2023 Year In Review; 2024 Portfolio

Disclaimer: Nothing on this blog is intended as financial or investing advice. Please do your own due diligence.

I am a little late to this, but wanted to do a brief recap of 2023, followed by an overview of my favorite ideas for 2024 as well as my what my portfolio looks like heading into the year. Moving forward, I will plan to provide monthly updates about my positions, some of which I will surely write long-form pitches on moving forward, though definitely not all of them.

2023 Recap

After a pretty miserable 2022, I posted a weighted average gain of 106% across my two largest accounts, which account for the substantial majority of my net worth: +81.4% and +61.97% as compared to 2023 returns for the S&P 500 and the Nasdaq, respectively. While some of this is attributable to good stock selection, I definitely owe some of this performance to levered beta (I aggressively levered up during the December 2022 sell-off, which turned out to be a very timely decision, and ran between 120%-130% long for much of the year). I also had some added luck, particularly with my biggest winner from 2023, Opera (OPRA), which had a meme-stock like run in the middle of the year which I was able to time nearly to perfection.

2023 Biggest Winners

My biggest winners based on percentage gains for 2023 were:

5. Tidewater (TDW) - ~95%

Tidewater was (and continues to be) my biggest position heading into 2023. Though it comes in at 5th in terms percentage gain, TDW was my largest winner in an absolute sense given how largely I sized the position. I continue to be very bullish on this stock and it is one of my favorite ideas for 2024. I will provide more detail below.

4. Spotify (SPOT) - 127.92%

Spotify is an unusual position for me. It is by far the largest market cap company I own, it is not a conventional value stock, and there was no event angle when I purchased it. However, in December of 2022, the stock was trading around $75/share, or around 1x sales. I thought this was way too pessimistic. Generally, I think investors have been way too cynical about SPOT’s bargaining power vis-a-visa record labels. I think the company has really strong operating leverage and consequently, a path to immense profitability provided the proper execution. So far, my thesis has panned out, with company finally posting a positive (albeit small) operating profit in Q3. Management has also shown serious commitment to cost-cutting, most recently announcing a 17% reduction in the workforce. With operating leverage starting to show, the market rewarded this with a massive 2023, and the company now trades for around $195/share. While I think SPOT is a great company with an underestimated moat (after all, they have beat out the biggest companies on earth - Apple, Google, Amazon - to be the leading streaming service), and there may be more upside to come, I think the stock is trading pretty close to fair value here. Now that I have long-term capital gains treatment, I am most likely going to be closing this position out in the coming days. (For a good write-up on the economics of Spotify and streaming more generally, I recommend this VIC pitch.)

3. Liquidia (LQDA) - 130% (shares + call options)

I got involved in Liquidia as a litigation special situation. My cost basis is around $6.50/share. LQDA has developed a drug called Yutrepia for the treatment of Pulmonary Arterial Hypertension (PAH). Treatment for PAH is presently dominated by United Therapeutics’ (UTHR) Tyvaso. I won’t get too into detail here but the long story short is that UTHR has thrown every legal wrench possible at LQDA to prevent Yutrepia from coming to market and the parties have been engaged in complicated patent litigation for a couple years. However, in December, the Court of Appeals for the Federal Circuit upheld the Patent Tribunal and Appeal Board’s findings of invalidity of certain UTHR patents. With the ruling, LQDA finally has a clear path to commercializing Yutrepia for PAH. Accordingly, the stock soared on the news and it now trades for over $12. In addition to stock, I had a fairly sizeable amount of Jan 2024 $7.50 call options, which returned nearly 400%.

Though the event angle has largely played out, based on my research, it appears that Yutrepia may be a superior product to Tyvaso. I may write this up in detail later, but with the right execution, I think LQDA can easily be worth over $20/share. Therefore, I have not sold any of my stock and exercised a good chunk of my calls to add to my position. Just today, Needham issued a $28 price target. This remains a catalyst rich and high upside situation for 2024.

2. Mereo BioPharma (MREO) - 194%

This has been a huge winner for me and, as I discuss below, I think there could be huge upside from here in 2024. I started purchasing shares in October 2022 for around $0.95/share, with buys as low as $0.50 and as high as $1.70. Today, shares trade at around $2.40.

1. Opera (OPRA) - ~335% (incl. dividends) (closed)

Opera was by far my biggest winner last year. My cost basis was around $6.50 and I closed the position out around $26. The company also paid out a large special dividend and regular dividends during my holding period. I owe a significant amount of this return to fortuitous timing and riding some irrational market exuberance.

