Back in November 2012 we invested in Maxygen (MAXY) based on a simple premise. The company was in the process of liquidating and returning capital to the shareholders, and had no ongoing operations. Since they had more cash sitting on the books than the market value of the company, some return was guaranteed. Without any ongoing operations, the downside was protected too. There was a kicker as well. The company owns MAXY-G34 product candidate that it was trying to market and sell. If the patent sale went through, there was significant upside to the stock.
In short, almost 0 downside and possibility of a significant upside.
These are mighty favorable odds and it made sense to take a position. It was essentially a call option on its patent sale guaranteed to stay in the money (ignoring daily trading noise)
The company has now decided to stop its marketing and liquidate the company and expects to return between $2.45 and $2.50 per share to the shareholders. There might be additional return of up to $0.09/share as contingency reserves are released. We took a position at an average cost of $2.46/share on Nov 12, 2012 and sold our position on Jun 4, 2014 for $2.50/share, netting us a return of 1.27% (net of commissions).
We had positioned about 3% of the portfolio in this stock.
Working Through Special Situations
This was a special situation investment in the sense that the investment was not made based on future revenues in the traditional sense. The company had no operating business. These kind of situations are rare but whenever one can find an opportunity where the risk is close to zero and there is a possibility of significant upside, it is imperative to take a position. Many of these may not work out but all you would have lost is some time. We took care to not allocate too much of the portfolio in this opportunity so less money was committed. However, even a small percentage of these investments when they work out can make an appreciable difference in the overall portfolio return.