Okay, okay. I can take a hint. A few days ago I wrote about AST, the stock for Asterias. It had a nice run to new records, and I wrote about deciding not to sell, and not knowing the details of the news. The details were easily uncovered by a reader. (Check the comments on the previous post .) And then the stock decided to rise higher. At one point today, it was up 50% from my last post. There was enough of a rise that taking some profits was effectively painless. I may have a hint of what’s going on with Asterias, but I still don’t know about what’s happening with AST. Spinoffs and divisions make simple stories complex, and provide opportunities for arbitrage. I’ll keep my story simple, and yet ponder the other possibilities.
For the advocates of medical advances, Asterias is definitely working to advance the technology. In particular, they are trying to help regrow damaged nerves. Succeed at that, and treating accident victims or people afflicted with strokes becomes possible in new and revolutionary ways.
For the stock hounds, AST has gone from a 52 week low of $1.37 to a 52 week high (today) of $15.10. Buy low, sell high and turn a dollar into eleven (minus commissions, of course.)
I balked at selling at $10, realizing that it should eventually go higher, especially if the trials succeeded. I bought below $3, having missed the low; so, selling a portion at $10 could recover my profits, give me a bit of profit, and let the rest ride with no real risk. And yet, go back and read my rationale for not selling then.
The same argument seemed less certain when the stock added another 50% in three days. While the stock was up 50%, the rise was also about twice my investment. I could sell even less, and still have as much left over as my total holding from three days earlier. Take a $2.50 entry. Compare that to a $10 stock, and selling 25% recovers the initial cost. Watch that stock hit $15 and see that the initial cost can be recovered by only selling 16%. Round up, sell 20% and make a profit as well. I listened to the math, partly stepped away from my Long Term Buy and Hold strategy (details in my book), and sold about 20% of my shares.
Congratulate myself on making about 25% in about 9 months, with substantial profit positioned for a possibly impressive future.
Here’s where the weirdness comes in. I’m guessing that the professionals already know this and that nothing is out of balance in the market. There’s too much money at risk, and too much of an opportunity for the professionals to miss profits from arbitrage plays, so surely they’ve reflected what I’m about to show. And yet, something seems amiss when I look at the market cap of Asterias, and some of its connected companies.
I own AST because I own GERN. GERN is the stock for Geron, another leading edge biotech, and one that is making too slow progress with its treatments. Through some merger, acquisition, and spinoff mechanics, the stem cell technology being used by Asterias was spun off from Geron, through BioTime, which has a division that is Asterias. As if the technology wasn’t complicated enough, welcome to the byzantine world of corporate finance. I ended up with shares of GERN, and AST, and BTX (sort of). Here is where the possible weirdness is manifested.
Asterias is using a technology that was spun off. Its value should be a fraction of the value of the origin, Geron. Asterias is a division of BioTime. Its value should be a fraction of the value of its parent, BioTime (BTX). In the time it took AST to go up ~30%, GERN and BTX went up ~3%. For a while, Asteria’s market cap exceeded its parent, BioTime, and may have exceeded its original company, Geron – all for a treatment that is only in phase 2 clinical trials.
Arbitrage lives off deviations in value across markets and equities. Surely someone has noticed. Ironically, the resolution of any imbalance may result in a decrease in AST’s price; though arguments could also be made to increase BTX’s price. Geron, in the meantime, is missing out on a substantial increase in value. They stewarded the technology for years, and simply ran out of money and time to develop all of their good ideas. Geron focused their strategy on telomerase, because it is equally revolutionary, and potentially more important because it can treat a wide variety of cancers and auto-immune ailments. If they’d only been able to hold onto both technologies, their stock would be much higher, their finances would be stronger, and more of their technologies could be advanced to the potential good of more patients.
I invest in small companies because they are easier to understand, usually. Even situations like Asterias’ are simple when compared to the intertwined machinations that are the collaborations, competitions, and complexities that are typical for mature mega-corps. For large companies, only the large financial institutions have the resources to discern the influence of one product on the whole. As complicated as Asterias’ situation is, I prefer it to trying to understand Apple or Microsoft. As an individual investor, I may not know everything about all the companies I’m invested in, but I know a larger fraction – and I know enough to notice a hint when it comes my way.
Whether AST should be lower, or BTX should be higher, or GERN should be valued for its identification of revolutionary technologies; I do know enough to take a hint when the market sends one my way. I sold a bit. Recovered my money. Took some profits. And am positioned to benefit in the future. Evidently, I may not know everything, but I may know enough.