By Tom Winnifrith | Sunday 12 April 2015
Disclosure: Financial Investigative Media Limited, which is not owned by Tom Winnifrith but by a trust for his dependants, owns shares in companies mentioned in this article. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.
The largest holding that Real Man has in its portfolio is Optibiotix (OPTI). At 34.5p we are, quite amazingly, looking at a 300% profit (plus warrants) on our initial investment. The size of the holding is, I admit, a trifle frightening as are the gains. But although we have advised readers to bank gains we are not doing that ourselves. Are we mad? I think not.
Well okay we may be mad for other reasons but not on this count. Perhaps the biggest mistake I have made as an investor is cutting winners too early. There will come a time to bank gains here but frankly I am not sure when it is, I might as well ask my morbidly obese three legged cat Oakley. Because Optibiotix is a biotech stock. And valuing such an enterprise on a fundamental basis is really just very difficult indeed.
Lots of folks tell you that they can do so by working out the Net Present Value of future discounted cash flows but really that is all hocus pocus. That is because the potential of Opti’s microbial weight loss products may well be vast but the truth is that we just have not got a Scooby what market share it will gain and how quickly and on what terms. You know it could be a Betamax (great product, but just trumped by VHS) and flop or it could be VHS.
And so analysts at Hybridan did their NPV sums and came up with a value of 200p for the shares share but then risk weighted that back to 49p. To me that is also a confession that they also do not have a Scooby. And so why do we hang on?
The first reason is that I do rather rate Mr O’Hara the CEO and you back management with a track record. Of course you are only as good as your last deal so that may well prove a duff reason.
The second is a rather shoddy reason. The market has absorbed the Helium fund selling a stack load of shares for reasons to do with the fund and its other issues rather than Opti. That tells me that there is a short term appetite for the shares which may well push them higher or that someone knows something. Either way I judge it a poor time to bail. Heaven knows what the shares would have been without Helium letting stock go.
The third is that good sources tell me that there are other commercialisation deals to be announced. That should prompt Hybridan to reduce its risk weighting and so up its target price. That would do us all no harm at all.
The fourth is the current market cap of just £25 million. I look at peers in a similar space and think that this is really not that much. 4D Pharma is also using bacteria albeit to tackle different conditions but at 727p it is capitalised at £440 million. God knows whether that is too high or too low either but it makes me think that the Optibiotix market cap really is not that great.
Moreover at £25 million this is largely a private punter stock. If Optibiotix can get to £30-40 million in market cap then it would be normal to get some institutional investors sniffing and potentially brokers more powerful than Hybridan getting behind the stock.
I sense that that could actually be the trigger for us to sell. The day that this moves from a third tier broker with a PI investor base stock to a company that is covered by second tier brokers and is attracting institutional money is perhaps the day we will decide that it is time to call it a day.
On that basis we hang on for now. But in doing so we break every golden rule of value investing. We do not 100% understand the company as we are not scientists, the asset backing is IP not tangible assets and we cannot put a concrete valuation on the underlying investment. As such this is rather frightening uncharted territory for us.
For now it all looks good. Fingers (and everything else) crossed.
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