Free webinar tonight; Why I attend the ICR Conference; Let your winners run; All of my 10-baggers; Denny's; The dangers of shorting growth; Freshpet; Lime pulls its scooters out of 12 markets and lays off staff

By Whitney Tilson

Tuesday, January 14, 2020
A A

1) A final reminder: Stansberry Research is hosting a free webinar tonight at 8 p.m. Eastern time. My friends Porter Stansberry, Dr. Steve Sjuggerud, and Dr. David Eifrig are coming together to discuss their market predictions for 2020… their favorite stock picks for the year… and their opinions on cryptocurrencies, gold, and other big topics.

They’ll also tell you about Stansberry’s Portfolio Solutions products, so you can see what a “bulletproof” portfolio (as they call it) looks like. Last year, these portfolios all beat their respective benchmarks.

Again, it’s free to attend and listen to what Porter, Steve, and Doc have to say. And just for tuning in, you’ll get each of their No. 1 favorite stocks for 2020. Click here to register for the event.

2) Every year, I come to the ICR Conference in Orlando mainly to get good stock ideas – both long and short (I summarized my big winners from last year in yesterday’s e-mail).

But I also come for other reasons. One is to network – I’ve run into a number of friends and readers, which is always fun… Plus, they shared some great insights and stock ideas with me.

One reader thanked me for highlighting in my December 23 e-mail why it can be safer and more profitable to short a company’s bonds rather than its stock. Since I suspect many folks missed it because of the holidays, I wanted to flag it again.

Coming here also brings back memories of many stocks I once owned or shorted – and reinforces lessons that I, sadly, too often had to learn the hard way. A critical one is to let your winners run, as long as the story remains intact.

Over the years, I’ve owned many 10-baggers – stocks that have gone up by at least 10 times from where I once purchased them through today: Netflix (NFLX), McDonald’s (MCD), Ross Stores (ROST), Yum Brands (YUM), Amazon (AMZN), Jack in the Box (JACK), Apple (AAPL), Home Depot (HD), Huntsman (HUN), and General Growth Properties.   

Of those 10, can you guess how many I actually earned 10 times my money from?

I’m embarrassed to say only one: General Growth. I purchased nearly 1 million shares of the then-bankrupt mall operator in early 2009 at an average price of just $0.67 a share. By the end of the year, the stock had soared to $11.56 – up more than 17 times.

But for all of the others, rather than just sitting on my hands and letting the magic of compounding work for me, I instead got stupid – sometimes just for a day, but that’s all it takes – and sold.

These mistakes are all seared in my mind… but it turns out I’d forgotten one…

Yesterday at the conference, when I saw that the management of Denny’s (DENN) was presenting, it triggered a memory. Didn’t I used to own that stock? Sure enough, I did, back in 2002, when the entire restaurant sector got clobbered mainly due to a price war between McDonald’s and Burger King. I took advantage by investing a quarter of my capital in shares of McDonald’s, Yum Brands, Jack in the Box, CKE Restaurants, and Denny’s.

Denny’s was the smallest position of the five because it was by far the riskiest – it was on the verge of bankruptcy, as you can see from these two good write-ups posted on ValueInvestorsClub at the time. Nevertheless, I purchased nearly 1 million shares of the stock at an average price of around $1 in early 2002.

A little more than two years later, I congratulated myself for an excellent investment and exited at an average price around $2 – turning what became a 20-bagger (DENN shares are now trading for more than $20) into a mere double. Sigh…

(Incidentally, the four other restaurant stocks I bought back then were all at least 10-baggers as well, except CKE, which was taken private after “only” a 5 times return.)

The lesson here is that if you own a solid company that’s growing nicely and your investment thesis is playing out… don’t do anything (even if the stock no longer appears super cheap). As long as it isn’t crazily overvalued and the story – the reasons you own it, such as its competitive moat, value drivers, etc. – is intact, then let your winners run. You only need a few 10-baggers (or far more, like Apple, Amazon, and Netflix) in your career to ensure a fabulous long-term track record.

3) Another important lesson that was reinforced at the conference yesterday: don’t short growth stories, irrespective of valuation, unless you’re certain that the company will miss expectations.

The most obvious example in today’s market is electric-car manufacturer Tesla (TSLA), which is setting new highs almost every day. It’s now approaching a $100 billion market cap, more than General Motors (GM) ($50 billion) and Ford Motor (F) ($37 billion) combined!

I saw another example when I went to the management presentation of natural pet-food maker Freshpet (FRPT). Someone posted it as a short idea on ValueInvestorsClub in September 2017, when the stock was at $16.25 per share. It was a detailed, well-articulated argument – including 28 tables and charts – arguing that the company’s growth would stall and, with the stock trading at a rich 4 times revenues, there was plenty of downside.

But it was exactly wrong…

Around that time, the company increased its marketing spending, which drove sales growth to above 20% annually. Investors have responded by boosting Freshpet’s multiple to nearly 10 times revenues, and it’s up nearly 300% to more than $60 per share!

4) Another day, another struggling Unicorn… Lime pulls its scooters out of 12 markets and lays off staff. Excerpt:

Lime, the world’s largest scooter sharing company, is pulling out of 12 markets and laying off staff as it struggles to become profitable.

In the U.S., Lime will exit Atlanta, Phoenix, San Diego, and San Antonio. Overseas, it’s pulling out of cities including Bogotá, Lima, and Rio de Janeiro.

Lime is eliminating 14% of its full-time employees worldwide, which will impact about 100 people, according to the company. Lime declined to say how many part-timers will be affected.

The company said it was struggling to turn a profit amid low ridership, and that it is facing regulatory challenges in some of these markets, including bans on nighttime riding and high fees to operate. 

Best regards,

Whitney

Whitney Tilson

Get Whitney Tilson's Empire Financial Daily delivered straight to your inbox.

About Whitney Tilson

Prior to creating Empire Financial Research, Whitney Tilson founded and ran Kase Capital Management, which managed three value-oriented hedge funds and two mutual funds. Starting out of his bedroom with only $1 million, Tilson grew assets under management to nearly $200 million.

Tilson graduated magna cum laude from Harvard College with a bachelor's degree in government in 1989. After college, he helped Wendy Kopp launch Teach for America and then spent two years as a consultant at the Boston Consulting Group. He earned his MBA from Harvard Business School in 1994, where he graduated in the top 5% of his class and was named a Baker Scholar.

Click here for the full bio