Tesla thoughts; Beyond Meat below $100; Jeffrey Vinik to Shut Down Hedge Fund; Kenneth Fisher Ruled Investing. Then He Made a Sexist Joke.; My assistant Kelli

By Whitney Tilson

Thursday, October 24, 2019
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1) I’m still analyzing Tesla’s (TSLA) earnings report – and awaiting the 10Q – but I have two general (and conflicting) views…

First, there’s no question that reporting a positive net income, operating cash flow, and free cash flow quarter is impressive and unexpected. The stock is responding accordingly (thanks in part, no doubt, to the mother of all short squeezes).

Second, many of the numbers Tesla reported don’t make sense. Sales exceeded production, but inventory went up by $200 million? Sequential revenue was down, but pre-tax profit rose by $546 million? Some funny things are going on here – and Tesla didn’t provide much in the way of explanation in its earnings “update” (a 28-page slide deck) and conference call.

To be clear, I don’t think there was outright fraud. Rather, I suspect the company did classic “kitchen sink” accounting in the first half of the year, whereby it took massive write-downs, and is now releasing the excess to make its third-quarter numbers look better than they really were. (Believe it or not, done “correctly,” all of this is within the bounds of GAAP accounting – hence, it’s not technically fraud, though it’s certainly misleading…)

This Bloomberg article, Tesla’s Surprise Looks Strangely Familiar, captures my suspicions well:

The profit and free cash flow figures also require scrutiny. Despite a slight drop in revenue, Tesla’s pre-tax profit swung up by almost $550 million from the second quarter.

Of that, $126 million, or almost a quarter, was due to a positive swing in “other income,” including foreign-exchange gains. Another $117 million reflected restructuring charges going to zero.

Tesla’s spending on SG&A also fell to its lowest share of revenue since the final quarter of 2018, the last time it reported a GAAP net profit. At less than $600 million, it was also the lowest in absolute terms since the second quarter of 2017, when Tesla sold less than a quarter the number of vehicles. By far the biggest swing, worth $317 million, was the improvement in gross profit margin.

To be clear, cutting costs is positive and necessary. The question is whether this can be sustained, given we’ve been here before, only to be quickly disappointed.

Finally, I want to repeat some things I’ve said many times before…

  • I am not short Tesla (I’m not allowed to have positions in any stocks I write about), nor have I recommended shorting it in my newsletter, the Empire Investment Report (which is long-only).
  • Although I think Elon Musk is a less-than-stellar human being (to say the least), I have always acknowledged that he is a remarkable engineer and entrepreneur – what he has built at Tesla and SpaceX is truly extraordinary – and humanity owes him a debt of gratitude.
  • I write negatively about Tesla not because I’m rooting for the company to fail, but because I think the stock is extremely risky, with more downside than upside, and therefore warn my readers away from it. (Note: Since I warned investors to avoid the stock on March 21, when it was at $295, the S&P 500 is up 6% while Tesla is roughly flat.)

Today, I am neutral on the stock. I think it’s a terrible long, but probably also not a good short right now, either. Over the next few months, the company will likely report positive developments regarding the launches of the Shanghai Gigafactory and Model Y. In addition, I suspect it has more kitchen-sink benefits it can use to spruce up its fourth-quarter earnings. So for now, I think the wisest course of action is to sit on the sidelines and perhaps look for an opportunity to short the stock early next year…

I cover the company on an almost-daily basis for those on my Tesla e-mail list. To sign up for it, simply send a blank e-mail to: [email protected].

One final note: I lost my charity bet with Andrew Left and a dozen other folks that Tesla wouldn’t report a positive net income quarter this year, so I’ll be donating $15,000 to various charities of their choice. I tip my hat to them…

2) While being bearish on Tesla hasn’t been the right positioning for the last few months, pretty much all of my other big short calls have worked spectacularly…

For example, Beyond Meat (BYND) fell to my price target just below $100 yesterday in barely more than half the amount of time I predicted. On July 30, I wrote:

If you’ve been speculating in the stock of plant-based meat producer Beyond Meat (BYND), well, congratulations… but don’t ever do that again. Speculating in the stocks of recent IPOs is a sure way to lose a lot of money, fast…

“But wait,” you might say. “I just made a lot of money here!” To that, I reply with this story I recall Charlie Munger telling long ago: “If you run through a dynamite factory with an open torch and happen to get to the other side without blowing yourself sky high, that doesn’t mean it was a good idea.”

