Hey there Graham - good afternoon
Are you asking me if i'm interested in shorting it? The short answer is no - I have no real opinion on Celgene. There are others that are more interesting. I actually wrote a long post one night but never sent it to you. I'm like who cares!
But after a little homework it seems like a good business trading at an absurd valuation.
I have always used kind of blended valuation method to get a feel what a business is worth. I tend to look at what I would pay for it or what the operating assets would yield on an enterprise basis - is any of it sustainable or can it revert back to a 'normalize' level... ground breaking stuff I know
With that being said what my 'blend' or valuation for CELG would be somewhere around $19. The graham number is higher than that looks like - somewhere around $23). Sooooooo not exactly close - currently trading $111
I believe shorting on an overvalued basis alone is not really that good of a risk/reward. My approach to shorting usually centers around flawed relationships - I guess you could sort of say this is grounded in the idea of reflextivity where there is an underlying trend that has a perceptual bias riding alongside it both influencing eachother with ultimately the relationship not holding
For example last year when Upstream E&P companies (especially the MLPs --- specifically LINE, MILL) were issuing debt and common shares to not only cover there HUGE DIVIDENDS but fund there unprofitable operations and huge Capital expenditure programs. The glaring hole that was being created on there balance sheet and cash flow statements baffled me how these 'flawed' relationships were going to hold ( i talked about this multiple times on this board). This for me was a no brainer and i had up to 20% or more of my portfolio (or should i say net worth) into long dated put options on LINE and a few others beginning in early 2014. I also took similar positions in the mining sector in 2011-2012 based on very similar lines, capex boom, debt, chinese addicted, etc...
Biotech is different - the only thing I can kind of key in on is the companies that continue to acquire at a really rapid pace by issuing their really expensive stock to do the acquisitions. At some point it is going to come back to haunt them. I have a couple in mind but I cant really get comfortable with shorting them outright. There are a few I had on my radar that already plummeted, and there are a few I had on my radar that have skyrocketed!
That being said I have broken my rule here and am short just on a valuation basis alone - I am long 2017 puts at various strikes on the IBB. I started with a small position but have slowly built it up as I have gone along here and when Implied volatility has come down. The position is almost 10% and I am down almost 20% so far on the position.
I dont believe celgene is worth an outright short on valuation basis, but I am comfortable with short exposure to the sector.
I could very well be wrong and VERY early to this party, but I like the risk reward. If this doesnt work out I lose 10%, but if I am right I am going to make 3 to 10x my money.
I believe situations like these only come along a few times every decade where the writing is on the wall and the relationships cant hold (thinking housing 08, oil 08, mining/china 2010-12, silver/gold 2012, shale/oil/E&P/upstream mlps 2014, and now biotech). I have only dabbled in 2 or 3 out of the 7 opportunities that have came along, and I will say the drawn downs and time decay are brutal and especially if the positions moves against you ... but the payoffs on a couple of them have turned my portfolio from barely keeping up with the market to trouncing it over the last 5 years.
And yes Jergis, I still struggle with portfolio sizing - its really really hard to run a long short portfolio.. and being not that smart doesnt help me much.
At the end of the day I would like to have more company specific exposure, that to me is where you get the huge payoffs for flawed problems within an industry or sector - that has worked for me in the past... but just cant really get a good feel for what I would want to bet against.. soo IBB it is.
Mattyice |
