Recent Exits: NBIX, VIPS, SLM

Thoughts on three recent exits/position reductions. I would consider buying back at lower prices.

Neurocrine Bioscience (NBIX)

Ingrezza failed its phase 2 trial for Tourette’s syndrome; and the stock dropped from $53.5 to now $46.2.

I came away with a small profit and actually bigger confidence. The results were not good, but the decision procedure was sound – it gave me a shot at high upside while preserving capital. Had the trial results came out good this could have easily been up 30% with long term upside of 100%.

Going into the phase 2 results, NBIX was 8-9% of my total net worth with average cost of ~$47.4. I was sitting on a 13% gain. That gave me the cushion to sit through the event, knowing that a failure would probably result in a small hit to principal. The idea was to be aggressive with profits but conservative with capital. After the bad news came out I quickly cut NBIX down to a immaterial position with average exit price of more than $48, retaining a small profit for the entire trade.

Buying well is truly half the battle. That requires knowing a situation well, anticipating the scenarios, and going big when opportunities present themselves.

The episode also illustrated one of the advantages of individual investors. I highly doubt an institution could have went from 0% position to a 9% position and then down to < 1% position as quickly as I did - and come out unscathed.

The stock is now undervalued, but with no clear catalyst. If NBIX gets to low 40’s I’d strongly consider loading up again.

Vipshop (VIPS)
I exited the position before the company’s latest earnings. I had been accumulating JD and Alibaba and prefer their competitive positions.

Originally I saw Vipshop as a niche strategy (discount retailer), but the more I look at JD and Alibaba, the more I wonder if that’s even a valid category. For example, Vipshop sells excess inventory for brands – a lot of which are typically available after China’s November 11th “singles day”. Now, obviously Alibaba is the king of Single’s Day – so why can’t Alibaba just run some discount/flash sales to get rid of those exact same items, which is already listed on Tmall/Taobao?

The other thing I wonder about is the integration of warehouse and inventory systems. Let's say some apparels were listed on JD.com and was already in JD’s warehouse. Why not just let JD run its own flash sales? Why bother with moving inventory from JD’s warehouse to Vipshop’s warehouses?

As e-commerce matures and inventories get more integrated into JD or Alibaba affiliates warehouses, whoever list the items originally will also be the best candidate to get rid of that same (now excess) inventory. So is the “online discount retailer” even valid as a separate model?

Another thing that bothers me about Vipshop is its build out in last mile delivery. It seems to me they are aping JD, but with less resources. Logistics in China is becoming a crowded space, and a capital intensive one. Alibaba’s Cainiao allies are mostly publicly listed now, so they will be able to access capital and pour money into logistics. It’s not clear to me how Vipshop has a competitive advantage there.

This is another one where I bought so cheaply that I booked a nice gain. The stock actually looks like it has bottomed, but I'm in no hurry to get back in.


Sallie Mae (SLM)

I cut this down after the stock started dropping. As much as I like the growth prospects, I never felt comfortable with the political risk. SLM would have been a huge beneficiary of Trump's tax cut but it doesn't look like it will happen anytime soon.

Everyday, major news outlets report on America’s "student loan crisis". Read through the comment sections and I get the sense that people think if they can sue the hell out of Sallie Mae, cause it to go bankrupt, then they don’t have to pay back their loans.

Borrowers (a big and growing portion of society nowadays) have incentives to hurt Sallie Mae. That means politicians have great incentives to hurt Sallie Mae. That’s a dangerous place to be for shareholders.