A grab bag of shorts (Jan 2019)

This post is a list of short ideas, sorted by market cap.  The borrow on these stocks is generally 10% or lower.  Some of the more interesting shorts are AMD, PVG, TMR.TO, CRC, Chinese reverse mergers, and CGIP.

AMD ($20B mkt cap)

See my latest post on AMD.  AMD’s upcoming earnings will likely miss analyst estimates now that video cards are selling for less than half the price compared to several months ago.

Horizon Pharma ($3.55B mkt cap)

In the past, I’ve written about the business model of giving away free drugs.

To recap how the American healthcare system works: American employers (above a certain number of employees) have to provide healthcare at any price.  This leads to drug companies exploiting the payors by engaging in price gouging.  This is why drugs cost a lot more in the US than other countries with free market systems (e.g. Canada) or prescription drugs provided by a single payor system.  Some pharma companies decide to engage in an adversarial relationship with PBMs, the middlemen who sit in between payors and drug makers.  They may try to trick the PBMs into authorizing drug reimbursement for wildly overpriced drugs.  They may do this through “specialty” pharmacies, which have no medical specialization (e.g. drugs that are difficult to store/transport, cancer drugs with complex interactions).  Rather, some specialty pharmacies specialize in gaming the PBMs’ authorization processes.  These adversarial elements tend to be unsustainable.  Eventually the PBMs figure it out and sever their ties with specialty pharmacies.  Then the PBMs and drug makers may go back to a co-operation model whereby drug makers pay so-called “rebates” to PBMs.  Such rebates are sometimes criticized as kickbacks designed to influence the PBMs into allowing drug makers to overcharge payors.

My issue with Horizon is that its adversarial relationship with PBMs have been unsustainable.  Its “innovations” in marketing drugs (management likes to highlight its innovative practices on conference calls) seem very short-sighted and ultimately not very profitable, even though it generates revenue growth that impresses Wall Street.  For example, Duexis and Vimovo saw 30% and 52% decreased sales from 2017 versus 2016 (see the table on page 90 of the 10-K).  The shenanigans have not been sustainable or particularly profitable.

The latest 10-Q is fairly candid about issues with HorizonCares and so-called “patient access”:

There has been negative publicity and inquiries from Congress and enforcement authorities regarding the use of specialty pharmacies and drug pricing.  Our patient access programs are not involved in the prescribing of medicines and are solely to assist in ensuring that when a physician determines one of our medicines offers a potential clinical benefit to their patients and they prescribe one for an eligible patient, financial assistance may be available to reduce the patient’s out-of-pocket costs.  In addition, all pharmacies that fill prescriptions for our medicines are fully independent, including those that participate in HorizonCares.  We do not own or possess any option to purchase an ownership stake in any pharmacy that distributes our medicines, and our relationship with each pharmacy is non-exclusive and arm’s length.  All of our sales are processed through pharmacies independent of us.  Despite this, the negative publicity and interest from Congress and enforcement authorities regarding specialty pharmacies may result in physicians being less willing to participate in our patient access programs and thereby limit our ability to increase patient access and adoption of our medicines.

We may also encounter difficulty in forming and maintaining relationships with pharmacies that participate in our patient access programs.  We currently depend on a limited number of pharmacies participating in HorizonCares to fulfill patient prescriptions under the HorizonCares program.  If these HorizonCares participating pharmacies are unable to process and fulfill the volume of patient prescriptions directed to them under the HorizonCares program, our ability to maintain or increase prescriptions for our medicines will be impaired.

I believe that this stock is fairly overpriced because Wall Street doesn’t understand the business model and the nature of Horizon’s “innovation”.  While co-operation with PBMs tends to be highly profitable, an antagonistic relationship with PBMs is a different beast altogether.

To be fair, there are probably better shorts than Horizon Pharma.

Retail (accounting-based shorts)

Restoration Hardware ($2.7B mkt cap)

See my previous posts on RH.  The way that RH capitalizes expenses is quite suspicious.  Capex was a meagre $2M in 2010, peaked at $158M in 2017, and was $112M in 2018.

Marian Husband’s Linkedin profile (see post) suggested that RH’s reported revenue numbers were overstated, although I couldn’t verify that via other means.  (She has since revised her LinkedIn profile and left RH for a position with Enphase, another publicly-traded company.)

Since my very first post on RH back in April 2014, I would note that the company doesn’t seem to have found much success in the initiatives that the CEO Gary Friedman was excited about.  The company has scaled back its Source Book, is opening mega-showrooms at a slower rate (so much for the real estate transformation), doesn’t talk much about RH Teen or RH Modern, and has gotten rid of the distribution centers that it built out just a few years prior.  The company did find success in opening more outlet stores, although it’s not very sexy and Gary Friedman doesn’t like to talk about it.  It has also found success in sourcing cheap furniture from China; most RH customers don’t notice the difference in quality.  Overall, I am skeptical about this company’s fundamentals and reported numbers.