Opera owns web browsers, a news aggregation app, as well as variety of related products. I started buying OPRA shares for under $6 in December 2022. The thesis was that business was trading for far too cheap after backing out non-operating assets. The company had about $2.70/share in cash, $1.35/share in private investments and no debt. Subtracting those items from the balance sheet, the market was valuing OPRA’s operating business at less than $2/share, or around 4x adj. EBITDA. This was far too cheap for a profitable, debt-free, asset light tech company which had grown revenues at over 50% in 2021 and over 20% in 2022. The stock was trading so cheaply for the following reasons: 1) Chinese majority ownership with a convoluted corporate structure; 2) margin degradation; and 3) the general tech selloff in 2022. Those concerns ended up being non-issues. Essentially, before COVID, OPRA was a profitable business with slowing growth. New management took over and started investing heavily in S&M with an effort to expand MAU’s; this impacted the bottom line but was very successful in expanding revenue (from $161 million in 2018 to $380 million TTM). However, in 2022 management began suggesting that margins would start reverting to normal. If so, operating leverage would kick in on a much higher top line figure and profitability would inflect. I figured fair value was closer to $12/share and, given the asset protection, I made it a fairly large position. In short, margin degradation would not be an issue.

Shortly after building my position, the company announced a special dividend in January 2023 for 12% of the market cap. This began to catalyze the share price, sending it over $7 within a few weeks, likely because the Chinese ownership now appeared to not be so scary.

Then in February, the company announced impressive results, with both revenue and EBITDA growth exceeding expectations. The market was now valuing the operating business at around 7x EBITDA or ~$9/share. I thought this was still far too cheap.

Impressive results continued into the next quarter and the company raised FY EBITDA guidance again. The stock traded to around $12, which was my earlier estimate of fair value. After accounting for dividends, I was up around 100% in 5 months.

However, given the improving fundamentals of the business and no clear overvaluation, I decided to adhere to the “let your winners run” principle and I held on. That is when the luck began to kick in. Around this time, the market started getting wildly ecstatic for all things Artificial Intelligence, and OPRA, which announced a collaboration with OpenAI for its web browser, got caught up in the frenzy. The stock began a parabolic ascent, seemingly finishing up 5% every day. By July, shares hit a high of $28. Rather recklessly, I held on the entire way and was up nearly 400% in 8 months. At that point, the stock was clearly overvalued and I was beginning to get anxious. Then, I believe 2 days after hitting the high of $28, the company filed a mixed shelf offering, which additionally permitted the majority shareholder to sell up to $142 million of stock. I figured a sale of shares anywhere closed to that amount would create serious downward pressure on the stock. It also signaled to me that management knew the stock was clearly overvalued and would use the opportunity to get out. Weirdly, the stock was pretty slow to react to this news in the pre-market (one of the advantages of focusing on underfollowed stocks) and the stock only fell to around $26. I decided now was my time to sell and I cashed out fully. That was clearly the right decision as the stock tumbled 29% once the market opened, and began a rapid decline towards $12, where the stock still trades today.

Obviously, the lesson here is that while it is often smart to let your winners run, don’t let greed compel you to hold something where the valuation is fully disconnected from reality.

Honorable Mentions: Natural Resource Partners (NRP) - 75%; Unit Corp. (UNTC) - 82%

2024 Preview

Below is my portfolio heading into 2024, listed in descending order of size. As you can see, my favorite themes for this year are biotech and energy. I plan to update this monthly moving forward.

• Tidewater (TDW) - offshore oil services company with inflecting profitability (see below).

• Mereo (MREO) - activist controlled biotech with multiple shots on goal (see below).

• Calumet Specialty Products (CLMT) - specialty chemical business with a traditional refinery and first of its kind renewables facility; catalyst rich special situation; enormous SOTP discount with clearly communicated steps to unlock the value.

• Liquidia (LQDA) - (discussed above) resolved litigation overhang; clear pathway to commercialization.

• Spotify (SPOT) - (discussed above) probably close to fair-value; likely to close this out soon.

• Natural Resource Partners (NRP) - owner of 13 million acres of mineral interests, mostly coal; charges royalties for land use; hidden value in soda ash asset. See here for a great write-up.

• Geo Group (GEO) - private prison operator; trades at a significant discount to real estate assets; significant event angle - the company owns high-margin monitoring technology used by ICE to supervise unlawful migrants; if the government provides funding to increase enrollment, stock could be worth multiples.

• Spirit Airlines (SAVE) + call options - merger arb; stock trades at ~50% discount to JetBlue’s offer price; I believe DOJ’s antitrust arguments are weak and the market is seriously mispricing the odds of the deal closing; judge’s decision is eminent.

