This post will be a short post as BioSyent is well known in the investment community and I have nothing material to add. Instead I will focus on how my view of a BioSyent type company has changed.
BioSyent almost perfectly embodies my maturity as investor. The company has grown rapidly, operates in a market that I am not well versed on, and is expensive.
In the past I would have overlooked BioSyent immediately. And to be honest I had initially overlooked it when it was first mentioned on twitter when shares where less than $1.00. As I was developing my qualitative skills as a microcap investor I wanted to get exposure to best in class management teams. A tagged along with a friend as was introduced to management of BioSyent. I was impressed and was willing to at the very least follow RX.v to see if there would ever be an opportunity to purchase shares at a more reasonable valuation.
I started formally tracking BioSyent in mid 2015. Shares were trading about where they are today after running all the way from under $1.00 to over $12.
I have seen a pattern with many high growth companies. The company usually is dramatically undervalued and shares trade extremely cheap. Then something changes the future of the business and the market is slow to react. The share price increases but not as quickly as the fundamentals of the business. As the company continues to execute the increase in valuation is higher than the increase in earnings. Suddenly, the company can do no wrong. Eventually the company’s momentum wanes and there is nothing to support the high valuation. Shares come back down to earth on the slightest stumble or pause in growth.
There are a few different likely outcomes:
- The rise in earnings was a temporary phenomenon and the shares will continue to trade lower.
- The rise is earnings is sustainable but the growth has disappeared as the share price needs to re-rate to the new reality.
- The rise in earnings is temporarily paused and the company enters transition mode. New products/services are being introduced, but do not drive enough revenue to have an impact to overall results. While the transition period drags on the shareholder base is slowly churned through. Many start to question whether or not they will see growth again. Short term investors are slowly replaced by longer term investors who believe in the story.
Being long RX.v I obviously believe we are in the middle of the 3rd outcome. The valuation of RX.v is high, but I am comfortable that my capital is being put to work wisely and management is aligned with shareholders.
The share price may be volatile in the short term, but looking out 2-5 years, I beleive $8/share will appear cheap. BioSyent may have fallen victim to tax loss selling and/or additional selling pressure as a Canadian investor’s shun all things pharma related after the blowup of Valeant.
Are there company’s that you are willing to pay a premium for?