Seth Klarman bought a 16.92% of stake in biotech Targacept (NASDAQ:TRGT) after its stock price dropped 60% following a drug trial fail. His purchase price was around $7.26. Then it suffered a few more big drops. This price chart of its stock reminds us of what Peter Lynch famously said: Don’t try to catch a falling knife.
But Seth Klarman is not like most of us. We don’t need to repeat his achievements or his book here. He bought the stock as a “cigar butt investment,” meaning poor companies at very low prices. Our columnist Matt Blecker has done a detailed analysis on Targacept. He concluded that the company would have $8 per share of net cash by the year end, which means that the stock is even cheaper than it looks now. We will appreciate if he can give us an update.
If we look at the balance sheet of Targcept, as of Dec. 31, 2011 it has $195 million of cash, and total liability of $84 million. With 33.38 million shares outstanding, the stock has per share net cash of $3.3 a share, which is more than 75% of the stock price. The stock does look cheap.
If we look further, the company burns around $20 million of cash each quarter. That is certainly a worrying sign. Is that why Seth Klarman gave it up?
For details of what Seth Klarman has bought, please check out Seth Klarman’s portfolio.