2023 Performance Review

Happy New Year everyone! With 2023 in the books, it is time to reflect on the performance of the ideas published on SSI during the last year.

But first things first – I want to say a huge thanks to all subscribers for continuing to support SSI, sharing profitable investment opportunities, and actively participating in discussions – without you, SSI would not be as exciting as it is today. Thanks for subscribing and for being a part of the Special Situation Investments community!

Contrary to gloomy expectations at the start of the year, 2023 proved to be a buoyant year for the equities markets. The event-driven space was no exception to this, presenting a number of attractive opportunities to capitalize on. For SSI, 2023 was a very productive year with:

  • 18 Portfolio ideas
  • 99 Quick pitches

SSI Tracking portfolio returned +12% during 2023 and is up +726% since 2017 (see the table below). You can also find a full breakdown of 2023 returns by individual names at the bottom of this post.

While I am not specifically benchmarking SSI or myself against any indices, this 2023 performance lagged significantly behind the broader market (the S&P 500 returned 25%). Part of this underperformance can be attributed to the fact that half of the model portfolio remained in cash throughout the year. Typically, we only had around 10 active portfolio ideas at a time, with each receiving 5% of the portfolio allocation (based on my own rules, which were developed when SSI had approximately 20 active ideas). Thus, with half of the model portfolio uninvested and earning zero, the returns on the invested part of the tracking portfolio were diluted.

The lower count of active Portfolio ideas was primarily due to my reluctance to incorporate certain Quick Pitches as Portfolio picks. This decision was driven by factors such as lower liquidity, lower conviction, or simply because I did not personally originate the idea. This is an issue that I intend to address in the coming year. Nevertheless, I hope that SSI subscribers were able to capitalize on a high number of investment opportunities highlighted as Quick Pitches, all of which came with in-depth supporting research.

Performance table

I do not think I have made any big mistakes in picking new portfolio ideas during 2023 – most of the losing positions during the year were closeouts from 2022 or earlier, except for MIXT and SRG. MIXT’s merger is still set to close in the coming months so the recent price reversal is likely to be temporary, whereas SRG’s liquidation is still ongoing with an expected liquidation value 50% above the current price.

In the rest of this post, I will reflect on some of the common event-driven themes that worked out well for SSI during the year.

Large asset sales. During 2023, we had several setups where the company announced a sale of a substantial part of its business/assets and intended to return capital to equity holders. The market seemed to be repeatedly mispricing these setups, underestimating either the amount of capital that would be returned or the valuation of the remaining business. Similar to previous years, most of these cases have worked out well, while several are still ongoing/actionable.

Tender offers with odd-lot priority. Despite odd-lot tender offers getting more and more popular, a number of lucrative setups continue to pop up, offering investors low-risk return opportunities. A notable example is DCBO where the spread between the tender offer and market price stood at a staggering 20%+ (or C$1000 for odd lot accounts). I am not sure how often these opportunities will continue to present themselves in the future and if we will still be able to call it a ‘low-risk return’ but will be happy to take advantage when I notice them.

Biopharma strategic reviews/liquidationsThe ongoing challenging financing environment in the biopharma sector has prompted a high number of companies to discontinue their development programs, lay off a significant portion of their workforce, and initiate strategic reviews. Despite these actions, these companies were subsequently trading at substantial discounts to net cash and their hypothetical liquidation values. While the outcomes of strategic reviews were generally uncertain, the discounts to net cash provided a buffer while awaiting the results. Moreover, in several instances, the reputation of management teams and/or shareholders suggested that the strategic reviews were likely to yield positive outcomes for equity holders. Some of the strategic reviews ultimately resulted in reverse mergers (NLTX and TALS), acquisitions by shareholders (PRDS), or liquidations (OTIC and APTX).

Privatizations by controlling shareholders. Privatizations by controlling shareholders were a recurring theme across various industries throughout the year. Large/controlling equity holders made non-binding takeover proposals that were slated for assessment by targets’ special committees. In several instances, the acquisition proposals appeared to be opportunistic, hinting at a potential price increase. Although there was no guarantee that both parties would reach an agreement, the potential acquirers’ reputation/size and/or long-standing association with the company suggested that they were unlikely to simply withdraw, which provided downside protection. The majority of the cases covered eventually resulted in definitive agreements at improved terms.

Biopharma merger arbitrages with CVRs. Throughout the year, I highlighted numerous setups where investors were effectively getting CVRs for free or at a minimal cost. The mergers for these cases have successfully closed, positioning CVR holders for potential substantial returns if certain conditions or milestones are met.

 

Breakdown of 2023 performance by individual names

Performance Breakdown 2023 1