Instos are buying, MSB is going higher!
MSB clearly has upward momentum - volumes are huge with insto buying and new instos may be getting interested. The volume continued right into the close on Friday in Australia and volumes have also been high in the much smaller US MESO ADR market.
Frankly, nothing any of us say on HC is going to change that! So, I don't have any qualms reading posts from individuals who are selling their parcels to the instos who are hoovering them up. There will always be people who get nervous after a big rise and want to take a profit. Sometimes it works, sometimes it doesn't.
My earlier posts on trading still stand - it has been shown in almost all studies that investors outperform traders. See Appendix 1 below.
The Prof has been marketing to instos in the US and Australia in the past two weeks. Nothing much new in that, he's been marketing to instos for years - the difference is that now they're listening, and actually turning up to presentations! I've been informed there were up to 10 instos at a Bell Potter lunch last week. I know that at similar presentations in the past year there have been almost none - with instos who have already invested preferring to have one-on-one meetings and very little interest from potential new buyuers.
We have recently seen very strong insto support in the insto placement of 37.5m shares at $A2 (raising $A75m) and the selldown by Capital of the remainder of its 27m share holding at $A1.711 (another $A45m+ of insto buying.
The sudden increase in insto attendance at a general lunch last week (rather than taking one-on-one meetings) generally indicates new instos doing their research and starting to build models on the company. Whether or not they invest remains to be seen, but ASX200 Index inclusion in June is certain if the price can hold up, and this will drive a lot of Index Funds
to buy MSB. Small cap managers will already be feeling under pressure to buy, as MSB is now a much larger stock in the ASX300 Index and the past year was the first really upside big performance which lasted until year-end (see more in small cap managers section).
Active managers generally market themselves to clients that they meet with management and get to know the company well before they invest.
Before anyone carries on that the instos get privileged info, they don't (see Appendix 2 below).
Positive momentum in first 6 months of 2020 - I'm letting profits run!
Even for traders at the moment, with ASX200 Index inclusion likely in June, and with anticipation of trial results by the end of June and with obvious insto buying from people who haven't been in this stock for years (if ever), I'd tend to let my profits run!
I can't see much on the near term horizon (ie before June) to get in the way of this momentum. Previous problems which have stopped the share price have been misunderstood trial results (nothing due til June) and capital raisings - rights issues/share placements etc (no need for that before next year, unless a really value-accretive opportunity came up).
Furthermore, there's always the possibility of another major partnering deal coming "out of the blue" like the Grünenthal announcement - I'm not counting on it happening before the Back Pain and Heart Failure trial results come out, but the company has announced that they are in "advanced negotiations" and another deal like Grünenthal would certainly add to the momentum.
Big price rise on increased capital makes MSB important to Small Cap managers
The ASX200 Index inclusion will be dealt with in the next section. That will put pressure to buy MSB on ASX200 Index Funds.
Small cap managers (those who invest in stocks outside the ASX100) would now already be feeling pressure if they missed investing in MSB in the past year, as it is already in their benchmark ASX300, it has tripled in just over 12 months (low was $1.015 on Xmas Eve 2018) and it's still going up with strong positive momentum.
There are now 537m shares on issue, at a price of $3.07, with a high of $3.21 (market cap $A1.72bn). That is 25% bigger than the last time it got to a share price this high in April 2017, when it hit $A3.40 and there were just over 400m shares on issue (market cap at April 2017 peak $A1.366bn).
Furthermore, the pressure didn't really hit the small cap managers back in 2017 due to the fact that the price peaked in April and then fell quickly to $2 by the end of June financial year end (market cap back down to $A800m). That $2 was still up 100% in the year to June 2017, but the price now had negative momentum, and they could tell clients they were smart not paying the highs of $3.40 just a couple of months earlier. In the following year to December 2017, the price was actually down - so no pressure on Fund Managers at that time - it is very different for the past 12 months, and that pressure looks like continuing - it's no wonder to me that fund managers are dusting off their models and attending presentations - even if it's just to assure their clients that they are across the "performance risk" of not investing in MSB.
The following graph shows the pressure on Small Cap Managers into the December 2019 year-end results. The only other time this has happened was in 2010 when MSB did the big deal with Cephalon ( there were half as many shares on issue at the time, but the share price ran to $10 and the ASX300 is 45% higher today than back then, so it was a big impact on managers' performance).
