I am very lucky in that I met a portfolio manager that cares about my development as an investor.
I feel comfortable to share my thoughts freely and as a result, he gives me advice on how to look at stocks and assess situations from trading or fundamental perspective
I want to keep record of his teachings and then I thought – why don’t I share these with other people?
This week’s lesson that I want to memorialize is: ” DON’T TRADE AGAINST MANAGEMENT’S BULLISH TONE / HYPE”
His rationale was that stocks will trade on management’s bullish tone / hype because investors listen to what they say and tend to trade.
Once he said it, I could already remember two names where I lost good amount of money in the short-term.
I can’t be naming names here, but of the two cases, both were EXTREMELY PAINFUL SHORT-TERM, and I was only right on one name.
Company #1 – MASSIVE PAIN, BUT TURNED OUT TO BE RIGHT
This company is not a standalone entity. Time was JP Morgan Healthcare Conference in January 2020 (the pre-covid19 period). They were about to get the product approved by the FDA and launch the product. Shortly after the meeting started, I immediately learned why the stock was up 10% the day before (my meeting was 2nd day of the conference) – management team was talking up the launch – exuding confidence and saying consensus is too low. Based on my due diligence, I felt that there is no way they could meet the expectation that they were setting for investors. Stock was already up 10% since the conference started – so I thought I should short the stock and shorted the stock.
Alas, the stock continued to go up that day and was up EVERYDAY of the conference. By the end of the week, I was already down 15% on the position. They were meeting new investors throughout the week and new investors bought the story and kept buying.
When they launched the product, the product did not launch well and their stock got smoked. I was right and made good money, but I could have made a lot more and not go through painful period if I followed management messaging / hype.
COMPANY #2: MASSIVE PAIN AND TURNED OUT TO BE WRONG
This company is a long-only darling – management team that carries very high credibility and has executed on their strategy. They also have a prolific organic drug discovery engine that kept spitting out new drugs – albeit small opportunities.
On my valuation analysis, I felt that stock was trading at ridiculous valuation – it was good stock and good company, but “give me a break!” right?
I kept shorting the stock, but stock kept going up. They continued to deliver on small opportunities and small NPV opportunities that were expected to be positive continued to push the stock price higher and higher. This was intra-quarter – my thought was “when earnings come out and the numbers hit, people will realize what is going on and sell out of their positions”.
When quarterly came out , I called around sellside analysts to make sure I get the set-up around buyside expectations for the quarterly revenue and guidance. In my mind, I was a good analyst – 1) I did my detailed financial analysis and checked buyside expectations.
The earnings day came around – my analysis was right – they missed quarterly consensus and the guidance came below expectations. BUT, STOCK WENT UP!!
I had failed to properly value its platform value – investors had not been buying the stock for small products now – they were buying for the discovery platform and there were more buyers on small opportunities because they served as validation datapoint for the platform.
It was a massive pain and I was wrong – I got out with sizable loss on this position.
TWO CASES ARE VERY DIFFERENT, but they have one thing in common
Investors gave them benefit of doubt – maybe this is because biotech is a growth industry and it tends to attract OPTIMISTS
It really is important to understand the actors of biotech financial markets – which I failed to realize before and now I do not plan to repeat those mistakes.
Minimizing mistake is the most important thing in this industry – let’s continue to learn so that we can raise our hit rate by 1% at a time. One day I hope to get to 60%+ hit-rate.