CONN ($647M mkt cap)

My key concern has to do with re-aging.  Some lenders will give their borrowers a break if they have a temporary setback in their finances such as Hurricane Harvey, divorce, medical bills, temporary loss of income, etc.  Conn’s describes it as:

Customers may have disruptions in cash flow due to job loss, medical bills, or other unforeseen events
Conn’s modifies delinquent accounts as part of its collection practice to help customers maintain consistent payment habits

By classifying loans as re-aged, Conn’s does not immediately consider the loan to be delinquent (even though the borrower hasn’t diligently paid their debt).  So my concern is:

  1. Is Conn’s actually engaging in (expensive) high-touch servicing for its small loan amounts?  Conn’s is not in the mortgage lending business where it is dealing with large loans.  Are their debt collectors really talking to debtors about their financial circumstances and verifying debtors’ claims about temporary financial setbacks?
  2. Why do Conn’s borrowers have such incredibly bad luck?  And why has their luck gotten worse?
    1. In Q4 2014, 11.5% of the portfolio balance was re-aged.
    2. In Q2 2017, 16.0% of the portfolio balance was re-aged.
    3. In the next quarter impacted by Hurricane Harvey, that rate went up to 23.8%.
    4. In Q3 ’18, it went up to 25.5% (the 10-Q attributes 2.2% of that to re-ages related to customers affected by Hurricane Harvey).

    Am I supposed to believe that Conn’s borrowers are unusually unlucky as they lose their job, have medical bills, and get divorced at extremely high rates?  While Hurricane Harvey was a legitimate excuse, it does not explain why borrowers are so unlucky and have becoming unluckier.

Also, Conn’s has a program for “Unilateral Retroactive Extension – Allows customers in certain states who are more than 30 days past due to become current”.  It is unclear to me as to which side unilaterally gives the borrower a break, although it definitely strikes me as a highly questionable practice if you are lending money and trying to get repaid.

The short thesis basically boils down to this: Conn’s borrowers aren’t incredibly unlucky.  They aren’t experiencing job loss, medical bills, and unforeseen events at such incredibly high rates.

See my previous posts on CONN.

Mining

PVG ($1.33B mkt cap)

I’ve written about Pretium previously.  The key posts are:

Recently, Pretium announced that it missed its own production guidance.  I found this surprising.  Originally, I found that its guidance was strange given that the range was extremely tight at roughly ±5% (200,000 to 220,000 ounces).  Given the extremely variable nature of the deposit, such an extremely tight estimate seemed geologically unreasonable.  Now it turns out that the company missed by -10%, delivering 188,983 ounces instead of 200,000-220,000.  I could not work backwards to figure out what management’s original plan was.

It is quite unclear to me as to why management doesn’t think ahead as they constantly inflict themselves with missteps:

  • Going back to the bulk sampling program… it is extremely unclear as to why management authorized the expansion of the bulk sampling program if they weren’t prepared to accept negative results that might be uncovered.
  • They should not have hired Strathcona if they wanted somebody with Ivor Jones’ integrity.  They should have hired “independent” qualified persons rather than independent qualified persons.
  • Management said that they would give guidance by the end of 2017 and then they didn’t do it.
  • Management provided a silly (extremely tight) guidance for H2 2018 and missed their own guidance.

I just can’t figure out what management was thinking.

Regardless, I think that Pretium’s resource estimates should not be relied upon as Ivor Jones’ work was extremely questionable and contradicted by the findings of the expanded bulk sampling program.  Eventually this will end badly.  My hunch is that Strathcona will be quite vindicated when all of this eventually ends.

TMR.TO (C$688M mkt cap)

This is a cash flow negative mining play.  The recent Sept 2018 equity offering strongly suggests that this company is cash flow negative.

This history of this mine is as follows: the mine was originally built by Newmont Mining.  Unfortunately, part of the mine burned down so it wasn’t operational.  Newmont sold the mine to TMAC, which rebuilt the mine.  Unfortunately for TMAC, a different part of the mine burned down so TMAC rebuilt the mine again.  This second fire makes it difficult to determine the mine’s cash flow.

One unique aspect of this mine is that its location is extremely remote.  Heavy equipment (and construction materials needed to rebuild the mine) and ore can only be transported during ~10 weeks each year when there is sea access.

SVM ($382M mkt cap)

No comment.

CRC ($1.03B mkt cap)

CRC has poor cash flow and therefore the NPV of its assets are correspondingly low.  If oil continues to stay at $50, they are in a world of trouble (the futures market indicates $56 oil).  I guestimate around $1.5B to $2.5B of assets versus $7B+ in liabilities.  See my old blog post on how to quickly estimate the discounted cash flow of oil and gas reserves.

Development-stage pharma

IOVA ($1.12B mkt cap)

This company’s pedigree is not good, which led to the company settling with the SEC over issues relating to stock promotion (the company was formerly known as Lion Biotechnologies with the ticker LBIO).

