Random Ramblings April 2025
Summary
Walker says KROS’s strategic review did not close the valuation gap; it highlighted how little investors trust the board to protect their capital. He is long KROS. The shares rose from roughly $10 to $12 after the company promised an update within 60 days, yet Walker estimates $16-$18 a share of net cash plus Takeda royalties that he considers clearly NPV-positive. The market is effectively saying KROS will “turn every dollar they have into 66 cents,” making continued shareholder pressure essential.
Pre-commercial biotech is experiencing an “absolute nuclear winter,” with many companies valued at a fraction of net cash. Walker cites businesses holding $300 million of cash below a $100 million market cap and KROS holding roughly $750 million against a post-announcement valuation near $500 million. These are corporate-governance trades: the prospective return depends on boards rationalizing operations before speculative programs consume the cash. Walker is also long Sage and says he has mentioned other biotech holdings as well as companies in which he does not own shares.
Large biotech investors’ reluctance to become activists may be protecting access to a financing market that Walker argues is effectively unavailable. Funds tell Walker they avoid public pressure because management teams might exclude them from future PIPE rounds; his answer is that nobody should inject fresh money when it will “instantly…trade for 50% of net cash.” If several existing positions doubled through liquidation or rationalization, those investors would have more capital—and a defensible explanation—for future deals.
Stock compensation becomes sharply more destructive after a share-price collapse because nominal awards do not fall alongside market capitalization. At a $400 million valuation, $10 million of annual stock compensation means 2.5% dilution; at $200 million it becomes 5%. A biotech falling from $1 billion to $200 million while maintaining $30 million of awards dilutes holders 15% annually, potentially while issuing equity at half of cash value.
Market volatility is an argument for maintaining research cadence and continuously repricing opportunity cost, not for staring at the screen. Walker says an unchanged portfolio from April 2024 to April 2025 would suggest insufficient rock-turning or prior-updating, however strong the stated conviction. His comparison is explicit: replace a stock at $10 with $5 downside and $20 upside when another at $10 offers $8 downside and $30 upside.
Tariffs could create highly local winners even if they damage the economy overall. Walker’s simplified hypothetical is cement: a U.S. plant near Canada could capture border towns formerly served by a closer Canadian plant once a 10% or 25% tariff offsets the freight advantage, improving utilization and pricing. The broader research prompt is to find companies with domestic or non-Chinese sourcing while competitors absorb potentially extreme China tariffs.
Investors who delay adopting AI risk surrendering a cumulative process advantage comparable to refusing email or Google decades ago. Walker spent a day and a half and conducted three expert calls on one biotech drug, then received a better research report from ChatGPT’s Deep Research in about 15 minutes. He has not yet heard much beyond better prompts, uploaded internal files, and working through ideas, but his conclusion is categorical: “You’re falling behind pretty quickly.”
Deep dive
1. KROS remains a governance trade after its strategic-review rally
Walker’s previous episode argued that KROS should wind itself up because it traded at a “huge discount to cash.” One day later, the company announced a strategic-alternatives review and promised an update within 60 days. Walker separately says that someone—not him—had acquired more than 11% of the stock in response.
The move from roughly $10 to $12 sounds substantial until set against Walker’s estimate of $16-$18 per share in net cash, before giving credit to royalties owed by Takeda that he considers clearly NPV-positive. The stock merely rerated from about 50% to 60% of cash.
His message to investors who think they missed the opportunity: “The answer is no.” The market still assumes severe capital destruction, so he urges shareholders to tell the board which path they support and demand “really compelling evidence” for any alternative to maximizing shareholder value.
2. Biotech’s nuclear winter demands dirtier hands from shareholders
Walker describes pre-commercial biotech as an “absolute nuclear winter”: many companies with $300 million in cash trade below $100 million, while KROS carried roughly $750 million of cash against a market capitalization near $500 million even after announcing its review. He says he is long both KROS and Sage; some other examples he discusses are holdings, while others are not.
