November 16, 2011

Mind the Gap

One might easily and appropriately take me to task for comparing apples and pigs: apples-John Paulson's bet against the U.S. housing market, pigs-my bet in owning Provectus shares. Please don't hold it against me. This past summer, as we (4 children, two parents, an au pair, a Honda Odyssey minivan, and lots and lots of stuff) traveled cross-country -- again.... -- on a Griswoldesque road trip to visit my wife's family, I eagerly and enjoyably read Gregory Zuckerman's book The Greatest Trade Ever: The Behind-the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History. From a capital markets perspective, I lived this (and the snapback rally) in more ways than one, personally, professionally and financially. As I hone my craft that is investing (and investment management), the story of Paulson's wager against housing, as well as the stories of Kyle Bass and others during this same period of time, represent, at least to me, prime case studies of a successful investing process: target identification, broad and deep analysis, investment thesis cogency, decisive/intelligent decision-making on entry, regular healthy self-questioning, principled conviction, patience, and decisive/intelligent decision-making on exit. The book is compelling to me because, as I contemplate my investment in Provectus, Zuckerman's storytelling is such that I found mental and emotional commonality with the characters' experiences.

But enough about apples and pigs. It seems to me there is a clear gap, perhaps a chasm, between the extrinsic and intrinsic valuations of the company. Google Finance pegs Provectus' market capitalization today at approximately $96 million. Shouldn't the current valuation be much, much higher? Shouldn't it be even higher when a deal to buy the entire company eventually is transacted? The so-called biotech valuation curve or a comparative analysis of similar public companies might yield a valuation several multiples higher ($200 to $300 million). An internal company analysis might peg the value at several multiples of an order of magnitude higher ($2 to 3 billion), at least, when the end game is upon us.

If I (and a few other hardy souls) believe such a gap exists, why does Mr. Market scoff at me (us)?

"Markets can remain irrational a lot longer than you and I can remain solvent." (John Maynard Keynes/A. Gary Shilling)

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