Whitney Tilson's Value Investing Congress Presentation: Short Exact Sciences (EXAS) ~ market folly

Wednesday, September 10, 2014

Whitney Tilson's Value Investing Congress Presentation: Short Exact Sciences (EXAS)

We're posting up notes from the 2014 Value Investing Congress in New York. Next up is Whitney Tilson of Kase Capital who presented various short ideas.

Whitney Tilson's Value Investing Congress Presentation

Presentation has 4 parts: lessons from a dozen years of short-selling, update on 2 short ideas (LRN and LL), and a new short idea (EXAS)

Why short-sell?
Insurance (but made for painful 2013-14): pays when you need money to buy cheap good companies in big declines
Plentiful opportunities now (shortsellers run out of town: shops closing, long only launches)
Can make money
Can provide funds to buy more longs
Keeps him from messing up the longs
Big rush from winning/intellectually satisfying
Most HFs are expected to short

Finding ideas:
- Other short sellers
- Conferences
- VI Insight, VI Club, Seeking Alpha,  SumZero, Activist Shorts, Citron, Screens
- Media (look for hype)

Right now seeing incredible shorting opportunities
Be very diversified: has 50 shorts now
Offset longs and shorts (match cap/industry and the way they trade: tough to run long PG BRK and short volatile small names)

Lesson: stock follows earnings = reported results have to start showing cracks (example MBIA took a while)

Lesson: avoid "beat and raise" names = runaway trains (examples PCLN TRIP FB LNKD)

Lesson: be patient, wait for a break (example shorting CROX too early)

Lesson: look for Titanics, mortal damage but taking a while to sink (LRN, NSR, HLF, WRLD) 

Lesson: look for obvious bubbles (3D names, PLUG, Ballard, SaaS, biotechs) 

Update on K12 (LRN) Short
Losing their largest EBITDA contributor in PA (downgrade this morning)
Likely- per his contacts- to lose several other contracts in the next 1-1.5 yrs
Doing bad things, like enrolling no-shows and billing
Still overvalued

Update on Lumber Liquidators (LL) Short
Still many ways to win
Business performance is poor (dropping SSS)
There might be news on the formaldehyde end (not in deck)

New Short Idea: Exact Sciences (EXAS)
New colon cancer test: essential to detect early
Company has long history of failure, the new test is FDA approved
The "superior" results were rigged
Essentially a binary outcome based on reimbursement rate decision
Even if high price approved, it will fail in the market = requires filling up a cup with excrement vs. just swipe
New technologies coming (ie pill cameras) 

Q&A: Why short at all? Munger quote from a private meeting "every guy has to learn for himself [not to short]"

Q&A: Are you still in CALL? Yes but two Qs of bad prints so less enthusiastic now.

Q&A Options? "Options are heroin. They feel so good and they kill you." Now only two positions, LT ITM call on CP, defacto a stock position. Puts in IOC.

Q&A: VIPS? Got in at 80, covered at 120. Analyst called him after a visit in China: it is a real business and it grows at the rate chinese internet cos are growing, nothing suspect.

Q&A: IOC: not a great short now because of the Total partnership. Will take a while to see if the gas is extractable, Tilson does not think so.

Be sure to check out the rest of the Value Investing Congress presentations here.

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