The following is from an email which Whitney Tilson sent to ValueWalk
Also see The Strange Case Of Lakewood And Opko Health, Whitney Tilson on his new big short, Whitney Tilson on K12 ‘My response to Dear Whitney – Are we having fun yet?’, and Whitney Tilson On Why He Loves 3D Systems As a Short
1) I read this in-depth story about Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930) on the front page of the Business section of yesterday’s NYT with interest. This is a remarkable company that’s really come out of nowhere in the past couple of decades to become one of the world’s most profitable and successful business (reminds me of Hyundai, which I own). Yet the stock (which trades only on the Korean exchange) gets no respect, with a trailing P/E of only 7.1 and EV/EBIDTA of only 2.7 (and the preferred stock is 30% cheaper!).
I’m taking a hard look at this company/stock, so if you have an opinion on it, bullish or bearish, I’d love to hear it. It’s hard to see how you lose money buying one of the world’s most profitable companies at 1.9x EV/EBITDA (for the prefs) unless earnings suddenly collapse, which is hard to see for such a well-diversified business.
Lee Kun-hee, the man who built the most successful, most admired and most feared business in Asia — a $288 billion behemoth that is among the most profitable in the world — had a message for his employees this year: You must do better.
At other companies, congratulations might have been in order. His companies were headed to another extraordinary year. But this was Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930), the South Korean industrial group that Mr. Lee, an elfin man with a stubborn will, transformed from a second-rate maker of household appliances into a conglomerate with a flagship electronics business that has left most rivals eating its silicon dust. There would be no pat on the back for Samsung’s 470,000 employees. Instead, in June, he sent a companywide email sternly urging them to raise their game.
“As we move forward, we must resist complacency and thoughts of being good enough, as these will prevent us from becoming better,” Mr. Lee, who is 71, wrote. Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930)’s management, he said, “must start anew to reach loftier goals and ideals.”
Two decades earlier, having taken over the company from his father, Mr. Lee met with dozens of his executives and gave them a similar order, one that remains embedded in company lore: “Change everything but your wife and children.”
That message was effective. Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930)’s sales are equal to about one-quarter of South Korea’s economic output. Samsung Electronics, the flagship, posted $190 billion in sales last year — about the same sales as Microsoft Corporation (NASDAQ:MSFT), Google Inc (NADSAQ:GOOG), Amazon.com, Inc. (NASDAQ:AMZN) and Facebook Inc (NASDAQ:FB) combined.
Last year, Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930) shipped 215 million smartphones, about 40 percent of the worldwide total, analysts estimate; this year, it is expected to ship more than 350 million. Interbrand, a marketing consulting firm, ranked Samsung as the eighth-most-valuable brand in the world. Mr. Lee is one of the world’s richest men.
The company’s sweet spot has become electronics: It makes chips, display panels and many other electronic parts, and then assembles its own smartphones and other devices.
This kind of vertical integration has fallen out of fashion in the West, where it is considered unwieldy. While Apple Inc, (NASDAQ:AAPL) designs its hardware and software, for example, the company buys chips from other companies, including Samsung, and outsources the assembly of iPhones, iPods and iPads.
But many years ago, Mr. Lee prodded his lieutenants to see the company’s deep reach into the supply chain as a competitive advantage, not a burden. So far, it has worked for Samsung.
“I don’t think people realize how effective a machine Samsung is in terms of how quickly they can turn around products in response to market change,” said Chetan Sharma, an independent analyst who advises mobile carriers.
So why the crabby email? What on earth is Lee Kun-hee so worried about?
2) Re. my email last week on Lakewood Capital’s report on Opko Health (http://seekingalpha.com/article/1887851-opko-health-the-placebo-effect), some folks on the message board were making a stink about Lakewood’s 13-F filing, which showed that Lakewood owned some OPK shares, so I posted this:
A couple folks have asked why Lakewood’s 13F shows a long position in OPK if they’re short the stock. This is a common misunderstanding. Allow me to explain what I’m quite certain is really going on (though I have no direct knowledge of this particular situation). With heavily shorted stocks like OPK, it can be very difficult to get the borrow, so if your broker finds you some borrow, it makes sense to take more than you need and then buy the stock to offset this.
So, for example, if you wanted to be short 100,000 shares of OPK, you’d get the borrow on 150,000 shares and short them — and also buy 50,000 shares. Then, if you later want to increase the size of your short position, you don’t need to get more borrow (which might be impossible to get at that time) — you simply sell some of the 50,000 shares you own. Easy!
There’s nothing illegal or even unusual about this.
The confusion arises because funds, in their 13F filings (which all funds with over $100 million in assets must file), are only required to disclose their LONG positions — thus, Lakewood’s filing shows a long position in OPK when in reality they’re short it.
3) Lakewood’s report on OPK has attracted rebuttals from the usual promoters, but I was shocked to see StreetSweeper (http://thestreetsweeper.org) going to bat for the company (see the pandering interview they did with CEO Phillip Frost here: http://seekingalpha.com/article/1899701-opko-health-standing-bullish-following-q-a-with-dr-phillip-frost), since StreetSwepper has done some good work exposing obvious frauds and/or promotions (for example, see this on Unilife, which I’m short: http://thestreetsweeper.org/undersurveillance/Unilife_Corporation__UNIS___Top_10_Reasons).
But then I read what Lakewood discovered and the mystery is solved. To not disclose this enormous, obvious conflict is a huge ethical breech. Here’s what Lakewood just published in the comments section of StreetSweeper’s interview with Frost:
We respect the work that TheStreetSweeper has done in recent years exposing questionable companies and protecting the investing public. However, we do have some serious questions about the relationship between TheStreetSweeper and Opko that we think need to be answered. Consider the following:
Hunter Adams is the founder of TheStreetSweeper (please see his bio per TheStreetSweeper – http://bit.ly/1baJ2RI). This article from 2010 highlights that Hunter Adams’ “estranged wife was financing” TheStreetSweeper (http://bit.ly/1eiEobX).
Additionally, as we cited in our report, Dr. Frost has a large number of connections to Barry Honig, an individual who we believe is a serial stock promoter and who has been the subject of multiple lawsuits. We have counted numerous different penny stocks in which Frost and Honig have both invested in recent years, including entities in which