Quick Ideas #7

Closing two and two new ones

I want to close a few positions. First Homology (FIXX) a busted biotech mentioned here about 2 months ago. A terrible reverse merger was inflicted on FIXX shareholders, and I was hoping the deal would be changed or some activist shareholder would jump in. So far that has not happened while the stock is up 18%, so I am closing it here. 

Since writing up Noah holdings (NOAH) some commenters made some interesting points on the stock. This prodded me to look into it a bit deeper making me realise that a larger portion of NOAH’s earnings comes from variable interest entities than I realized. And there might be some hidden risks in the performance of the PE funds. And rereading some of the transcripts, this line in particular raised an eyebrow:

“We have OpenAI, ChatGPT on the back end. They support our sales, especially on the compliance side, it is quite impactful because when it comes to legal and compliance issues and details, our colleagues don't have all the answers right away because so many jurisdictions are involved. If we can use ChatGPT, it's of great help.”

So I am out of this one at $12.4 making a tiny profit. Cheapish, but not cheap enough.

Then I got two new positions. First one is Avrobio (AVRO). I first mentioned it here and managed to make a quick 20% in this trade and now I am reopening it. I think the perception is that maybe Q4 will have a high cash burn? Part of Q3 expenses were a non-cash $2.7m restructuring charge and a $3.8m fee for terminating the MPSII agreement. So that means normalised cash burn except for one off expenses was just over $11m in Q3 already. Given that they started cutting late in the quarter, I expect Q4 cash burn to be somewhere in the neighbourhood of $4-8m, excluding any one off expenses (which can’t be more than a few million $?). And then cash burn in subsequent quarters to be no more than $5 million. I think at minimum shareholders should probably be able to get $1.6/share in liquidation proceeds here assuming IP is worthless. So I got back in at $1.33.

Second one is TK Group (HK:2283). A Chinese high end plastic mold and component manufacturer. I actually mentioned this stock here last year, but quickly closed it again after deciding the time wasn’t right yet. It is now trading lower at 5x LTM earnings and a 8.2% trailing dividend yield. Has almost its entire market cap in net cash and Apple is actually a customer of theirs. They make some of the components in the new Apple Vision pro. The Chairman has been buying and they have been setting up production facilities in Vietnam because some of their Chinese made components are affected by the trade war.

If they merely keep revenue and profit stable, the stock is cheap. But if they grow and get back to 12-13% margins, the stock is really cheap. Historically this has been a company that has paid out sizable dividends, paying out 0.2/share at their peak (A 14% dividend yield). 

The chairman had plans to double revenue by 2025, but I see no mention of that anymore in the latest report as it was probably a bit too optimistic. Nonetheless, there is potential for growth here which the market is not pricing in at all.

For those reasons I am long at HK$ 1.4/share. 

Readers of this blog should do their own due diligence before buying or selling anything, since I have been wrong before and cannot guarantee all information in this write-up is 100% factual. I may buy or sell the above mentioned stocks at any time.