Whatever works (for you). Also a biotech bet.
Portfolio construction and thoughts and a skirmish into biotech.
I have always wanted to share something on portfolio construction/structure. These reflections may seem obvious, but given the level of noise out there, I thought it was worth putting something on paper. What is a better portfolio Figure 1 or Figure 2?
Figure 1
Figure 2
At first, I would say Portfolio 1, it is more balanced, more diversified, 15 companies is enough to make a difference with the market (ie: not forced to closet index). Portfolio 2 is the work of a madman, someone so arrogant or so ignorant to think that neither of those companies can fail and price go down permanently.
But obviously, it depends on many things.
If you are a fund, hedge fund or working person in their 50s with all (or pretty much all) their net worth on their portfolio (Axioms), then the first impression is broadly correct. You are asking for a blow up.
If you are a private investor, then things change. These are some points to consider:
If you are young, the right way to think about your net worth is to capitalize the future savings from you salary. There is a lot of uncertainty here too of course, you don’t know your level of expenses, you don’t know your future salary or if you’ll get fired tomorrow. But if you are able to save 20-30% of the value of you portfolio every year with your current salary, holding two companies is not crazy. Net worth concentration axiom is broken.
If you are older, but you don’t have all your chips on stocks (ie: you have a small business, a house and some money in the bank) then the net worth concentration axioms breaks again. If you have 20% of your money on 2 stocks, I can sleep with that.
If you feel extreme YOLO and you have your net worth on two stocks, but your strategy or mindset is that of a trader (ie: price advised) then it might work and you’ll be OK. Here you risk is managed not by diversifying but by using momentum based strategies - super risky, but better than believing that your picks cannot fail.
Also, owning more companies does not diversify off all risks. Clearly if your 15 companies are oil E&P you have a key risk: The price of oil.
This feels obvious when presented in such blunt way, however, people may not realize “hidden” risks shared by their companies. The most common of all (and one my portfolio is guilty of) is the long duration that underpins so many of the growth companies. The companies might be great, but you are placing a bet on the expected long term interest rates that inform the multiple you are paying. This has been a super successful strategy since the GFC and I think it will be a decent one for the future. Understanding what you are betting on, it is the only thing that differentiates you from a madman.
“The only difference between me and a madman is that I’m not mad.” – Salvador Dalí Quote.
So whenever you see a theory of portfolio construction or a guy on Twitter sharing his stonks, before rushing to a conclusion or judgment on the sanity of the thing, read some Ortega y Gasset and be conscious of the paramount importance of circumstances.
With that off my chest, I will sketch an idea, a bet really (and a not very informed one) .
Immatics
Immatics is a development stage biopharma that aims to apply the gene therapy revolution to solid tumors. Most of their pipeline is focused on TCR-T gene therapy.
CAR-T consists on modifying the patient’s (autologous) T cells, genetically modify them to express a Chimeric Antigen Receptor that targets the cancer cells’ antigens and infuse them back into the patient. This works and has some approved drugs (Kyrmriah, Yescarta and Tecartus - this last one on the US only), however only positive results have been obtained on lymphomas and leukemias, not solid tumors.
TCR-T consists on engineering T-cell Receptors to recognize the cancer cells’ antigens, using either an off the self product or by genetically modifying T-Cells and infusing them back into the patient. The trick here is that TCR offer a much broader targeting. They can target fragments of antigens or peptides, offering the possibility to target the whole foreign (malicious) protein spectrum, not only the antigens exposed on the membrane (as with CAR-T). The TCRs are also engineered to generate a high affinity binding that results in a higher inmune response than the low affinity that naturally occurs. This approach promises - NY-ESO-1 has already shown amazing results - to target solid tumors with gene therapies AKA curing cancer. Bummer, we are still far far from it.
This is a simplifying picture from IMTX investor presentation:
IMTX capitalizes (No warrants or dilution included) $633M at $10 per share and with the cash of $303M you have an EV of $330M.
This is the pipeline:
We have plenty of read-outs from the Phase 1 coming in early 2021. If ANY of those results (IMA201/2/3/4 or IMA101) is positive, that is worth the $330M you are paying.
Adaptimmune was up like 100% to an EV of $1.3B on a positive result for their phase 1 results, which shows the potential for IMTX as well as proof that the TCR approach works. On a side note, since those good results ADAP has suffered a grind down (with a placing just after those good results of course =) ) to an EV of $300M, which makes it interesting here - it has 25% short interest.
Although I am a fan of the new gene therapies (both allogenic and autologous) despite allogenic being a bit too far away into the future, I am betting here because of the SPAC sponsors and structure.
IMTX was previously ARYA, the first SPAC launched by Perceptive Advisors, one of the best biotech funds out there, and by best I mean returns-wise. IMTX was looking for a Nasdaq listing (who in their right mind isn’t) and pondered several options, even a merger with some biotech shell. It was finally ARYA that got the prize and listed this german company on the Nasdaq.
SPACs in biotech do not share the horrendous track record these have in general, with the holly grail of IMVT being a 5 bagger in one year and even ARYB/CERE trading strong. I wish I could get a Medivation.
This is what to expect for Q1 2021:
YOLO safely.