ABEO ($360M mkt cap)

The pedigree of this stock is not good.  The SEC filings (DEF 14A) state that they paid for an “investor relations” firm:

During 2014 and 2013, SCO and affiliates charged $300,000 each year in investor relations fees.

See @MoxReport’s Oct 9 tweets for more information on current investor relations campaigns affecting the stock.  It’s pretty amusing.  Definitely check out MoxReport’s full writeup on the stock.

CYDY ($169M mkt cap; illiquid, requires a lot of margin)

This biotech company is running out of cash and there are doubts as to whether or not it will be a going concern.  Their latest 10-Q states: “These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern.”  The Hollywood actor Charlie Sheen has promoted this stock in the past.

Chinese reverse mergers

I just can’t look away from Chinese reverse mergers even though shorting them went extremely poorly in 2013 when many of them were taken private.

HOLI ($1.16B mkt cap): I’ve written about this company previously.

CO ($723M mkt cap): This Chinese reverse merger has some interesting corporate governance practices that I’ve written about in 2014.

SVA ($410M mkt cap): This is a Chinese reverse merger but I don’t have any great insights on it.

CBMG ($350M mkt cap): This Chinese reverse merger has pivoted its business towards development-stage biotech.  The Pump Stopper wrote about CBMG back in 2015.  Melissa Davis, who did excellent work while she was at The Street Sweeper, also wrote about CBMG.  Nowadays, the borrow is much cheaper than what it used to be.

CXDC ($116M mkt cap)

I’ve written about this company previously.  Since then, there was a failed takeover bid from the CEO from Feb 2017.  As I’ve mentioned on Twitter, they still can’t put together a website despite having around 2,461 employees… the website had various spellling misteaks when I last checked.

Hudson’s Bay HBC.TO (C$1.56B mkt cap), SHOS ($43M mkt cap), Pier1 PIR ($63M mkt cap)

These are money-losing retailers.  My thesis is that most areas of retail are dying industries; the unprofitable retailers as well as the ones with the lowest returns on capital are the ones that will go to zero first.

The book retailer Barnes and Noble is another money-losing retailer.  JC Penney (JCP) is another one, although its borrow is expensive (it does have an options market).

Miscellaneous bad businesses ($676M and lower)

VRAY ($676M mkt cap):  This company sells a unique MRI machine to the medical industry that costs millions of dollars.  Unfortunately, it loses money on every machine that it sells.  Management states that it hopes to hit an inflection point where it will actually make money whenever it sells its MRI machine.

AMSC ($251M mkt cap): This company hasn’t reported a GAAP profit since 2002, with the exception of 2010.

REFR ($52M mkt cap):  This company has burned through almost every dollar that it has raised and continues to lose money.

CLIR ($32M mkt cap): This company has a long history of losing money.

HIIQ ($541M mkt cap)

This is a battleground stock that is heavily discussed on finance Twitter.  The criticism leveled against the company’s business model is that it uses aggressive telemarketing to trick consumers into buying sham health insurance.  Even some Glassdoor.com reviews are consistent with that view.  The question is whether or not regulators will shut this company down.  (For what it’s worth, I don’t think it’s 100% guaranteed that regulators will do that.)  The FTC has already shut down Simple Health Plans LLC, which is connected to HIIQ.  The bull thesis is that the company’s regulatory issues are behind it (thanks to its settlement with various regulators) and that the company fundamentally has excellent economics.

Writeups:

CGIP ($28M mkt cap)

This company is a bankruptcy play.  Note that when distressed companies turn out to be valuable (or there is a short squeeze), the stock can go up several-fold or more.  Bankruptcy plays can be risky.

In the past, CGI was a trucking company that was targeted by two different activist shorts, Jay Yoon and Prescience Point.  The CFO back then, Bobby Peavler, responded to Jay Yoon’s Seeking Alpha article (filed as an 8-K) even though Jay Yoon did not have a big name as an activist short.  I found the vitriol in Peavler’s response to be unusual and excessive (so I shorted the stock).  Subsequently, Celadon retracted its financials when its auditor discovered highly questionable accounting that may or may not have been designed to inflate the company’s earnings.  Management said that it would make the filing of audited financials a priority… and then it fired its auditors (8-K).  So it goes.

The company currently has a pressing problem with repaying its debt.  It is on its 12th credit amendment.  The 3 lending banks seem like they really want to get out of their relationship with Celadon but they can’t because nobody wants to refinance Celadon’s debt.  The 12th credit amendment has a very high interest rate but will forgive most of it if Celadon can quickly find another lender; the lenders clearly want out.  The debt is theoretically due on June 28, 2019.  However, there are early repayment clauses so Celadon may have difficulty meeting its upcoming Jan 31 payment.  There may be yet another amendment soon.

 

*Disclosure:  I hold short positions in these stocks, except for JCP and BKS.

One thought on “A grab bag of shorts (Jan 2019)

  1. Pingback: Artículos recomendados para inversores 277 - Academia de Inversión - Aprende value investing desde cero

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