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Whitney Tilson Updates His Followers on His Short Positions - Criticizes Buffett Favorite IBM

January 27, 2014 | About:
CanadianValue

Canadian Value

117 followers

Hedge fund manager Whitney Tilson (Trades, Portfolio) sent the following e-mail to his followers on January 26, 2014.  In it he mostly discusses his short positions:

It’s so interesting to see investors discover that the stock market offers not only reward – but also RISK! This is a good thing – I think it’s terribly unhealthy for our markets when speculators run up the stocks of the most fraudulent Herbalife Ltd. (NYSE:HLF), NQ Mobile Inc (ADR) (NYSE:NQ) , screw-their-own-customers – K12 Inc. (NYSE:LRN), World Acceptance Corp. (NASDAQ:WRLD), over-promoted/over-hyped – 3D printing stocks, Unilife Corp (NASDAQ:UNIS), Textura Corp (NYSE:TXTR), Opko Health Inc. (NYSE:OPK), InterOil Corporation (USA) (NYSE:IOC), Tesla Motors Inc (NASDAQ:TSLA)companies (I’m short all but 1 of these).

2) An interesting excerpt from John Mauldin’s latest newsletter, with data that shows that the US stock market is the second-most expensive in the world, after Sri Lanka:

Not only does today’s CAPE of 25.4x suggest a seriously overvalued market, but the rapid multiple expansion of the last few years coupled with sluggish earnings growth suggests that this market is also seriously overbought, as I pointed out last week and as we are seeing play out this week. Today’s CAPE is just slightly less expensive than the 27x level seen at the October 2007 market peak and modestly below the level seen before the stock market crash in 1929. Although we are nowhere near the all-time “stupid” valuation peak of 43x in March 2000, a powerful narrative drove the markets to clearly unsustainable levels 15 years ago and a powerful narrative is driving markets today. Then it was the myth of dotcom and new tech, and now it is the tale of QE and the Fed.

Honestly, it doesn’t feel that way. While small cap stocks look stretched and there are pockets of complete insanity, the big-cap stocks that make up the bulk of the indices (and to a lesser extent, the economy) seem to be within the range of fair value – albeit at the high end. But this is only if – and this is a very big if – margins stay at the super-elevated levels. Doug Kass has made some good arguments that I’ve included in a past email about why they might mean-revert.

3) I think International Business Machines Corp. (NYSE:IBM) is a slowly declining business engaging in every trick in the book to mask this fact (which is why I’m short it). Jeff Matthews nails it in this blog post:

IBM, to IBMers, always stood for “I’ve Been Moved,” a reference to the way Big Blue moved employees around the country and around the globe to get experience as they worked their way up the ranks.

To Wall Street, however, IBM could stand for “I’ve Been Manipulated,” because no public company we can think of does a better job of schmoozing Wall Street’s Finest and convincing them that there’s a there there, when in fact the there is not quite as there as it might seem.

4) 3D Systems Corporation (NYSE:DDD) and Tesla,attached is a report by Citron Research with a very well done (and well-deserved) take-down of DDD. I found this table on page 8 to be particularly interesting. Given what a great short I think Tesla is, it underscores what a truly brilliant short 3D Systems Corporation (NYSE:DDD) is:

5) Good to see the increased scrutiny of Herbalife  Ltd. (NYSE:HLF) in both the US and China. This is playing out just the way  MBIA Inc. (NYSE:MBI)  did for Ackman: a long period of pain, in which prominent money managers took the other side and he was roundly mocked and dismissed – followed by TOTAL VINDICATION.

Herbalife, the nutritional supplements company that has long been in the cross hairs of a powerful hedge fund manager, is coming under increased scrutiny in Washington.

Senator Edward J. Markey, Democrat of Massachusetts, sent letters on Thursday to the Securities and Exchange Commission and the Federal Trade Commission urging those agencies to look into the business practices of Herbalife. The senator also wrote to Herbalife’s chief executive, seeking more information about the company.

