The search for value is getting harder, but its not impossible, not yet. I wonder if at the point of impossibility to find decent value, the end of the bubble will appear. Either way, I don’t care. I’m not in the business of market timing, I’m in the business of finding value and extracting profits from that value. I think I’ve found another one of those value plays in SWKH.
SWK Holdings Corp is a specialized finance company seeking opportunities in the healthcare industry. The Company provides capital solutions to various life science companies, institutions and inventors. More specifically, their investors presentation says, “SWK’s primary focus is on originating and investing in structured, asset-based debt transactions in the pharmaceutical and medical device space, including IP-based cash flow streams, synthetic royalties, legacy product acquisitions.” In other words, think of it like a hedge fund for bio-pharmaceutical companies.
Who Runs the Fund?
SWKH is mainly run by two men: Brett Pope CEO, and Winston Black, Managing Director. Brett Pope has an impressive track record within the healthcare investment industry, just take a look:
Mr. Pope co-founded PBS Capital Management in April 2009, a healthcare oriented investment partnership designed to leverage the principals’ expertise in special and misunderstood situations in the healthcare sector.
Mr. Pope spent seven years at Highland Capital Management, resigning in May 2008 as Partner and Co-Head of Private Equity.
Mr. Pope moved from Portfolio Analyst to Partner in less than four years. ó Prior to moving to Private Equity, Mr. Pope managed a $7 billion portfolio ($4 billion in healthcare), which consisted of leveraged loans, high-yield bonds, distressed debt, public and private equity, and pharmaceutical royalties.
Prior to joining Highland Capital Management, Mr. Pope served as an equities analyst with Streetadvisor.com, Southwest Securities, and Hodges Capital Management. He also spent two years at Associates First Capital.
Mr. Pope graduated magna cum laude with a BBA in finance from the University of Texas at Austin and has earned the right to use the CFA designation.
Winston Black’s track record is similar, but we won’t get into it in this piece. Let’s move on to the company.
SWKH Strategy for Returns
SWK Holdings aims at creating a broadly diversified group of non correlated assets within the healthcare and biotech sector. They do this through investing in different revenue streams within the sector, such as royalties, debt financing, or equity interests. This is why I am particularly interested in the company. As a whole I am bullish on the pharmaceutical industry, and I believe the advancements in technology will be the only catalyst needed to spur growth in the industry. When it comes to small cap biotech companies, quite a few people are always looking for a super specific catalyst that will send their stock soaring. This is hard to do. You have to make sure you’re timing is right, and you have to make sure you don’t buy before they release the results of their FDA trials.
However, through SWKH, one doesn’t have to worry about all of that. Investing in SWKH is investing in the healthcare technology sector, but with much less risk. The 1-Year beta for SWKH is 0.31. How are they able to keep such low risk even though they are only invested in one of the most risky asset classes within US Equities? Debt Investments.
That debt investments have a higher priority on the list of repayments when a company goes under is the primary reason for SWKH’s success and low beta. This style of investing enables them to use their own balance sheets, not leverage, and still receive an asymmetrical ROE.
Although I am moving more towards being a price action first trader, the fundamentals are what drives the engine higher if the price action works out in your favor. In other words, if the company is crap and you get a price action alert, you would be more hesitant to make a move as opposed to a company with solid fundamentals that made the price action jump you’re hoping for (I’m looking at you PDLI!).
SWKH is a micro cap company with a market cap of roughly $145M. Like I mentioned in previous posts, within the US Equities asset class, this is where I’m finding the most value (with the exceptions of a few: RGR, GME, LB, etc). Enterprise Value/EBITDA is 3.77. They have four employees and 143 shareholders.
PE Ratio is 4.55, Price / Revenue is 4.53, Price to Book is 0.71, Price to Sales is 6.49. All of those numbers are attractive, but its the PtB that really interests me, because Jacob and I are focusing our Net Net search within Biotechnology on the sole purpose of trading at discount to asset value.
Net Margin is 119% and operating margin is 62%. ROA comes in at 19.3%, ROE is 15%, ROIC is 19.6%. All of these are great numbers.
History Tells All
Going back to 2006, SWKH shows signs of a major turnaround. Let’s start with revenues. In 2010 and 2011, SWKH failed to bring in money, they didn’t have any revenues. In 2016 SWKH sported 22.38M in revenues. Operating income has gone from -7.12M in 2006 to 17.89M in 2016. Free Cash flow has grown from -10.38M in 2006 to 9.64M in 2016. More recently, the company transformed from a net income loss in 2015 of 7.37M to a net gain of 28.89M in 2016. Those are serious gains. Certainly the market should’ve recognized this, right? Wrong.
Price Action Analysis
I love the price action of this stock. If you look towards the far right end of the chart, you see a bullish saucer pattern, which could be a signal of a bottoming. What’s important to note is the 200 MA that is hovering close above the current price. If the price can break the 200 MA I will be quick to buy some shares of this company and set my stop loss below the 50 MA, risking 1% of my capital. The share price has already crossed the 50 MA in a bullish manner, but I was late to the party on that, I would’ve loved to grab it then. However, no reason to live in the past, I like the 200 MA as a break-entry point for this trade.
As always, shoot holes in my ideas. If you liked this idea, feel free to leave a comment. If you hated this idea, feel free to leave a comment, I love debate!