Saturday, May 20, 2023

My Latest Stock Idea Has 183% Upside and Just 5% Downside

By Whitney Tilson (View Archive)

I'm always on the search for profitable investment ideas and insights to share with Empire Financial Research subscribers...

That's why I read widely, travel to conferences and events all over the U.S. and Europe, and have built a network of relationships with the smartest investors I know all over the world.

Sometimes it's exhausting.

In early January, less than 24 hours after returning from a two-week holiday with my family in Antarctica, I was on a flight to Las Vegas to attend the Consumer Electronics Show and see all the latest technological developments around artificial intelligence, electric and self-driving cars, augmented reality, drones, etc.

Then, I immediately flew to Orlando for the annual ICR conference where more than 200 consumer, retail, and restaurant companies presented over two days.

I was so impressed with what I saw from two companies in particular that I recommended them in the January and February issues of the Empire Investment Report.

But my favorite way to come up with great investment ideas is to piggyback on others' ideas...

I take no pride in originating a unique idea myself that nobody's ever heard of. My goal is to make you money, period.

For example, in 2008, when I saw the storm clouds of the global financial crisis on the horizon, I bet against the stocks of a wide range of financial and real estate-related companies like investment bank Lehman Brothers and mall operator General Growth Properties (GGP), both of which went bankrupt. Having made nearly 100% on my short position, I covered both and moved on...

But then on May 27, 2009, just two months after the market bottomed, my college buddy Bill Ackman of Pershing Square gave a presentation at a conference, explaining why he'd bought 25% of GGP's shares in bankruptcy.

He made a compelling case that GGP was an unusual bankruptcy. You see, most bankruptcies occur when a company is insolvent, meaning that its liabilities exceed its assets. This usually means that debtholders and other creditors take a haircut, while shareholders, who are lowest on the list of claimants, get nothing and the stock is a zero.

But in rare instances, like the global financial crisis, companies are forced into bankruptcy due to illiquidity. The value of their assets exceeds the liabilities, but they're illiquid, meaning they can't be sold quickly to raise cash. In this case, a company doesn't have the cash to pay off the debt that's coming due and, if debtholders won't "roll" the debt, the company can be forced into bankruptcy.

This, Bill argued, is what had just happened to GGP. Its malls were highly valuable and tenants were still paying rent, so cash flows were healthy, but debtholders had panicked and refused to roll the debt.

Seeing that GGP's assets were worth far more than its liabilities, Bill bought a huge stake in the company, hired lawyers, and showed up in bankruptcy court to argue that GGP had the resources to pay all of its creditors in full. He also made the case that the remaining value – which could be as much as $30 per share for a stock then trading at $1.19 – belonged to shareholders like him.

I quickly did my own research, called Bill with a few questions, and bought the stock.

Long story short, everything played out exactly as – and even faster than – I hoped. By the end of 2009, the stock was up 17 times!

Here's another example...

On May 4, 2014, I attended the Ira Sohn conference in New York and saw a presentation by a guy named Will Snellings of the Marianas Fund.

I'd never heard of him or his fund, but I was impressed with his pitch for discount airline JetBlue (JBLU). He argued, with simple yet compelling math, that earnings were poised to soar because the company had just added two rows of seats on every plane, introduced a new first-class cabin on transcontinental routes, and started to charge for checked bags.

I knew a good bit about the airline because I'd written five articles about it in 2003, and I still had relationships with people who worked there. So I called them to verify what Snellings had said. When they confirmed it, I loaded up on the stock. Sure enough, earnings – and the stock – tripled soon after.

Last month, Bill Ackman invited me to be a judge at the 16th annual Pershing Square Challenge that he sponsors at Columbia Business School...

Of course, I said yes, hopped on my bike, and rode up to the school's new campus on 130th Street in Harlem.

Each year, dozens of three-person teams of MBA students develop stock pitches. The five finalists present to a panel of judges. This year, the judges included Bill, investing legend Leon Cooperman, me, and five others. The stakes were high, as the winning team receives $100,000 and the second-place team earns $50,000.

It was a tough decision, as each team of students did excellent work, but ultimately a clear winner emerged...

In fact, I think it's such a great idea – and was so impressed with the pitch – that I got permission from them to share it with Empire Investment Report subscribers.

Since bottoming in early 2009 during the global financial crisis, this stock has soared, rising more than 200 times to its peak in early 2021.

It's been steadily falling ever since, losing nearly half its value over the last two years because investors believe the company's earnings will decline from the pandemic-fueled peak.

I agree.

In fact, it's already happening. In the first quarter, while revenue rose 4%, earnings per share fell almost 30%.

So why are we buying today?

Just as investors became overly optimistic and bid the stock up far too much in late 2020 and early 2021, they have now become overly pessimistic, and the sell-off is way overdone.

Well, the base-case scenario for the stock is simple: If the company hits its goals and simply trades back up to its historical price-to-earnings multiple, shares have almost 200% upside from today's prices in less than three years.

But even if management and analysts are being overly optimistic, my calculations suggest that the stock only has about 5% or maybe 10% downside.

We like asymmetric setups in which we make a lot of money if we're right and only lose a little if we're wrong. That's what we have in this stock.

If you're interested in reading this research, click here to learn how to get started immediately.


Whitney Tilson
May 20, 2023