And:

Nu Skin Enterprises, Inc. (NYSE:NUS), the Utah-based purveyor of anti-aging skin-care products whose shares were crushed earlier this month after a news report in China said the government there was looking into whether it is violating anti-pyramid laws, isn’t the only US multi-level marketer that could feel the regulatory heat.

It turns out that Herbalife, which sells protein shakes and other nutritional supplements through a multi-level marketing model similar to Nu Skin’s, has also been targeted as a pyramid in the Chinese media, The Post has learned.

An investigative report in First Financial Daily, also known as China’s Business News, said “suspicion has been brought up” that Herbalife is not operating in accordance with China’s laws prohibiting multi-level marketing and therefore may be a pyramid scheme.

6) Speaking of regulatory scrutiny, this ruling is a VERY big deal:

The Chinese units of the Big Four accounting firms should be suspended from auditing U.S.-traded companies for six months, a judge ruled, a move that could complicate the audits of dozens of Chinese companies and some U.S.-based multinationals.

Believe it or not, China frauds like NQ and promotions like Vipshop Holdings Ltd – ADR (NYSE:VIPS)  (I’m short both) are back in a big way – and it wouldn’t be possible with the Chinese affiliates of the big-four accounting firms blessing the cooked books. Read the judge’s ruling at: www.sec.gov/alj/aljdec/2014/id553ce.pdf. It’s jaw-dropping what these accounting firms are doing – they’re utterly complicit in the fraud. It is an absolute disgrace that the big-four firms are willing to so completely sell out by allowing their affiliates to continue using their good names in the face of overwhelming evidence of being complicit in such widespread fraud.

7) Gee, what a shocker that Nokia Corporation (ADR) (NYSE:NOK) (BIT:NOK1V)’s handset business is in freefall (sales down 29% YOY). That’s why I was short it!

In a troubling sign for Microsoft Corp.’s MSFT -0.66% push into the competitive smartphone industry, Nokia Corporation (ADR) (NYSE:NOK) (BIT:NOK1V) on Thursday reported a fourth-quarter sales decline for its soon-to-be-transferred handset business.

In the fourth quarter Nokia’s devices business, which is now reported as discontinued operations, reported sales declining to €2.63 billion ($3.56 billion), a 29% drop over the year and 4.5% lower than the previous quarter.

But it’s thin gruel to see this, given the pain I took on this short (the only thing I got right was immediately covering, saving myself from a further 50% runup since then).

It’s a good reminder that one must evaluate the risk in every short position that a big, dumb, cash-rich behemoth can come along and buy the company you’re shorting…

I wonder if the folks at Microsoft Corporation (NASDAQ:MSFT) have realized yet that they bought a pig in a poke – a deal that I think will eventually be seen as comparable to HP’s disastrous acquisition of Palm (but 7x larger). How appropriate for Steve Ballmer to leave MSFT shareholders with one last turd in the punchbowl.

About the author:

Canadian Value
http://valueinvestorcanada.blogspot.com/

Rating: 2.6/5 (5 votes)

Comments

rob24601
Rob24601 premium member - 7 months ago
One the long side of the IBM bet you have Warren Buffett (Trades, Portfolio), Ray Dalio (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), David Dreman (Trades, Portfolio), Mario Gabelli (Trades, Portfolio), Jim Simons (Trades, Portfolio), and Steven Cohen (Trades, Portfolio). On the short side you have Whitney Tilson (Trades, Portfolio) and Jeff Matthews. Which side of this bet would you want to be on?

DfiinancialH
DfiinancialH - 7 months ago

No words! Tilson is clueless

vgm
Vgm - 7 months ago

"Tilson is clueless"

Yeah, surely any real investor worth his or her salt has something better to do than short a stock which Buffett has pumped $11B into. Talk about asking for trouble.

Whitney also recently made a big splash about shorting Lumber Liquidators. Now Lone Pine and SAC have disclosed significant long positions in LL. Let's see how THAT works out - might be like his pal Ackman with HLF.

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