Whitney Tilson of Kase Capital has a lengthy email about shorting stocks. He discusses many shorts and his current thoughts on them. He also states that he will present his largest short at the VIC starting Monday (stay tuned to ValueWalk for live coverage). Below is the full email from Tilson.
1) I have two strong feelings about shorting right now:
a) It’s a horrible business, it’s cost me a fortune over the past 4½ years, I wish I’d never heard of it, and every bone in my body wants to cover every stock I’m short and never short another stock again; and
b) In my 15 year career of professional investing, the only other times that have been as target-rich in terms of juicy, obvious shorts are late 1999/early 2000 and late 2007/early 2008 (and we all know how those ended…).
So which feeling am I going to follow (I feel like John Belushi in that famous scene in Animal house, with the angel on one shoulder and the devil on the other…)? I don’t know, but this I know for sure: the only other time I felt like covering every short and becoming a long-only manager was October 2007. So I went through my short book, stock by stock, and said, “OK, am I willing to cover MBIA at $70? Hell no, not a single share! Allied Capital at $30? Hell no, not a single share! Farmer Mac at $30? Hell no, not a single share!” And on it went… I couldn’t bring myself to cover a single share of any stock I was short – they were all “trembling-with-greed” shorts.
And that’s exactly how I feel today…
So I’m going to stick my next out and share my views on four battleground stocks that are among my favorite shorts: World Acceptance Corp. (NASDAQ:WRLD), Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR), Herbalife Ltd. (NYSE:HLF), and InterOil Corporation (NYSE:IOC). And next week at the Value Investing Congress I will present another short, my largest.
2) Let’s start with an easy one, World Acceptance (WRLD), which I first wrote about in my email on 5/19 (let me know if you want me to resend you this email). Here is what I wrote in my Q2 letter to investors about it:
World Acceptance is an installment lender that makes small, unsecured loans to subprime borrowers via 1,203 offices in 13 states and Mexico. It has highly attractive financial characteristics and has grown strongly for many years, leading to exceptional stock performance. Keep in mind, however, that these statements also characterized subprime mortgage lenders like Countrywide up to the peak of the housing bubble – just before they collapsed. Like them, I believe that World Acceptance is a truly predatory company, victimizing and exploiting its customers with usurious interest rates, outrageous fees, and overpriced, unnecessary credit insurance. This business is so shady and exploitative that it is effectively outlawed in all but the 13 states World Acceptance operates in.
I became aware of the company by reading an expose published by ProPublica, which has won two Pulitzer Prizes for its investigative journalism. Its series of articles on World Acceptance is an extraordinary piece of work that lays out in detail the many ways in which the company deceives and defrauds its customers. Here are the highlights (lowlights) from the series:
Repeat Refinancing of Delinquent Borrowers
- · “In every World office, employees say, there were loan files that had grown inches thick after dozens of renewals.” “That’s [World’s] favorite phrase: ‘Pay and renew, pay and renew, pay and renew,’” Simmons said. “It was drilled into us.” It’s a tempting offer: Instead of just scrambling for the money to make that month’s payment, the borrower gets some money back. And the renewal pushes the loan’s next due date 30 days into the future, buying time.”
- · “For Sutton, making her monthly payments was always a struggle. She remembered that when she called World to let them know she was going to be late with a payment, they insisted that she come in and renew the loan instead.”
- · World’s credit quality is a fiction, a substantial number of customers can’t repay and are repeatedly refinanced. “At World, a normal month begins with about 30 percent of customers late on their payments, former employees recalled.”
Comments on Deceptive Sales of Credit Insurance
- · “Former World employees say they were instructed not to tell customers the insurance is voluntary.”
- · “World can legally understate the true cost of credit because of loopholes in federal law that allow lenders to package nearly useless insurance products with their loans and omit their cost when calculating the annual rate.”
- · “As part of her loan, Sutton purchased credit life insurance, credit disability insurance, automobile insurance and non-recording insurance. She, like other borrowers ProPublica interviewed, cannot tell you what any of them are for: ‘They talk so fast when you get that loan. They go right through it, real gibberish.’”
- · “‘Every new person who came in, we always hit and maximized with the insurance,’ said Matthew Thacker, who worked as an assistant manager at a World branch in Tifton, Ga., from 2006 to 2007. ‘That was money that went back to the company.’”
- · “When insurance products are optional — meaning the borrower can deny coverage but still get the loan — borrowers must sign a form saying they understand that. ‘We were told not to point that out,’ said Thacker, the former Tifton, Ga., assistant manager.”
- · “‘You were supposed to tell the customer you could not do the loan without them purchasing all of the insurance products, and you never said ‘purchase,’’ Buys recalled. ‘You said they are ‘included with the loan’ and focused on how wonderful they are.’”
- · A regional supervisor threatened to discipline a sales person for advising customers that the insurance was voluntary.
- · World’s systems don’t let a customer to decline the optional insurance: “But World soon made it harder to remove the insurance premiums,’ Buys said. She couldn’t remove them herself but instead had to submit a form, along with a letter from the customer, to World’s central office. That office, she said, sometimes required borrowers to purchase the insurance in order to get the loans.”
Threatening Customers in Violation of FTC rules
- · “If the phone calls don’t work, the next step is to visit the customer at home: “chasing,” in the company lingo. ‘If somebody hung up on us, we would go chase their house,’ said Kristin from Texas. The experience can be intimidating for customers, especially when coupled with threats to seize their possessions, but the former employees said they dreaded it, too. ‘That was the scariest part,’ recalled Thacker, a former Marine, who as part of his job at World often found himself driving, in the evening, deep into the Georgia countryside to knock on a borrower’s door.”
- · “Visits to the borrower’s workplace are also common. The visits and calls at work often continue even after borrowers ask the company to stop, according to complaints from World customers to the Federal Trade Commission. Some borrowers complained the company’s harassment risked getting them fired.”
- · World also threatened to collect personal possessions pledged as collateral even though the FTC bars pledging “household goods” such as a TV and furniture.
The Consumer Financial Protection Bureau was established precisely to combat practices like World’s. As the ProPublica article notes:
The Consumer Financial Protection Bureau…has the power to sue nonbank lenders for violating federal laws. It could also make larger installment lenders subject to regular examinations, but it hasn’t yet done so. Installment companies have supported Republican efforts to weaken the agency, echoing concerns raised by the lending industry as a whole.
Will the CFPB act to rein in World and its ilk? I think it’s likely, as it’s already acting against payday lenders, which utilize similar techniques to victimize consumers. In April, the CFPB released a report entitled Payday Loans & Deposit Advance Products, which the Wall Street Journal covered in an article