Cable Car Capital’s Jacob Ma-Weaver On Retrophin And Plus500 [Part Two]

Cable Car Capital LLC is a San Francisco-based investment adviser founded in September 2013. The asset manager was founded by Jacob Ma-Weaver and uses a concentrated, hedged, value strategy.

Jacob was kind enough to answer some questions for ValueWalk about his investment style and some of his current positions.

The interview is split into two parts; you can find part one here.

To the end of September, Cable Car was up 37.2% for 2015. Since inception, Jacob Ma-Weaver’s strategy has returned 25.1% annualized for investors. You can read more about Cable Car, and the group’s investment strategy at the links below.

• Cable Car Capital 3Q15 Letter: Closes Exact Sciences Short, Long Kobex Capital
• Cable Car Capital: World Acceptance Corporation (WRLD) FOIA
• Cable Car Capital Up 37 Percent In H1 2015
• Turing Pharmaceutical – Healthcare Cost Inflation: Cable Car
• Cable Car Presentation At The Clinical Lab Fee Schedule Public Meeting

Cable Car Capital’s Jacob Ma-Weaver Retrophin and Plus500

ValueWalk: As of September 30, Cable Car’s five largest positions accounted for 70% of assets. Why do you believe such a concentrated portfolio is suitable, and how do you go about managing risk in such an extremely concentrated portfolio like this?  

Jacob Ma-Weaver: Cable Car’s level of concentration is a deliberate reflection of the realities of a single portfolio manager’s time and attention. I believe holding significantly more positions would reduce the degree of due diligence I could perform on each company while diversifying away much of the potential benefit of active management.

Part of the reason I am comfortable with large position sizes relates to the risk/reward framework described in part 1. If I have sufficiently convinced myself that the risk of loss is limited, I can be more comfortable tolerating price changes that do not reflect the underlying value of an asset. Also, for companies with significant non-operating balance sheet value, such as high excess net cash positions, a position’s size in the portfolio may not be reflective of the amount of capital that is truly at risk from a fundamental standpoint. Position sizing is a function first of downside risk, followed by potential return and conviction.

Because I define risk as the likelihood of permanent capital impairment, not the variance of returns, I embrace a degree of mark-to-market volatility and believe it can provide opportunities to create value on the margin. Cable Car has a maximum long position size of 30%, which is arbitrary but chosen so that extreme idiosyncratic risks or mistakes of analysis will at least be survivable. For short positions, position sizes are kept much smaller since the risk/reward dynamic is generally less favorable, and I sometimes express my views through option strategies that cap the potential loss.

VW: One of your largest positions is specialty pharmaceutical company Retrophin. Could you give a quick run-down of your thesis for Retrophin and do you mind commenting on the company’s performance over the past three months?

JMW: Cable Car recently added to its position in Retrophin after the company hit the headlines following the political attention to drug price increases and the company’s former CEO, Martin Shkreli. Despite negative sentiment toward specialty pharmaceutical companies in general and companies with high-priced drugs, in particular, I believe Retrophin’s portfolio of marketed products and pipeline are being underappreciated by the market. Not all price increases are created equal, and I think that the company’s pricing of Thiola, a treatment for a rare kidney stone disorder called cystinuria, will withstand political scrutiny. My conversations with doctors and patients in the cystinuria community suggest that RTRX has significantly improved convenience and access to an important therapy that was in chronic shortage prior to the company’s involvement. Thiola is priced below the only approved alternative, which has more severe side effects. While eventual generic competition is likely to limit the long-term value of Thiola, it is funding continued investments in Retrophin’s development program in the meanwhile.

RTRX has a clean balance sheet with over $8 per fully diluted share in net cash and investments, and its three marketed therapeutics for rare diseases are early in the process of identifying new patients. The addressable market for Retrophin’s two bile acid disorder therapies is misunderstood by many analysts, and in my opinion, the lifetime value of the three marketed products alone significantly exceeds current enterprise value.

I believe RTRX has downside protection from its cash position and the cash flow generated by its marketed products. Also, there are plausible scenarios that could result in a much higher valuation in the future. I am generally loathe to pay a premium for pipeline candidates in clinical trials, and I do not think any pipeline value is reflected in the market price. However, RTRX has significant option value from several promising rare disease therapies that would materially increase the company’s value if approved.

VW: Finally, Cable Car hit the headlines in the UK earlier this year when you revealed in a series of blog posts that you were short spread betting and CFD provider, Plus500. Firstly, how did you go about putting together your short thesis for PLUS, and where did the idea come from? Secondly, how would you respond to the accusation that your method of publicizing Cable Car’s PLUS short could be construed as market manipulation?

JMW: Great question. I’m glad of any opportunity to defend published short research, which plays a very important role in maintaining honest, fair, and transparent capital markets. Disseminating a thoroughly researched, factual, and an accurate short thesis is emphatically not market manipulation. If anything, it is the exact opposite of market manipulation, as it seeks to correct artificial prices based on false or misleading information and misconceptions in the marketplace. Contributing to the public’s understanding of a business and the market’s proper allocation of resources, at great risk and expense, is something we should celebrate. Certainly there are some short sellers whose work is premised on conjecture or distortion, but the market has a way of being very unforgiving of inaccuracies and unfounded speculation. The same is true of long-biased authors. As long as an author’s position is disclosed and facts are distinguished from opinions, in my opinion publishing investment research provides a service to the market.

I first became aware of PLUS through industry research supporting an unrelated investment (long) in a financial exchange last year. The reported profitability seemed too good to be true and worthy of fuller investigation, but I got much more interested in the business model after they emerged relatively unscathed from the Swiss National Bank’s decision to remove the CHF peg. Dan McCrum’s excellent series at the Financial Times provided a jumping off point for a lot of additional forensic accounting work and background investigation.

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