The following graph shows the log-scale MSB share price -
this enables you to see that the percentage move in the past year is similar to that of late 2010 (see the 2 red lines). That 2010 move into the end of the year created a buying frenzy in 2010 (on top of a spectacular deal with Cephalon, although I'd argue that if the recent Grünenthal deal is considered the first of a series of global deals in heart and back pain, they'll add up to more than the Cephalon deal). We haven't seen a similar upward percentage move near a December or June year end since the big move of 2010:
I wouldn't want to be a small cap manager trying to explain why I'd missed this one and why it cost me performance vs the ASX300 Index - especially if it were continuing to rise!
ASX200 Index Inclusion
The big index funds will have to consider the risk of a stock of not owning a stock like MSB, with such large price moves and lack of correlation to the Index. Often index funds don't fully replicate the ASX200 index as many stocks trade in a similar way to other larger stocks, so they can manage their costs by just buying one stock to cover the performance of a few similar stocks. MSB certainly doesn't trade like other stocks and its correlation to the Index isn't significantly different to zero, so the Funds are likely to buy MSB to cut risk of underperformance and to cut tracking error (a statistical measure of how differently the Index Fund trades compared to the Index).
My own calculations currently show MSB would enter the ASX200 in the June rebalance, but not the March rebalance. Some people have been asking why, and I've explained this at length in the past, but you need to jump through a few hoops - it's not as simple as being bigger than stock number 200:
1. A stock has to leave theASX200 Index to allow a new one in. At present, I think there are 6 stocks under threat - depending on what their prices do between now and the end of February. I'm not going to start running commentary on this (as it's too time consuming), but NHC, HUB, ORE, EHE, PNI and PLS need to be careful. You only fall out of the bottom of the ASX200 if you rank 221 or lower - ie stocks which end February ranking between number 201 and 220 will be safe, even though there may be other larger cap stocks which are not in the ASX200
2. A stock has to rank above number 179 to enter the ASX200. ie if you rank number 180 at the end of February, you won't enter the ASX200.
3. There are IWF "investible weight factors" applied - MSB has an IWF of 85% (presumably it is The Prof's holding of around 15% which is discounted out). So, your market cap may appear to be number 179, but if you have an IWF of less than 100%, your market cap will be discounted and you may no longer be stock no 179.
4. The market cap is based on the daily average over 6 months. This is actually MSB's main problem for the March rebalance - it just spent too much time below $2 from the end of August. Don't forget we were in the 140's in early Sep and fell back into the 160's in mid-October.
5. The current MSB market cap is $A1.65bn - easily in the top 200 stocks. This falls to $A1.4bn after the IWF - still enough to enter the ASX200 if it were to average that price over the 6 month period - and I expect this will be enough to easily enter the ASX200 in the June rebalance (even if the price falls back below $3). However, the low price from end-August to Christmas last year was nowhere near enough to go into the ASX200 for the March rebalance - and the price would now have to move closer to $3.80 to $4 by the end of February to have a hope of March Index inclusion. My current estimate is that MSB's market cap after IWF would be around $984m if the current price continues til the end of February. There are several stocks in front of MSB in the March queue at present - however MSB is first on my queue for the June rebalance.
6. There is also some discretion and volume rules for the Index Committee to downweight stocks for low trading volumes etc - the large trading volumes recently mean this won't be a problem for MSB. There could also be a review of MSB's IWF in the June rebalance. I don't expect it to change, but there's a small risk that the Index Committee could do something at their discretion to hurt the chances of any stock in the Index (and that could actually help MSB if stocks above it on the queue get downweighted). ISX may have had a larger market cap than MSB, but is delisted at present after a long-running dispute, so is currently unlikely to go into the ASX200 ahead of MSB.
7. It's all a moving feast and there is still a month to go til the end of February. New stocks can list and can be included quickly in the index if they are large important names.
Prices can move around dramatically, both up and down and MSB's relative ranking may well change before the end of February, but I don't expect it to make it into the March rebalance (unless it goes above $3.80). That could be a good thing and may provide time for insto analysts to do the required research over the the remaining 4 months until the end of May so that many more instos are consistently buying over the first half of this year - and that includes small cap managers, index funds, biotech experts and punters who anticipate good trial results - it's all a bit like speculative buying of a small mining stock while they are exploring - and that means the momentum is likely to stay positive.
The trend's your friend - let your winners run!