• Cipher Pharmaceuticals (CPH.TO) - Canadian microcap with a stable (albeit low growth), high ROIC, core licensing and product business; very cheap on a free cash flow basis; high insider ownership; large buyback policy; event angle - holds the Canadian rights to Moberg’s MOB-015 for nail fungus, which has received EU approval - if approved, likely to capture the majority of an $80 million market in Canada and operating profits could triple.

• IWG Group (IWG.L) - London listed, leader in hybrid work space offerings; earnings are set to rapidly inflect as the company transitions to an asset-light, higher margin business model; powerful secular industry tailwinds; should capitalize on WeWork’s bankruptcy; Worka, the company’s software platform, could fetch close to the company’s entire market value in a sale; 2024 switch to US listing and GAAP accounting could be a catalyst. Plan to write this up soon.

• Roivant (ROIV) - Parent of various biotech subs; presently trading at a discount to its cash and equity stake in Immunovant (IMVT), therefore the rest of the subs are valued as negative, which is way too bearish; IMVT could be sold for a premium in the near-term; sizeable upside to litigation between its subs Genevant/Arbutus Bio (ABUS) and Pfizer and Moderna relating to breaches of IP in developing COVID vaccines. I will definitely add to this position and it will move up on this list over time.

• Burford Capital (BUR) - Leader in litigation finance; quality high ROIC core business that should compound at high rates over time; event angle - entitled to receive more than double its market cap from an outstanding judgment against Argentina - President Millei has indicated willingness to agree to a payment plan, but the market remains skeptical as to the terms.

• iCAD (ICAD) - Microcap company with an AI platform to assist radiologists in reading mamograms; the product is being rolled out and the company could be worth multiples if successful in executing; more of a speculative, VC like bet, but the balance sheet is decently funded for the time being.

• American Coastal Insurance (ACIC) - commercial property and casualty insurer in Florida; founder owned and led, with a track record of successes; unique competitive advantages; Florida property insurance is very tight and is likely to remain so.

• Sportsman’s Warehouse (SPWH) - Sporting goods retailer, including firearms and ammunition, undergoing a turnaround; company over-earned during COVID and overzealously expanded; expansion occurred precisely as demand waned, resulting in huge working capital builds and negative FCF; new management team attempting to right the ship; activist involvement; stock is too cheap below book value if business can normalize and return to 10 year mean ROE.

• Solvay (SOLB.BR) - Belgian listed chemicals company; remainco of recent spin-off higher growth business; significantly undervalued on normalized earnings.

• Nuvation Bio - see here

• Unit Corp. (UNTC) - liquidating O&G producer with a cash minting drilling segment; company held a huge net cash balance and has been trading at a very low EV/FCF multiple; paid out $42.50/share in dividend in 2023 on a $55 stock price! Most of the easy money has been made, but there are a few more puffs left in this cigar butt.

• Tidewater Midstream (TWM.TO) - see here

• Lifecore Biomedical (LFCR) - special situation with speculation that the company is likely to sold; however, the situation has taken longer than expected to play out and the company is delinquent on filing its financials; messy situation that was probably a mistake to get involved in, but I am waiting it out.

• Ocean Wilson (OCN.L) - London listed special situation; company is the majority owner of Wilson Sons, a Brazilian port and towage company that is likely to be sold in the near term; OCN also maintains a sizeable investment portfolio; trades at substantial discount to the sum of these two assets; discount likely to partially close if Wilson Sons is sold.

• OmniAb (OABI) - owner of antibodies developed from transgenic animals; charges pharma companies fees to access the catalogue of antibodies, and if the drug is successful, OABI is entitled to royalties on drug sales; Spin-off with all the classic Greenblatt dynamics (forced selling, etc.); large insider buys; upside could be material in the long-run.

• Montero Mining (MON.V) - Canadian junior mining shitco with a litigation claim against Tanzania worth many multiples of its market cap; very likely to win given nearly identical precedents; question is collection and what the company will do with the cash;

• Cassius Mining (CMD.AX) - Australian company with a very similar set up to Montero - very clear entitlement to an award of multiples of its market cap against Ghana for expropriation of a mining license.

• Odyssey Marine (OMEX) call options - Another litigation situation with a decision due in Q1; OMEX argues Mexico violated NAFTA in denying it a permit to develop a subsurface phosphate deposit; liability very clear, but damages are uncertain - company is a zero if the damages come in too low.

Top 5 Positions for 2024

Out of the above, the positions I am most excited about, in order from 1-5 are: CLMT, MREO, IWG, ROIV, and TDW. This is getting long, so I will provide some color here on MREO and TDW only, but plan to write up the others in the future.

