Joel Litman's webinar tonight; My Real Vision interview; Good riddance, Adam Neumann, a hollow suit; 'Whee' is still going to go bankrupt; WeWork could cause a disaster for New York City's real estate market; What WeWork's Failed IPO Means for the Melt Up

By Whitney Tilson

Wednesday, September 25, 2019
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1) I recently had the pleasure of meeting Professor Joel Litman, a forensic accountant who has developed a methodology for analyzing companies’ financial statements, making dozens of adjustments to uncover their true earnings and financial health.

Nine of the top 10 global investment houses and 180 of the top 300 money managers pay up to $100,000 a month for his service, which he’s making available for the first time to individual investors at an affordable price.

He’ll be describing it – and revealing the name of what he says is the No. 1 must-own stock in America – in his free webinar tonight at 8 p.m. You can sign up for it here.

2) Two weeks ago, I did a 64-minute interview with Real Vision, which you can watch here. (It’s behind a paywall, but you can sign up for a 14-day free trial). Here’s a summary:

Value investor Whitney Tilson, founder and CEO of Empire Financial Research and the former managing partner of hedge fund Kase Capital, details his transformation from momentum trader to an investor living by Warren Buffett’s dictum that “it’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” In this conversation with Ed Harrison, Tilson explains why he sees WeWork pulling its IPO and eventually going bankrupt, lays out the case for Amazon and Fannie Mae, and speaks to the outlook for beaten-up European financials.

Here’s a 10-minute excerpt that you can watch for free: Becoming a ‘Fool on the Hill.’ Summary:

Whitney Tilson… talks to Ed Harrison about how a few big risks he took early in his career allowed him to grow his fledgling hedge fund. Heeding the advice of Warren Buffett provided him the perspective to identify the opportunities in non-consensus equities through the dot-com bubble. Tilson shares why that perspective helped develop his investment process.

3) In my e-mail only six days ago, I called Tesla (TSLA) CEO Elon Musk and “The Whee Company” CEO Adam Neumann “extreme narcissists and spoiled brats, which leads to all sorts of erratic behavior.” I predicted that “investors will demand that Neumann step down and throw him out.” Sure enough, that’s exactly what happened yesterday: WeWork CEO Adam Neumann Steps Down Under Pressure.

Good riddance – what a clown! He doesn’t hold a candle to Musk, who’s a more complex figure. Yes, he has many flaws: In addition to being an extreme narcissist and spoiled brat, Musk is a thin-skinned, vengeful bully and a pathological liar. But he’s also a remarkable entrepreneur who has built two companies – Tesla and SpaceX – that are shaking up two of the world’s largest, most complex industries and changing the world for the better.

In contrast, Neumann is a hollow suit, having created nothing new or innovative. He’s more like Billy McFarland, the shyster behind the Fyre Festival (which I wrote about here).

4) The big question now, with Neumann out, is whether Whee can get its desperately needed IPO back on track.

Reports have it delayed until 2020, but I don’t think it will ever get done. In the very near future, we’ll see huge layoffs, cost cuts, and asset sales in an attempt to reduce the company’s hideous burn rate. It will succeed partially, but Whee will continue to lose a lot of money… and growth will disappear.

At that point, it’s a tainted, money-losing, capital-intensive company with a terrible business model… and no growth potential. And then it’s going to go public? Ha! Not even the slickest, most shameless, highest-motivated investment bankers will be able to foist this pile of crap onto unsuspecting investors!

If I’m right about the IPO, then the rest of my prediction stands:

  1. Existing investors – led by SoftBank – will want to avoid a total wipeout and throw good money after bad and invest $1 billion or $2 billion in a distressed round that values Whee at $5 billion. 
  2. None of this makes any difference, and the company files for bankruptcy a year from now.

    5) Here’s the best article I’ve read on why the company’s business model makes no sense, and how WeWork could cause a disaster for New York City’s real estate market. Excerpt:

    The first reason for WeWork’s fall from grace is that the business model on which WeWork relies amounts to attempting to globalize a chain of sidewalk lemonade stands by signing a full-faith-and-credit forward contract for $34 billion of Crystal Light with Kraft Foods. And then counting on the world being both infinitely thirsty and that its purchasing power will never be dented by recession…

    The second bit of nonsense emanates from the business in which WeWork is engaged in the first place – leasing other people’s real estate to tenant-“members” with essentially no credit-capacity and in a business with minimal barriers to entry, other than a willingness to pay rent.

    Essentially, to revert to the lemonade stand analogy, WeWork is trading from the curb – albeit with a very expensive permit. The problem is, that everyone in commercial office real estate has a curb of its own…

    If WeWork were removed from the equation, the Manhattan market would have experienced negative absorption of roughly -700,000 square feet of leased space, as opposed to the just over 2.3 million square feet of net absorption that it experienced over the 24 months ended June. This, folks, means that at the margin WeWork is moving markets – bigly.

    6) So, does the failure of Whee’s IPO mean that the bull market is over? Not necessarily…

    In fact, it may be a sign of a healthy market, as Stansberry Research analyst Vic Lederman argued in yesterday’s DailyWealth: What WeWork’s Failed IPO Means for the Melt Up. Excerpt:

    Bull markets don’t sputter out with a sigh. They charge upward. They blaze past expectations.

    A bull market nearing its peak is a time of euphoria. And that’s just not where we are today…

    Suddenly, the WeWork IPO falling apart feels bullish. There’s still room to run in this bull market. Investors haven’t hit peak optimism. If anything, they’re gun-shy…

    Right now, Mom and Pop are worried about getting burned by a bad deal. And that’s not euphoria.

    When the end is near, you’ll know. Everyone around you will be talking about getting rich. And they’ll be pouring money into investments that seem too good to be true.

    There won’t be any suspicion. That feeling simply melts away in the final stages of the Melt Up. Investors are more focused on getting in while they can.

    So remember, bull markets end with euphoria. But today, investors are skeptical. Simply put, the Melt Up isn’t over yet.

    Don’t pull out of the market just because a half-baked pseudo-tech company failed to get its IPO off the ground. Take it for what it is… a sign that investors still have their wits about them.

    Well said, Vic!

    Best regards,

    Whitney

    Whitney Tilson
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    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.