I know some holders on HC have recently sold or announced they've gone short. That shouldn't matter to anyone here, they're not the main game and the share price has been going up strongly despite their selling. Don't be angry with them, we're all imperfect human beings subject to fears and temptations. Investing is very difficult and good investing requires thinking counter to almost everything else in our evolutionary history. That's why people generally aren't cut out for it - don't blame them, it's normal - really good investors are a bit weird.
In fact, some of the sellers have committed to buying back in at $5 if the phase 3 trial results go well - so they're going to be the backup buyers one day, and we are going to need more waves of buyers at higher prices to keep the price moving up. So let's keep them feeling welcome!
Have a look at Appendix 3 to see the massive selling that has occured in CSL shares over the past 20 years as the share price has risen! Profit taking has been a constant for CSL share holders.
The very strong MSB trading volumes so far in 2020 tells you there are more buyers than sellers at current prices, and we need some sellers or the buyers can't get set! The final match last Friday of over 209,000 shares on top of a total day's volume of over 5.4m shares (incl Chi-X) was one of the strongest shows of buying I can remember, considering there were no announcements, share selldowns, capital raisings etc. There are now much bigger insto volumes going through on Chi-X (710,000 on Friday) - almost equal to the total volume going through on the ASX this time last year (986,000).
Price leadership in US or Australia
Finally, as to whether this buying is led by the US or Aussie markets - it's all in the eye of the beholder, and is often what you want to read into it. See Appendix 4
Bottom line
This has been astonishing January trading volume as the price continues higher.
I believe it is led by new institutional buying and that buying continues - it was strong right into the close on Friday and shows no signs of abating.
I am personally going to let my profits run, although why anyone would care what I do is beyond me, as I'm just one more punter - but everyone seems to be making declarations and admissions on what they're doing after the strong share price rise.
The reason I'm happy to stay in MSB is the risk reward trade-off which I've outlined several times in the past. The downside appears very limited (recent analyst reports have outlined how GvHD alone can justify the market cap of the company) and the upside could be $A5, $A10 or $A20 using themajor analyst's valuations but putting in more reasonable assumptions for discount rates and probabilities.
The company has significantly de-risked in the past year, with large equity placements, new partnership agreements and has moved to the finish line for its two blockbuster phase 3 trials in Heart Failure and Back Pain. Cash burn is under control for the foreseeable future and there are no equity raisings contemplated. I take comfort from the big partnership deal recently concluded with Grunenthal, and take comfort from MSB's announcements that they are in advanced negotiations to do more. Thus the downside should be more limited than in the past.
It is likely to take the first half of this year to analyse the blockbuster trial data - so no bad news is likely on that front before June (and good news is more likely given the last report of the Data Monitoring Committee).
Meanwhile:
1. the BLA submission will go into the FDA next week, and an early approval pre-June would be hugely significant
2. MSB is my number one pick to enter the ASX200 in the June rebalance based on the current $3.07 share price and this should keep pressure on both the index funds and small cap funds to buy at least some of their holdings pre June. Quants show that index-inclusion is a powerful share price driver
3. active fund managers have been showing interest in researching MSB recently - and this recent big move right up through Dec 31 is not only putting pressure on shorts, it's also putting pressure on active managers now (MSB is becoming a bigger part of the index, and the very large price moves mean more underperformance for fund managers who don't own it). It is now 3.3x the market cap of a year ago (aloowing for the 37.5m share placement and the price rise from $1.015 to $3.07) - so every 1% move higher now hits underperforming active managers and shorts 3.3x harder than a year ago!
As I've said before, in over 40 years of investing, I've never seen an opportunity with a better risk/return trade off, with potential global blockbuster products in healthcare - one of the few global growth markets. Maybe I'm wrong, but that's how I see it - and I can't imagine coming across another opportunity like this in my last few years on this planet. Selling after what looks like a big profit, but is really only a small first bounce from multi-year lows on the long-term chart seems premature to me. I did that with FMG and STO in the past 3 years and regret it. I don't want to have to handle more regret from selling MSB, I'd really kick myself if it kept going up!
