In the hills just west of Charlottesville lies the Crozet Tunnel. Built in the mid 1800’s, it was a major supply route in the Civil War. Considered an amazing feat of engineering, the elliptical design of the tunnel allowed ample overhead room for the steam engine’s smokestacks. It was, however, too narrow to accommodate later versions of electric engines and was abandoned in the early 20th century.
Fast forward around 100 years and the tunnel has been restored and turned into a park that basically consists of a long walking path. Hikers can take the 5 mile roundtrip trail out and back, walking through the tunnel. It takes about an hour.
Walking through the tunnel is a very unique experience. You see, the tunnel is 3/4 of a mile long and is absolutely straight. Standing in the entrance, you can see the light at the other end of the tunnel; the engineers nailed it to perfection.
But here’s the interesting thing about this hike under the Blue Ridge mountains. Although one can see the brightness at both ends, it’s dark in there. I mean pitch black. When you are in the middle of the tunnel, the depth of the darkness is overwhelming. Turn to face the walls that are 5 feet on either side of you. You can’t see them.
The sensation of all light being swallowed up in the darkness is one I have felt sitting at my desk during most of 2022. Despite stating numerous times that I’m concerned about the market, the depth of despair that has entered into the micro-cap universe is far deeper and pervasive than I ever could have imagined. The euphoria of early 2021 is now just a distant memory as stocks have retreated far from those lofty levels, to the point where the average stock I monitor is down well over 50% from all-time highs.
At times like these, it’s very easy to become overwhelmed with despair. As they say, “selling begets selling.” When stocks trade down, down, down, if you focus on the share prices, you’ll get lost in the darkness. Instead, it’s important to stay the course and look at the light at the end of the tunnel.
And, there is a light in the future. As long as companies execute on their business plans, value is being created. Value that will eventually be reflected in share prices. I look at my portfolio and see companies in which, across the board, insiders have been buying shares. Why are they doing so? Because, there’s a light at the end of the tunnel. They are focused on that, not the current market environment. I try to do the same. It’s not always easy.
Besides the suffocating darkness, the other interesting aspect that plays with your mind in the Crozet Tunnel is the sheer length of the path. It’s so long that, despite seeing the other end, it never seems to get closer. You walk and walk but the light is much further away than you realize.
The depth of the current bear market makes it seem like it might never end, right? Most market pundits are now calling for a down market in the first half of 2023. Listening to them makes one question owning any stock.
I recommend ignoring the analysts. Most of them missed the downturn we suffered through and are only now turning negative. As is usually the case, they are late to the game.
Markets have historically looked ahead by six months or so. They are a leading indicator, not a trailing one. Are earnings for the S&P coming down next year? Most likely. Will that drive the market lower from here? Possibly but perhaps that’s already reflected in share prices.
I’ve been very cautious on the market for almost 1 1/2 years now. I did, however, say that my micro-cap universe had likely bottomed in May. For the majority of TW’s stocks (those not named TFFP for example), this has been true. It’s not been a fun December, or Q4 for that matter, but most of the early 2022 lows have held.
Looking forward, I’m suggesting investors focus on the light at the end of the tunnel and ignore the darkness around them. Find companies that have cash on the balance sheet, quality management teams and are executing on their business plans. These are the stocks you want to own.
Invest in companies where insiders are buying alongside you. This theme is one that I’m going to repeat ad nauseam going forward. I’m all done buying stock from CEO’s; I’d much rather compete with them on taking offers in the open market.
Sitting at my computer here on the last day of December, I can’t describe the feeling of relief I felt when I typed January 1, 2023 on the top of this week’s newsletter. It has been a LONG year. Not only did I get my butt kicked but I was right about the market. Talk about cause for constantly second guessing yourself.
This coming year, while still cautious about the market, I am very excited to see what happens with TW’s portfolio. We have many companies that, despite seeing their share prices beaten down, have made substantial progress fundamentally. This momentum will result in meaningful catalysts for a lot of the portfolio in the first half of 2023 and should help drive returns. The end of the tunnel of despair is getting closer day by day.
Two weeks ago, I established a new position in IN8bio (INAB) at $1.75(ish) and informed my premium subscribers as such. INAB was my pick for a year-end bounce as it’s dramatically oversold and has a meaningful catalyst in the next two weeks. That catalyst, data on their GBM solid-tumor program, is expected prior to the JP Morgan Healthcare Conference and could drive shares much higher in the near-term.
Longer term, I’ve become more convinced in this platform. Gamma-Delta T-Cells are a very hot space in cancer and IN8bio is one of, if not the, leaders here. Results so far have been quite promising. Patients on their drugs are surviving. More importantly, from an investor viewpoint, the drugs are showing great persistence.
I feel there are three key factors for immunotherapies to be successful. Persistence, or the ability to have a lasting effect, lack of side effects, and a reasonable cost. INAB seems to be checking the first two boxes so far. And, with an allogeniec product entering the clinic, we can hope to see them effective on the cost side soon as well.
Shares of INAB have had a rough go lately. This is not only due to the overall market but also slow enrollment (a problem across so many small biotechs), and the need for future financing.
I believe that the company has started to see better enrollment and am hopeful this issue has been solved. Meanwhile, insiders led the latest round of financing and I’m convinced that success in their programs will easily enable future financings at higher prices.
Meanwhile, INAB trades at a roughly $60 million market cap which is well below peers. The market for solid tumors is huge and there has been very little success shown by immunotherapies in this space. If these guys can continue to progress their products through the clinic, the upside potential here is massive.
