Investment management company Laughing Water Capital released its second quarter investor letter 2022, a copy of the same can be downloaded here. In the second quarter, the fund returned -19.4%, which brings the year-to-date return to -29.5%. The letter discussed the reasons for the underperformance of its portfolios. S&P 500 & Russell 2000 also underperformed in the second quarter and returned -16.1% and -17.2%, respectively. You can check the top 5 holdings of the fund to see its best picks in 2022.
In the Q2 2022 investor letter, Laughing Water Capital analyzed the current events in the market and pointed out how they affected its portfolios. The fund discussed the stocks like Avid Bioservices, Inc. (NASDAQ:CDMO). Avid Bioservices, Inc. (NASDAQ:CDMO) is a pharmaceutical company headquartered in Tustin, California. It has a market capitalization of $1.215 billion and the stock of Avid Bioservices, Inc. (NASDAQ:CDMO) closed at $19.65 per share on July 29, 2022. Avid Bioservices, Inc. (NASDAQ:CDMO) had a return of 16.38% for the past month, whereas its 12-month return plunged to -26.26%.
Here is what Laughing Water Capital specifically said about Avid Bioservices, Inc. (NASDAQ:CDMO):
“Consider the case of Avid Bioservices, Inc. (NASDAQ:CDMO), a large molecule,small batch Contract Drug Manufacturing Organization that will be familiar to all but our newest partners, as we owned shares from 1H 2018 until all but exiting our position in the low $30s in Q4 of 2021. Since that time, shares have declined precipitously as the company is both a “growth” stock and in the S&P Biotech ETF (XBI), which has declined ~36% YTD to quarter end. However, in my view Avid Bio is a baby with the bathwater, and we once again made Avid Bioservices a large position during the quarter.
First, unlike most “growth” stocks, Avid Bioservices is not a “disruptor.” You don’t have to make any blind assumptions about total addressable market (TAM), customer acquisition costs (CAC), or churn. There is very little risk of “garbage in, garbage out” when modeling Avid’s future. Rather, Avid’s assumed growth is tied to building additional manufacturing capacity. In my view, it is a much easier task to understand the dynamics of building an additional manufacturing facility than it is to understand the dynamics of alleged TAM, potential CAC, and unknown churn. Second, unlike most biotech stocks, Avid is a real business, not a binary bet on whether or not a drug will meet its hoped-for end state. Lastly, and most importantly, Avid Bio has one characteristic that staunchly separates it from other high flying growth stocks and biotech stocks that have been punished by the market: it is set to gush cash in the not-too-distant future.
The company is in the process of expanding its manufacturing footprint, having announced plans to have revenue generating capacity of $370M within the next ~12 months, vs. revenues of $119.6M in fiscal 2022 (YE April 30). This expansion is fully funded, and at that scale the company has guided to “low to mid 30%” EBITDA margins, which appears reasonable if not conservative based on commentary from competitors. From there, interest payments should be zero assuming outstanding convertible debt is equitized, and with nearly $700M of NOLs, it will be at least a few years before the company is paying meaningful taxes. Lastly, once the facilities are built out, they are relatively capital light, and maintenance cap-ex should be 3-3.5% of revenue. Thus, at the prices we were buying our shares, CDMO was perhaps 3 or 4 years away from trading at 7x-8x steady state free cash flow…” (Click here to see the full text)
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Even though Laughing Water Capital invested in Avid Bioservices, Inc. (NASDAQ:CDMO), the stock is not on our list of 30 Most Popular Stocks Among Hedge Funds. As per our records, Avid Bioservices, Inc. (NASDAQ:CDMO) was in 15 hedge fund portfolios at the end of the first quarter of 2022, which was up from 14 in the previous quarter. Avid Bioservices, Inc. (NASDAQ:CDMO) shares gained 36.74% of their value over the last 3 months.
We published another article in February on Avid Bioservices, Inc. (NASDAQ:CDMO). In addition, please check out our hedge fund investor letters Q2 2022 page for more investor letters from hedge funds and other leading investors.
Disclosure: None. This article is originally published at Insider Monkey.
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