Let's say a friend offered you a deal. His investment portfolio is 80% cash and 20% invested in a basket of securities. The cash totals $4,000 and the securities, mostly Facebook (FB), have a fair value of $1,000, for a total of $5,000. He says, "I'll sell you the whole portfolio for $3,900." Does this sound too good to be true? Facebook shares and some of the cash for free? Well, this friend happens to be the market, this portfolio is the Firsthand Technology Value Fund (SVVC), and this deal is available to you right now.
As of March 31, 2012, Firsthand's fund had net assets of $85.9 million, which worked out to be $24.56 per share of the fund, based on 3.5 million shares. Those assets consisted of securities valued at $38.5 million, or $11.01 per share, and cash of $47.6 million, or $13.60 per share (less a balancing item of $0.05 per share). The fund had appreciated in net asset value by 2.6% since the previous quarter's end. In April, the fund spent $2.4 million on a purchase of shares of Gilt Groupe. Later in April, Firsthand completed a follow-on offering of 4.4 million shares at $27.00 per share for proceeds of $118.8 million. The underwriters then chose to purchase an additional 0.66 million shares, also at $27.00 per share, for proceeds of $17.8 million. In May, the fund spent $1.8 million on a purchase of shares of Twitter.
Today, these pieces, after adjusting the security holdings for changes in market value through May 18th, 2012, add up as follows: The cash now totals $170.5 million. The securities now total $39.5 million. That makes assets of $210 million. The shares now total 8.556 million. That makes the net asset value approximately $24.51 per share, consisting of $19.93 per share in cash and $4.58 per share in securities. Note that Firsthand's valuation method values publicly traded shares, such as Facebook and Yelp, at a 15% discount to their most recent closing prices.
During the first 17 days in May, SVVC traded between $26.01 and $30.88. This makes sense, as it was trading between fair value and a bit of a premium on the securities it holds. The premium likely drew from an expectation that Facebook, the largest holding at around 12% of fund assets, would rise well above its initial public offering price once it started trading publicly. The talk of a "Facebook double" and excitement around getting in on the action prior to the Facebook IPO took SVVC shares up above $40 per share for several days in early April.
Then came the Facebook IPO. Facebook did not double. In fact, Facebook closed less than 1% above its initial offering price. So, what happened to SVVC? Did it lose its premium above $24.50? It lost a lot more than that. SVVC dropped 28% to $19.27 per share. That's right, more than 3% below the value of the cash in the fund even if Facebook, Twitter, and all of the other holdings were set to zero.
What could explain this? The only explanation I can think of is pure panic-selling, capitulation and the taking out of pre-determined stops. It is, without question, an over-reaction. Here are some negative claims that bears might make and the associated decreases in share price:
1) Facebook was trading at $44 per share on secondary exchanges before the IPO, and now it is trading at $38. This decreased the net asset value of SVVC by about 70 cents, or 2.7%, and is already reflected in the updated May 18th numbers above.
2) Facebook is heading lower. If Facebook was cut in half (a bit extreme), this would take SVVC to $22.57.
3) I don't like the solar stocks in SVVC's portfolio. No holding besides Facebook has a weight of more than 2% in the fund - insignificant.
As stated before, the cash in this fund is worth $19.93 per share. The security holdings are worth some multiple of $4.58 per share. The stock is currently trading at $19.27 per share. In theory, Firsthand could buy back all of its shares at this price, and still have all of its securities plus over $5 million!
I think SVVC is headed back higher, at least to the value of the cash per share, which would be a 3.4% increase, and possibly back to its net asset value, which would be a 27% increase. And if Facebook going public gave this fund a big premium, will Twitter? At the very least, if you're considering buying Facebook shares, ask yourself "Why would I buy them for $38 when I can get them for free?"
Disclosure: I am long SVVC.