MYX: A Post Mortem
No one likes admitting mistakes.
Especially when it comes down to our own hubris. I recently decided to finally get out of a bad trade, and I have been thinking quite deeply about what went wrong. This is more for myself, but I thought if I need to think deeply about it and learn from it, perhaps a reader can have something to take away from my experience.
At the end of 2016 Mayne Pharma (MYX.asx), a (mainly) generics pharmaceuticals manufacturing company fell on news that the American Department of Justice (DOJ) was investigating, along with others, that the company was complicit in colluding to set prices. When I heard about it I was pretty surprised, it had been a market darling and commentators were talking about its 2016 price bull run all the time.
The stock promptly fell on the DOJ news. When that happened I had a deep dive into the last 5 years of its financial history, and then another 5 to see how it had changed over the years. My aim was not so much as to work out if it was complicit, my aim was to work out if it was fairly valued. My working out showed that the price decline had made the stock price less than the intrinsic worth.
My thoughts at the time were that the DOJ investigation was mainly toothless. MYX would pay a small fine, would not admit to guilt and would probably walk away scot-free. Over 2016, I had a bit of experience in making money when the market had over reacted to bad news. In fact my two biggest winners of 2016 were during the rebound after bad news (ANZ & BHP). Almost the exact situation was in front of me.
So I watched the price fall, and at around $1.50 I decided to enter. At the time I was pretty confident that the bad news would just go away. I told myself that the DOJ investigation was because of Trump & Clinton who at the time; were making noise about healthcare price gauging in the US. As it got cheaper, I decided again, this is too good of an opportunity - and doubled up a month later.
One of the first things you learn when you start in this business is that you should always have a predefined exit, and you should always have a stop loss. I did not have either. 6 months later after the second double up I took another stab when the price hit $1. Thinking that it could not get any cheaper, I told myself then that it had to rebound, others had to see what I did. After that mistake it took me just over 7 months to then decide it was time to get out.
Before I got out, I was discussing the company and the share price fall with one of my mentors. He straight away got at the heart of my problem. I had not factored in the industry. For the companies I had made money in earlier with almost the same situation - they were in industries that were growing and/or they were large enough to absorb any changes to that industry. After I had gotten in a second time the company had announced it was facing stiff competition from other generic drug manufacturers and it fell even more on that news. MYX is a midcap sized company and were not big enough to absorb costs of competition without margins being squeezed. This would decrease analysts expectations, and ultimately make the stock price fall even more as the price fell to the new reality. Getting in that 3rd time was a stupid and inexperienced move. It was ultimately an act of hubris that it could come back from all of this. I thought I knew better than the market. Obviously I did not.
Industries change. And new competition arises all the time, what I had failed to see was that the generics market is massive and profitable. That exact profitability means it is filled with competition, all aiming for a slice of the pie. Not trying to work out a DCF on all of MYX's drugs and where the competition is, who it is; that is where I really failed.
If I had taken a better look at the generics market, I would have seen Indian companies are cheaper and better at generic drug manufacturing.
There are two majors failures here.
1) Fundamental due diligence - one must not only look at the company, but at the industry and competitors. Basically you need a holistic view of the company and were it resides in its industry.
2) Bad strategy - I should have had a stop loss, and an exit strategy for when things went bad. Not the mindset that I am right, and throw bad money after bad money. This is arrogance, which coupled with the bad strategy meant I lost a lot more than I should have. Before the second trade I should have looked at the business again, and seen if anything had changed, or if I had missed something. Maybe I would have found I missed point number 1.
WJD