Whitney Tilson discusses shorts in International Business Machines Corp. (NYSE:IBM), 3D Systems Corporation (NYSE:DDD) and Questcor Pharmaceuticals Inc (NASDAQ:QCOR) in an email sent to ValueWalk (see this post for background on IBM). See the part  of the email where Tilson discusses Berkshire Hathaway here.

4) While I understand Buffett’s continued ownership of Coke, I am perplexed by the huge position he’s established in IBM, a stock I’m short because: a) I think the business is likely slowly dying and; b) I’m certain the company is engaging in all sorts of earnings shenanigans (albeit perhaps legal ones).


In his letter, Buffett (correctly) disparages EBITDA on two occasions (“Our definition of coverage is pre-tax earnings/interest, not EBITDA/interest, a commonly-used measure we view as seriously flawed.” (page 11) and “When Wall Streeters tout EBITDA as a valuation guide, button your wallet.” (page 14)), but IBM is among the worst offenders among large corporations when it comes to using non-GAAP fakery to mislead investors, as Jeff Mathews points out in another brilliant column (I included his prior column in my last email a few weeks ago):


Whitney Tilson K12 Questcor Pharmaceuticals QCOR

Whitney Tilson Courtesy of Kase Capital

Emerson, you see, doesn’t lead with non-GAAP financials the way some companies do—and by “some companies” we’re thinking especially about IBM, which uses non-GAAP financials the way a magician uses his sleeves.

“We present GAAP numbers,” Emerson’s famously frank CEO, David Farr, has said on previous calls.  “Which means we include all pension costs, all intangible amortization, and our performance share stock programs in the consolidated numbers.   We present GAAP numbers.”

And Farr is true to his word: All the numbers Emerson’s team discusses on its calls are strictly GAAP—that is, they conform to generally accepted accounting principles.

In fact, in Emerson’s press release yesterday, the term “non-GAAP” appeared just twice, at the very end of the release with a table detailing a modest non-GAAP to GAAP reconciliation that would have boosted year over year earnings growth from 5% to 8% had the company chosen to use it.

Emerson did not, however, choose to use it.

IBM, on the other hand, has no such qualms.

The term “non-GAAP” appeared 39 times in IBM’s most recent quarterly earnings release, starting in the very first sentence.

Such is IBM’s prowess at presenting the most favorable numbers possible that, as we have seen in our previous look at the number-massaging machine known as Big Blue, an 11% pre-tax incomedrop in the fourth quarter turned into an 11% after-tax gain, thanks to the magic of a near-non-existent 11.2% tax rate in this year’s quarter.


5) My funds had a monster month, rising nearly 9%, but there were a few positions that didn’t work. Here’s what I wrote to my investors this morning about Green Mountain:


On the short side, Green Mountain rose 35.5%, but it began the month as only a 1.3% position so the impact was minimal (ah, the joys of shifting last fall to a more diversified short book, with much smaller positions). The company reported weak earnings and guidance (as I expected), but the stock jumped because of a simultaneous announcement of a partnership with Coke to develop Keurig Cold (which I didn’t expect).


I don’t think Keurig Cold – which is currently nothing more than vaporware – will ever amount to much, but nevertheless it’s a good deal for Green Mountain, as it adds potential upside optionality. But $6 billion worth of upside optionality (the extra market cap attributable to this announcement)? I think not, so I like this position more today than I did a month ago, and thus am comfortable with it as a 1.7% position currently.


6) Speaking of my favorite shorts, let’s turn to Questcor, which is doing so many bad things I can’t keep track of them all. Citron Reseach has done a series of excellent pieces on the company, including an incredibly damning one (plus a follow-up) this week, which I’ve attached (you can access previous reports here; scroll down and click Next Page a number of times). I didn’t used to think this stock could be a zero, but now I think it’s possible (though not likely). Citron makes a strong case that the company’s sole product has BIG problems and that the FDA could halt all sales.


In addition, Jesse Eisinger published this well-researched article on the suspicious timing of QCOR’s market-moving announcements and the CEO’s stock sales:

This is the story of a company and its fortunate chief executive.

Questcor Pharmaceuticals is a biotechnology company with a $4 billion market capitalization. Good things keep happening to Questcor in the middle of the month. Here’s what’s notable: The middle of the month just happens to be the time that the company’s chief executive, Don M. Bailey, sells stock through his regular selling plan.

7) And let’s not forget another one of my favorite shorts, DDD, which reported weak earnings and gave weak guidance yesterday – but who cares – the stock went UP! The company continues to miss and guide down, and operating and net margins continue to shrink amidst a deluge of ferocious competition, yet the stock still trades at 15.2x trailing revenues. Go figure…

I just realized what DDD reminds me of: Tyco! Such wonderful parallels – both have real underlying businesses, but are in highly competitive industries, so how does management concoct a growth story to jack the stock through the roof? Easy! Just acquire every company in sight, get very creative with acquisition accounting, and then work closely with Wall Street’s finest to pump up the stock – then, lather, rinse, repeat. I think there’s a good chance DDD ends up the same way: a smoldering crater.

Here’s a picture of the Tyco promoter, CEO Dennis Kozlowski:


And here’s a picture of the DDD promoter, CEO Ari Reichental:


8) This is a hilarious Twitter account mocking DDD’s CEO: @NotAviReich. Here are some of the best:

  • ·         Based on Tesla’s positive response, 3DS will build a 3D gigafactory. It will produce 1.2mm worthless plastic trinkets a day.
  • ·         3D printed homes? Just imagine, if every bum had one, we could end homelessness in America.
  • ·         $DDD had to ramp its R&D spend. Don’t you realize how much effort is involved in mastering printing sugar figurines of Kim Kardashian?
  • ·         “In the next 5-10 years, 3D printing will change everything.” I still believe that, if only b/c its changed nothing in the last 30 years.
  • ·         Today just goes to prove: while you can 3D print almost anything, it’s real tough to print profits.
  • ·         $DDD used to have 3-legged strategy, like a stool. Now we have six strategies. So, its a stool that became an octopus. Got it?
  • ·         3D Printers are the future of manufacturing! How many 3DPs are used to manufacture $DDD’s 3DPs? Don’t be a smart-ass.
  • ·         Still trying to figure out why I wasn’t invited to Davos as a thought leader. Luckily my cousin owns a meatball shop there, so I’m there.
  • ·         Recovering from CES. As they say: what happens in Vegas stays in Vegas. Funny, that also applies to the unsold 3D printers we left there.
  • ·         3DPs return factories from China to US. But Chinese are now building 3DPs and launching 3DP factories in China. I’m so confused.
  • ·         MLK dreamed of true democracy. I too
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