how to prune a sector zoo

[scorpioncapital]

Wondering if anyone investing in some sector (e.g. oncology stocks) has ever ended up with a zoo of companies, perhaps small positions but still very unorganized. Do you just watch it and trim the fat every year or two, say dumping the lowest priced stocks? Do you consolidate into bigger stronger names and risk losing a 10 bagger small cap?

[market malocclusion]

I have a specific concept for every investment, which I monitor for continued feasibility.  I cut investments if something happens which undermines my concept.  In general, I also quickly cut losses, even if I think the market is "wrong".  If you've got a zoo of stocks which don't incur losses, would you mind sharing some of your selection criteria?

You are lucky to have a zoo of assets worth keeping.  In the current market environment, I've only got a few ideas running.  

Side note, interesting that you mention oncology stocks.  About 18 months ago I was encouraged to invest in Halozyme (HALO).  I didn't like the binary risk of essentially banking on an single nascent oncology drug, because I thought the drug's clinical failure would equate to the company's failure, while the drug's clinical success brought only uncertain profit potential.  I didn't invest.

Turns out the drug's failure was a boon for the stock.  HALO shut down development, laid off personnel, enacted a major restructuring, bought back stock, investors cheered, and the stock has appreciated about 200% to date.  I missed out, but I learned a valuable lesson about underestimating talented management's ability to capitalize on seemingly bad situations.  

 

  

 

[scorpioncapital]

5 hours ago, market malocclusion said:

Hi and thanks for the feedback. I have a similar approach, however like fractions in high school math sometimes you reach a common denominator that cannot be reduced further. Of course this may be temporary situation in investing. For example since I posted I continued my research and slowly pruned it a bit. I try to replace something I like more with something I like less but the timing of such a switch is challenging. Being dogmatic has cost me in the past. Dogmatic means I will sell 100% of something and buy say 80% of something else and take out 20% as cash. I did this once and missed a 10x bagger by 2 weeks. I did this because I wanted to consolidate and be clean cut. Not saying I was wrong but I don´t feel I was right to be dogmatic either. Sometimes I am 100% sure of a switch.

I do lots of research and try to consolidate. One striking thing , for me anyway, for discovery level high risk biotech therapeutics is that small is beautiful. I prefer it to bigger  over 1 billion market cap..there are a few exceptions but not many. The big cap I sometimes own as placeholders if I can try to find something better and smaller. If not I keep it. In the non-drug discovery world I actually think it is the opposite. Big, strong, powerful is preferable. But in a sector where ingenuity and results can come from the little guy very easily, it seems less risk. If a giant oncology stock fails it can go down 80%. A small cap can also go down but perhaps it already is very cheap.

I also agree with you that in biotech it is very frequently never a lost cause and swooping in after a binary event , failure, or disappointment works out more than in other fields. I do worry about a biotech recession. I never experienced one and that is top of my mind in the decade ahead.

Anyway, regarding zoos..perhaps the best thing is to own the consolidation decision if you did lots of research. I try to eliminate things that duplicate each other. I also am trying to ask the question: does this company deserve my money when so many others can invest in it? I ask if they have something I wish to support which may be a personal preference or a superior business economics decision. I try to imagine the potential. I read many research papers to find clues about weaknesses or strengths. When market crashes 20 or 30%, as is common in volatile times or fields, I am trying to be ready to know what I want to buy. In theory I should sell what I will sell anyway in a crash to roll up to my target that also got cheaper ,before the crash occurs. I am not perfect and don´t always do this though. 

 

  

 

 

[SharperDingaan]

You need to be very clear on your time horizon, purpose, and metrics. As at the current price, are you just trying to reduce exposure, raise quality, or do something else?

Example: We hold a sizeable weighting in o/g drilling, via PD and ESI. PD is an old position that has been traded back/forth, following an aggressive RS it has a very low share count, and is now owned primarily by institutions. ESI is a new position put on within the last 12 months, following completion of an acquisition; it has a higher share count, but trades < $5 CAD, and is therefore under the investment threshold of most institutions (ex FFH). Both boats will rise with the tide, and the tide is rising, PD is the better quality, but ESI is the better growth.

PD has too low a market float for investment purposes; ultimately they need to either do an acquisition using their shares as currency, issue shares for cash, or do both. We hold them both because we hope to be both sides of an eventual acquisition. If we're right, our PD cost base will drop further, quality will improve, and we may even earn a dividend. If we're wrong we get growth instead. But no matter what - we will win, simply because the tide is rising.    

Point? When you are trimming you are executing risk management. If you don't have a plan, you are doing little more than throwing darts.

SD

 

Edited April 2, 2021 by SharperDingaan