Idenix: Almost There...

Today, Merck (Ticker: MRK) announced that it has received HSR approval for its acquisition of Idenix Pharmaceuticals (Ticker: IDIX):

“At 11:59 p.m., Eastern time, on July 18, 2014, the waiting period applicable to the Offer and the Merger under the HSR Act expired. Accordingly, the condition of the Offer relating to the expiration or termination of the HSR Act waiting period has been satisfied.”

It looks like this is on track to close when the tender expires on August 8^th. I’ve been adding to my common at ~ $24 and have a full position (also sold out of the money Puts). Now just make sure that a black swan does not show up!

Portfolio Reflection

I’ve been reflecting on the overall composition of my portfolio and realize that my top four holdings (Constellation Brands (Ticker: STZ), Vertex Pharmaceuticals (Ticker: VRTX), VISA (Ticker: V) and Apple (Ticker: AAPL)) currently make up ~ 59% of my portfolio value. Obviously, I have strong conviction with these positions and plan to hang on to them for a while. As you know, I also utilize special situation plays to add a bit of alpha to my portfolio. The special situation plays have positively impacted the performance of my portfolio. I plan to continue to utilize a growth investment theme in conjunction with special situations plays. I am very comfortable with my current portfolio and do not plan to make any major changes for the time being.

Here’s a summary overview of my current positions. I’m not going to talk about each of them, but I think you get the idea of my investment style. I still enjoy this game very much in trying to beat the market. If I didn’t believe that I can beat the market, I would simply invest in a low fee index fund. I stay far away from actively managed mutual funds since the fees they charge in comparison to their performance are not worth it.

June Results

I can’t believe we’re already starting off the second half of the year. So for the month of June, the portfolio performed well as some of my larger positions such as Constellation Brands (Ticker: STZ) and Apple (Ticker: AAPL) approached new highs. In addition, Vertex Pharmaceuticals (Ticker: VRTX) announced positive phase 3 clinical trial results on VX-809 and Kalydeco for cystic fibrosis, which helped to propel the stock up nicely. The portfolio generated a positive return for June of + 0.57% to + 2.15%. Why this range? I usually just look at the end value of the portfolio at the close on the last trading day of the month and that would be +0.57%, but today there was a weird option pricing for my Safeway short Put resulting in a wide bid / ask spread. This pricing skewed the value of my portfolio down. If I ignore that crazy option price, my portfolio will have increased ~ +2.15% versus the +0.57%. For simplicity, I think I’ll just use the +0.57% for the month of June.

That’s it for now…

Performance Year to Date = +9.50% to (+11.08%) with the running monthly returns as follows:

January -0.67%

February +6.50%

March -2.69%

April -1.51%

May +7.30%

June + 0.57% (+2.15%)

Idenix Arb Play

Even though there has been a lot of M&A activity, it’s been a bit difficult zeroing in on a good risk reward opportunity. One of the plays I do like is Idenix (Ticker: IDIX), which is being acquired by Merck (Ticker: MRK) for $24.50 in cash. Idenix still carries a decent spread (~ 1.9% or ~ 15.54% annualized based on yesterday’s closing price of $24.04. This is assuming the cash hits the account by August 8th). I believe this deal is going to close pretty fast. The companies have already filed with the FTC and the waiting period will expire on July 3^rd. I don’t see any issues with the FTC taking a closer look at this deal as Gilead (Ticker: GILD) owns this market right now. Merck’s tender offer will expire on August 4^th and this deal should close shortly after.

I’ve been playing this via long common (average price of $23.60) and short out of the money Puts. The large spread can be attributed to the painful memories of Bristol Myers (Ticker: BMY) acquisition of Inhibitex. Bristol Myers acquired Inhibitex for its early hepatitis C candidate, which was in clinical trials. Shortly after the merger closed, adverse events were reported in the Inhibitex hepatitis C trial. This resulted in Bristol Myers pulling the plug on Inhibitex’s hepatitis C program and writing off the entire acquisition. 

Can this happen with Idenix? Yes, but I see the odds as very low. I’m sure Merck has performed extensive due diligence to ensure there is no replay of Inhibitex.

EDIT: Updated tender filing with the SEC today... The FTC waiting period is now expected to expire on July 18th.
 

May Performance

I really don’t know what happened, but May turned out to be a strong month even though it didn’t feel like it. My portfolio generated a healthy return of 7.30% and a good chunk of it can be attributed to Apple (Ticker: AAPL). My other large positions such as Constellation Brands (Ticker: STZ) and Visa (Ticker: V) held up fairly well, but did not break into new highs like Apple. I believe there’s more upside as there seems to be a lot of skeptics out there, who are predicting a significant decline. As they say, a bull market climbs a wall of worry.

I have initiated a few new special situation plays such as B/E Aerospace (Ticker: BEAV) and Rackspace (Ticker: RAX). I still have a position in Safeway (Ticker: SWY) via short Puts.

I also added to my position in Vertex Pharmaceuticals (Ticker: VRTX), which currently makes up ~ 11% of my portfolio. Next month the company should be releasing the top line results from their phase 3 clinical trials on VX-809 and Kalydeco for cystic fibrosis. No doubt, this will be a big binary event. Obviously, I expect positive results, but you can never be certain with the final outcome from the trials. In any case, I like the odds based on the results from their phase 2 trials.

Performance Year to Date = +8.93% with the running monthly returns as follows:

January -0.67%

February +6.50%

March -2.69%

April -1.51%

May +7.30%

Some Trades

It’s been a fairly busy week and did not have time to post my recent transactions. I started pruning my portfolio a bit and closed out the following positions:

(1) Sold Loral Space and Communication (Ticker: LORL) for a 0.45% gain

(2) Sold IMS Health (Ticker: IMS) for a 19% gain (tiny position – received shares in the IPO)

(3) Bought back the July 60 short Puts on Joseph A. Bank Clothiers (Ticker: JOSB) for $0.14 (sold at $0.40)

(4) Bought back the October 60 short Puts on Joseph A. Bank Clothiers for $0.28 (sold at $0.45)

I initiated a new position in AerCap Holdings (Ticker: AER) at $43.75. I like this air lease company a lot and plan on adding on any dips. It’s currently an 8% position.

Safeway (Ticker: SWY) is the only merger arb play I have at this moment. I am playing this via short Puts.

That’s it for now…

April Performance

It’s been another somewhat rocky month. I closed out a small position in CBS Outdoors (Ticker: CBSO) and RDA Microelectronics (Ticker: RDA). I closed out CBS Outdoors because it was a small position, which I received from an IPO allocation. The 30 day IPO holding period was up so I decided to sell since I was not going to add to the position. 

RDA Microelectronics has acted weak since I purchased it and today the bottom fell out a bit. I exited the position generating a net loss of 5.72%. Fortunately, it was a relatively small position so no big damage. In my early days, I probably would have gone in big with RDA Microelectronics, but I’ve learned my lesson in minimizing my overall risk.

I still have special situation positions in Jos A. Banks (Ticker: JOSB), Safeway (Ticker: SWY) and Loral (Ticker: LORL). So we’ll see what happens…

Performance Year to Date = +1.63% with the running monthly returns as follows:

January -0.67%

February +6.50%

March -2.69%

April -1.51%