a big move that's clearly positive to consider buying back in. If you don't see that huge stream of earnings coming in from a big bargain basement acquisition then your risk-reward with a brain damaged jockey and very little earnings is not favourable in my opinion. I suspect investors will do ok if they are patient...but there's less risk and more value elsewhere. If Goodman takes a turn for the worse or simply decides to retire, then Knight may be in trouble. If the bulk of the capital had been allocated (and they owned a third or some percentage of a great firm that operated independently) then great. No problem. As things stand now? smh*

    smh = shaking my head