APPENDIX 1
I did a professional study on retail investors/traders vs insto investors a few years ago which showed the average retail investor in Australia underperformed the average insto investor by 6% pa. At the time, that didn't matter to the retail investors as the Aussie stockmarket had a long-term compound return of 12.5% pa and retail investors/traders were averaging around 8% pa (instos and corporate investors outperformed the index back then). When I spoke to retail stock traders about this, they always remembered their good trades and forgot the bad ones, and most were perfectly happy if they could generate 8% pa (that's a 10-bagger over 30 years - although a 12.5% return over the same period gives a 34-bagger if you just invested in the Index) - it didn't matter to them that their trading costs, spread costs and tax were high, and that they underperformed a passive investment strategy, they thought they were doing well, and proudly talked about their biggest wins. Sometimes I pushed a bit and they admitted the losses they made in the past on stocks which had gone bust and they lost the lot - but these were no longer in their investment portfolio, so they tended to underestimate the cost of the duds.
APPENDIX 2
Instos see the same slide pack that we see. They get the same info we get if we are prepared to dig around. In fact, the broad interests of many on the MSB threads of HC mean that we are probably better informed than an insto who is just reading a slide pack and attending a lunch. You can hear the responses of The Prof to analysts on the conference calls - if the info is uncertain or of an inside nature, he doesn't give it out. It's the same in private meetings. Analysts have to meet with companies to satisfy their clients they are doing due diligence and to make sure they don't misunderstand the strategy of the company. I'm sure that you can see from the massive disparity between analysts' models that the company is not feeding out market sizes, prices for drugs or targeted market shares beyond what the Prof has consistently said in the conference calls and slide packs. The simple fact is that MSB itself doesn't yet know how much the insurers will refund, how doctors will prescribe and how quickly people will take up these treatments - or even IF the FDA will approve them.
APPENDIX 3
In the past 20 years, 34m CSL shares have traded on average every month, and 8.25 billion shares have traded in total - that's over 18x the current 453m total issued number of shares and is an average of over 90% of the current share base traded each year! Despite all that selling, CSL has risen to $A310. So we don't have to fear sellers!! It is worth noting that while the recent monthly volume of CSL trading is the lowest since 2001 (currently 18m shares per month and 206m in the past 12 months), the $ value of monthly shares traded is currently the highest ever! That's profit taking for you!!
APPENDIX 4
I don't know why I'm going down this rabbit hole again, but there seems to be huge belief in US price leading. I've previously shown the stats which show no correlation between the US MESO closing price and the Aussie price the next day. That doesn't mean it can't go up in the US one day and be followed by a rise in Australia the next day - of course that can happen - but the stats show you can't depend on it, and that the (slightly) better correlation is the Aussie price leads the US price. The best correlation is that the previous day's Aussie price is the best guide to the next day's Aussie price!
The US market is much thinner than the Aussie market. I am led to believe that there are still around 40m Aussie shares deposited with the ADR custodian to back the issue of ADRs. The Custodian has previously refused to confirm this with me, as it's "confidential" (I don't know why) so I think there are 8-8.5m ADRs.
That means that when a US shorter tries to cover a position or a US insto decides to buy in, the US ADR price can move up aggressively. It's just a function of supply and demand in a thin market. Most times this is not reflected in the Aussie share price move the next day (although the Aussie price sometimes opens quite strongly on expectation of this "lead").
Mesoblast never makes announcements during US trading time - they are almost always between the US market close and the Aussie market open at 10am the next day. So you can get a good night's sleep - the overnight trading is noise.
Of course, some of the big investors (M&G and in the past Capital) have owned both ADRs and Aussie listed stock. They trade each on their own market and they own the bulk of the holdingas MSB Australian listed stock for liquidity reasons. If another overseas investor decides to take a big holding in MSB, they will probably buy the bulk of them in Australia - otherwise you are just pushing the price up in the US and not getting much stock - that's a pretty dumb buying strategy. Of course, there are some overseas instos who are only allowed to hold ADRs for investment risk and mandate reasons - they may be forced to pay up to get US stock, but it isn't hard for them to get a broker to buy the stock in Australia and then convert it to ADRs and then book them ADRs - all the real buying would be done on the Aussie market in this case.
As I have noted in the past, retail investors can do this too, if you have a good broker. ADRs can be converted back into Aussie shares and vice versa - so you can take advantage of some of these overnight price moves - though it is a bit clunky (cost is about US 5c per ADR - actually $US5 per 100 or part thereof) and you also have to take currency costs into account.
I don't believe the past few days' trading show any consistent "leadership" trends from either the Aussie or US markets. I don't think it matters and I believe the massive volumes in the Australian market are the main game. I believe the price would be going up whether or not the ADRs were listed in the US.