Some large and professional holders privately agree with Walker’s liquidation arguments and may own 4% stakes for years, yet resist public action because they fear receiving “the activist label.” Their concern is commercial: antagonizing one board could cost them invitations to later PIPE or private fundraising rounds.
Walker’s pushback is economic rather than moral. If five biotech positions all doubled after liquidation or rationalization, the investor would have twice as much capital and could write a bigger check in future deals; preserving relationships while these companies trade far below cash and risk burning it defeats the purpose of maintaining those relationships.
More fundamentally, Walker says nobody is going to put a PIPE into these companies while fresh money immediately trades at 50 cents on the dollar. Companies holding $10 per share of cash while trading at $3-$5 have no future, in his view, if they do not figure out how to rationalize value.
3. Stock compensation creates an “antifragile” downside dynamic
Walker starts from the value-investor position that stock compensation is a real expense, then asks whether its behavior under stress makes the stock “antifragile.” The intended alignment can invert when awards remain fixed in dollars while the equity value supporting them collapses.
His clean example begins with a $400 million company issuing $10 million annually in RSUs, or 2.5% dilution. If market turmoil halves the capitalization to $200 million, Walker says executives’ contracts and the practical need to retain senior employees mean the company will not simply cut compensation in half, so unchanged compensation suddenly consumes 5% of the company each year.
The biotech version is harsher: a lead drug proven worthless takes the company from $1 billion to $200 million, but $30 million of stock compensation continues, producing 15% annual dilution. When the shares already trade at half of net cash, that dilution is occurring at half of cash value.
Walker does not overstate the framework: it is “a little bit of a niche case,” existing grants are largely locked in over the short term, and companies can alter costs over the medium to longer term. Still, greater volatility means expected dilution may be materially understated precisely when shareholders are most exposed.
4. Volatility rewards process discipline and live opportunity-cost tests
Recording on April 11, Walker recalls the stock market falling roughly 5% each day amid the height of the Trump tariffs, followed by Wednesday swinging from roughly 2% down to 8% up. Outside the COVID period, he could not remember feeling—or seeing sentiment become—so bearish.
His own failure mode was staring at the screen while his research-notes folder stayed unusually empty. “It’s human nature, and shame on me,” he says. His prescription is to maintain the same methodology, system, and daily research practice: skipping two days leaves an investor two days behind, and the compounding is not helpful.
A portfolio should always represent the best risk-adjusted opportunities, subject to concentration and diversification. If its holdings and sizing exactly match a year earlier, Walker suspects the investor is not “turning over enough rocks,” updating priors, or comparing current positions with newly available risk-rewards.
His numerical swap test: an incumbent at $10 with $5 downside and $20 upside should yield to a new idea at $10 with $8 downside and $30 upside. Repeatedly finding that comparison suggests that apparent portfolio stability may actually reflect stale analysis.
5. Tariffs and AI create research edges for investors who keep moving
Walker expects tariffs to produce many losers and probably harm the overall economy, but local market structure could still create winners. Cement is his concrete analogy because its weight makes transport expensive and turns plants into geographically bounded monopolies or oligopolies.
In his simplified hypothetical, a U.S. plant 20 minutes south of the Canadian border competes with a Canadian plant five minutes north. A U.S.-side town might be six minutes from the Canadian plant but 19-$20 minutes from the U.S. plant; add a 10% or 25% tariff, and the U.S. operator may win the business, improve utilization, and gain pricing power where the plants previously competed toward marginal capacity cost.
When individual-company research feels impossible, Walker recommends durable projects: improve idea sourcing, learn coding for customized keyword alerts, study bankruptcy code and historical bankruptcy case studies, or redesign the investment workflow. “You don’t have to just read 10-Ks all day.”
AI is the longer-term process project he emphasizes. On one busted-biotech drug, roughly 15 minutes of ChatGPT Deep Research produced a better report than his day and a half of work; that work had included three expert calls. Although he still seeks applications beyond prompting, file uploads, and working through ideas, he views early adoption as a cumulative edge.