MEREO

Mereo is a biotech company with a very underrated pipeline of assets. I first came across the company in October 2022 when I took notice that Rubric Capital, a value hedge fund run by Point72 alum David Rosen, had gone activist. In June 2022, Rubric, which owned ~13% of the company at the time, wrote a letter to the board demanding that it take steps to maximize shareholder value. While such activist letters are not unusual, what caught my eye was that the letter contained Rubric’s valuation model, which suggested the company’s sum-of-the-parts was conservatively worth $4.13/share, versus ~$0.95 when I first discovered it. Notably, this valuation gave zero value to alvelestat or etiglimab (which, as I discuss below, likely have material value). I have absolutely no edge in valuing early stage pharma assets, but I figured it was worth a small position if the upside was anything close to what Rubric was asserting. Moreover, the company had over $100 million of cash at the time and an estimated runway until 2026. I was also buying the company for only a slight premium to cash, so I figured it wasn’t a total zero if I was wrong. Further, Rubric had successfully obtained half of the company’s board seats due to the proxy fight, which gave further comfort that value would be protected. So that was my initial thesis - a speculative high upside bet worth a small percentage of the portfolio. In December 2022, the market had a meltdown and shares traded for as low as $0.50. I added substantially to my position.

But then the situation got more and more interesting. During 2023, basically everything that could have gone right for the company did.

First, in January, the company announced that the FDA and EMA would provide relaxed Phase 3 primary end points for the company’s product Alvelestat, which is intended to treat AATD, which can lead to lung and liver disease. The company announced its intention to explore partnerships to fund Phase 3. Suspiciously, no partnerships have been announced (my pure speculation here is that this is because the company is looking to sell itself entirely).

Second, the company’s oncology product, etiglimab, once thought to be dead, received some positive news in August, when Roche’s similar TIGIT product showed surprisingly positive results. Etiglimab is not a major part of the thesis, but any added value it provides is welcome. The stock jumped from $1.25 to $1.60 on this news.

Third, and most importantly, the company’s lead asset, setrusumab, which is for the treatment of osteogensis imperfecta (OI) (a disease which causes bones to fracture with minimal impact) , has proceeded well through trials and has shown what could be enormous upside. Setrusumab is being developed in partnership with Ultragenyx (RARE), who is funding the development; MREO has retained EU and UK rights and is entitled to royalties and certain milestone payments from RARE. Significantly, RARE’s CEO has been incredibly bullish on the drug and has called it the most promising asset in the company’s pipeline - which is notable given that RARE is a much larger company than MREO and has a massive pipeline. In June, the companies announced that Phase 2 data showed that setrusumab rapidly induced bone production in OI-affected patients. This was promising but the market reaction was somewhat muted - the reason: increasing bone density would not matter absent a reduction in fracture rates. However, based on some further research, it seemed more likely than not that reduced fracture rates would likely be shown by further read outs. Then, in October, that data came: Phase 2 data showed a significant reduction in fracture rates, with a pediatrics professor noting “I have not yet encountered a patient with a fragility fracture while on setrusumab, and this may result from setrusumab’s effects on the skeleton, improving the rate of new bone formation and bone quality”. The stock, which had fallen back to $1.20, jumped to around $1.90 and it has continued to move higher since. Phase 3 enrollment is underway and the pathway to approval appears significantly de-risked.

In addition to having multiple shots on goal (there is an additional asset, Navicixizumab, which I have not discussed) I have added comfort holding this speculative position in size due to large and growing insider ownership. In addition to Rubric, which now owns more than 14% and was purchasing shares for around $2.05 in November, there are several other smart funds involved here, including Soleus (7.5%), Survetta (5.9%), Rock Springs (5.34%), and Orbimed (5.92%)

Today, shares trade for around $2.40. I think a buyout at a substantial premium to this price is more likely than not in the first half of this year.

Tidewater

I started purchasing shares of TDW in late September 2022 for around $20/share. The thesis was incredibly simple and offered mouthwatering risk/reward. TDW is the world’s largest operator of Offshore Support Vessels (OSV’s). Essentially, the company owns a fleet of boats which provide support for all phases of offshore oil and gas exploration. The offshore O&G sector was, and largely still is, one of the most hated out there. Indeed, much of the industry, including TDW, filed for bankruptcy in the years following the last commodities bull run. TDW emerged from bankruptcy in 2017 with a clean balance sheet, yet sentiment remained extremely sour, and the situation was made all the worse when the O&G industry was essentially shut off during COVID. However, by 2022, it became clear that sentiment was about to change.