If you still hold Beyond Meat’s stock, yesterday’s announcement that insiders are dumping 3 million shares means that it’s time to get out, even on a down day like today.

The setup here reminds me of cannabis company Tilray (TLRY) last September, when it briefly hit $300. At that very hour on live TV, I predicted that it would be down by 90% within a year… It closed yesterday at $40.64, down 86% since that call.

Both Tilray and Beyond Meat are real companies, not frauds, in exciting sectors that are sure to see tremendous growth. But trading at over 100 times trailing revenues, their stocks were or are caught up in obvious bubbles. The Beyond Meat one today isn’t quite as extreme as Tilray’s was at its peak, so I’ll make a somewhat more conservative forecast: The stock will be cut in half – below $100 – by the end of the year.

Less than three months later, the stock closed yesterday at $97.90. (And Tilray, despite having already fallen 86%, has been nearly cut in half over the same period, closing yesterday at $22.63. It reminds me of the old saying: “What do you call a stock down 90%?” Answer: “A stock that was down 80%… and then got cut in half!”)

So is it time to start thinking about bottom-fishing in Beyond Meat, now that it’s down nearly 60% from its July peak? I think not. While, as I wrote on August 1, “there is a compelling case to be made for Beyond Meat, Impossible Foods, and ‘alt meat’ in general,” its valuation is still absurd, with an enterprise value of around $6 billion and a stock trading at 37 times trailing revenue.

3) Wow, when an established veteran like Jeffrey Vinik struggles to raise money, it really underscores how tough things are for stock-picking hedge funds… Billionaire Stock Picker Jeffrey Vinik to Shut Down Hedge Fund. Excerpt:

In an investor letter dated Wednesday announcing his decision, Mr. Vinik, 60, wrote, “It has been much harder to raise money over the last several months than I anticipated.”…

He said he had been surprised to find how much the industry had changed since 2013… Investors he had known had changed jobs and the decision-making process to invest was far more drawn out than in the past, he said. He said he made the decision to close recently as it became clear more money wouldn’t be pouring in at the start of 2020.

“I honestly believed, obviously foolishly, that I could raise $3 billion by March 1,” Mr. Vinik said. “What I learned after probably 75 meetings is, the hedge-fund industry of 2019 is very different than the hedge-fund industry when I started in 1996, and it’s even very different from the hedge-fund industry when I closed in 2013.”

Despite the rise of quantitative and passive investing, which some managers say have distorted the market and made profiting off fundamental analyses of companies more difficult, Mr. Vinik said he felt his process of picking companies with good fundamentals still worked. But he said competition has increased and he believed it would continue to be a difficult environment for stock pickers.

4) Speaking of established veterans, Ken Fisher sure has gotten himself in a heap of trouble with what my mom calls “diarrhea of the mouth” (usually used to chastise me!). Some good lessons here of which every public figure should take note… This article, Kenneth Fisher Ruled Investing. Then He Made a Sexist Joke., is from the front page of the business section of today’s New York Times. Excerpt:

Over the years, Mr. Fisher has not been shy about making statements that have drawn scorn.

At a Reuters investment summit in December 2011, Mr. Fisher said entrepreneurs had contributed more to the country than any politician and he went on to rank Lincoln as one of the worst presidents. Mr. Fisher said that Lincoln had chosen war over negotiations with the slaveholding states in the South.

Just last year, Mr. Fisher offered up similar statements about Lincoln and slavery on Twitter. Forbes uncovered posts on Twitter in which Mr. Fisher said that Lincoln was his least favorite president and that everyone in the country, including African-Americans, would have been better off if slavery had been allowed to end “peacefully.”

And CNBC obtained an audiotape of a 2018 conference in which Mr. Fisher compared selling a mutual fund to asking a woman in a bar for sex.

5) Now that I’m no longer managing money, I’d like to find a great home at a NYC-based fund for my longtime right-hand person, Kelli Alires.

She has a unique skillset that would be invaluable to a small, independent fund manager like I was – I’d guess the sweet spot would be someone managing at least $50 million and looking to grow.

Over 15 years, Kelli handled routine communication with our 200-plus investors, worked with our prime broker, lawyers, accountants, and other service providers, dealt with compliance matters (including routine SEC audits), set up credit cards and bank accounts, paid all bills, organized events, etc. In short, she took care of pretty much everything so that we could focus on two things: raising money and managing it successfully.

If you’re interested, please contact Kelli directly at [email protected].

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.

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