Restoration Hardware recently announced the pricing of the convertible debentures that they are selling (here is the press release filed on EDGAR). Unfortunately, this is a blow to my short thesis.
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writeups – shorts
Yongye: Bizarre trading
A week ago, Yongye announced that shareholders approved the going private transaction (8-K filing). This would suggest that the merger has a higher chance of happening than before the vote. There is one less possible scenario as to why the going private transaction might fail for a second time.
Strangely enough, the stock is trading down a week later. I have no idea why this is. Shareholders may soon be paid $7.10 and the stock was previously trading at $7.08/$7.09. Perhaps Mr. Market’s mood swings are taking effect or some weaker merger arb players are panicking. In any case, I am closing a portion of my short position in Yongye. The $7 Jan 2016 puts previously trading at a bid/ask spread of $0.00/$0.05. The current spread is $0.30/$0.40. If you had a time travel machine, you could have made several times your money on these puts (before commissions and rebates). (*EDIT: When I talk about time travel, I’m being a little facetious.)
One somewhat similar situation is Fushi Copperweld, covered here on the Bronte Capital blog. Shortly before the going private transaction closed, somebody panicked and the common shares traded down. The transaction ultimately closed and the shorts lost money.
*Disclosure: I own Yongye puts. No position in the common.
Hollysys: Office Space
(This blog post only explains very minor red flags. I think I see much bigger red flags with Hollysys but I will not explain them. This will be a lower quality post compared to other posts on this blog.)
According to HOLI’s SEC filings, it owns Bond M&E and CE Concord. Hollysys decided to buy one of these companies and then the other. Here’s Google street view showing their neighboring offices:
Restoration Hardware versus West Elm
Restoration Hardware competes against a company called West Elm, which is owned by the publicly-traded Williams Sonoma (WSM). SEC 10-K filings disclose metrics for both companies. Restoration Hardware’s metrics are far superior:
- Higher “comparable brand revenue growth” overall
- Roughly three times higher sales per leased square footage (by my calculation)
Yet there are some curious things about Restoration Hardware:
- According to Google Trends data, West Elm has been trending stronger than the supposedly faster-growing Restoration Hardware.
- I’ve never seen a hot retailer shrink its store count. Hot retailers look like West Elm. They open stores because the rate of return on new stores is likely very high.
Coach: Victor Luis could be the next Ron Johnson
I have a few speculative out-of-the-money puts on COH. The thesis is simple. Coach’s same store sales dropped 21% in North America (press release). This is an outlier. It is highly unusual for same store sales to drop so fast. It is a sign that the CEO will eventually destroy the company if left unchecked.
Restoration Hardware: Their numbers don’t make a lot of sense
Restoration Hardware is a retailer with a shrinking store count, going from 95 stores in YE2010 to 70 stores in YE2014. Despite this drop in store count, capital expenditures have grown from $2.024M to $93.868M in that timeframe. One explanation is that Restoration Hardware is improperly capitalizing expenses to inflate its earnings. Of course, it is also possible that there is no accounting fraud here. Perhaps Restoration Hardware is legitimately making a huge investment in software and store renovations. As always, you should do your own due diligence and come to your own conclusions.
Market cap: $2.6B
Borrow: <1%
Shares short / shares outstanding: 10.3% (Shares short as a % of float would be higher)
Yongye (YONG): An asymmetrical trade
Today, Yongye stock shot up over the possibility of the company going private at $7.00/share. You should read the SC 13D filing on Edgar for details. The last attempt was for $6.69/share and it failed.
I am speculating that the second takeover will fail like the first. Suppose that I buy puts with a $5 strike at 10 cents (*I ignore commissions, which can be quite significant). The potential upside is 50X. I believe that Yongye may very well turn out to be a fraud and see its share price drop dramatically. The risk/reward here seems compelling.
The options market for Yongye is somewhat liquid and there are Jan 2016 puts available.