TDW’s economics are incredibly easy to understand and really boil down to supply and demand, and operating leverage. OSV’s have unique specifications, meaning you cannot simply repurpose a different kind of vessel to serve as an OSV. They are also very expensive to build and newbuilds take several years to come online. Therefore, TDW operates, at least in the short-term, in a supply constrained industry. The demand side of the equation is offshore O&G capex; as offshore drilling increases, there is an increase in demand for OSV’s, which are essential to serve offshore wells. I won’t get too into the specifics, but the demand side is robust right now and likely here to say. Given present state of geopolitics and a clear fracturing of globalism, there is a lot urgency for countries to establish energy security. Couple that with declining shale output, imbecilic ESG policies, and more and more nations nearing economic prosperity (e.g. India), demand for offshore energy appears likely to stay. (I would recommend listening this podcast, beginning at 45:50, with Bob Robotti, a board member and the company’s largest shareholder, for some brilliant insight into this). One last thing with respect to demand is that, while TDW does tend to trade like a derivative on the price of oil in the short-run, offshore projects tend to breakeven at around $55/bbl. Further, these are longer duration capex projects. Therefore, the fundamental downside of this investment should not really be impacted until we see oil below $60 WTI.

Okay, so we have constrained supply and enduring demand. What happens? Well, TDW makes money by contracting out its OSV’s at ‘day-rates’, which are a function of utilization. As more and more OSV’s are contracted out - i.e. utilized - E&Ps are forced to pay up for OSV’s, leading to an increase in day-rates. Because there is a fixed supply in the short-term, and because OSV’s constitute a tiny fraction of the overall capex for offshore projects, day-rates can inflect quickly, which they have. Leading edge day-rates have more than doubled since 2021, and the trajectory continues to be higher.

However, while day-rates have more than doubled, TDW’s profitably has increased far more. This is the result of the company’s operating leverage. Essentially, much of the cost of operating the fleet is fixed - the costs are incurred whether demand is strong or not. Therefore, as day-rates inflect, the incremental revenue that drops to the bottom-line increases parabolically. As you can see below, while growing revenue nearly 200% since 2021, EBITDA margins have expanded from 9% to 40%.

While this kind of inflection is a beautiful thing to time properly, the issue with high operating leverage businesses is that the leverage also goes the other way. When day-rates fall and revenues decline, there is no commensurate decrease in costs, since a sizeable portion of those costs are fixed. The companies therefore just as quickly become unprofitable, and of course the issues are magnified when there is financial leverage involved.

So the risk is that day-rates eventually come down just as fast they come up. And historically, this has been inevitable in the offshore space. As day-rates increase, players salivate about the incredible returns on capital; greed strikes and in an effort to capture more profits, new OSV’s are ordered; of course, each incremental OSV added reduces the utilization rate, which in turn reduces the pressure on day-rates; supply exceeds demand, day-rates plummet and operators now have to bear the fixed-costs of an even larger fleet as revenues come-down.

This classic cyclical supply and demand dynamic, magnified by operating leverage, is what has traditionally made investing in offshore so dangerous. However, this time really does seem to be different. First of all, we still have a long way to go until it becomes economic to build a new OSV. TDW projects that a new OSV is only economic to build at ~$38k/day rates. Moreover, these ships take years to build and there are not many players out there still making them.

Further, given heavy industry consolidation, the incentives to act irrationally and expand supply are no longer present. As I noted, much of the offshore space went bankrupt last decade and many never reemerged. TDW is the only publicly traded OSV company of any scale and they have been rolling up some of the smaller players through M&A. Further, TDW’s management team is really strong, and with Robotti as the major shareholder and on the board, I expect management’s focus will be on further M&A and capital returns, rather than any growth capex. Anyways, this is not intended to be a full-pitch of TDW, so I’ll end my musings there. If you want to understand the thesis better, I’d check out these two podcasts, one of which is with the company’s management (here and here).

As for my positioning, my average cost basis is slightly over $30/share (I added throughout the year on what I thought were silly pullbacks) with shares closing out 2023 near 52 week highs around $71. I have not sold a single share of TDW. I believe the company should be able to sustainably put up $20-25 of FCF/share for at least a few years starting 2025 and, as things currently stand, I have no intention to sell any shares until at it hits at least $100. Moreover, the company is temporarily limited in its capital return programs due to debt covenants. These covenant are beginning to roll off and the company recently completed the entire authorized amount on its first permitted buyback this quarter. I expect that repurchases will get increasingly aggressive as these covenants fall away.