Excerpted from an email which Whitney Tilson, with a focus on Valeant, sent to investors on Tuesday evening.
1) This article in today’s WSJ pissed me off – like most articles that paint a negative picture of short sellers who have the guts (and it takes guts, believe me!) to go public with their data, analyses and opinions:
As short seller Andrew Left is finding, scrutiny can cut both ways.
Mr. Left, who heads the short-selling research firm Citron Research, on Monday offered no new allegations against drug companyValeant Pharmaceuticals International Inc., after Friday hinting he had more accusations to unleash.
Mr. Left has contended the drug company has used its specialty pharmacies to generate phantom sales, an allegation Valeant denies. On Monday, he stood by his previous criticisms and reiterated his skepticism on the future of Valeant’s stock. Shares closed the session at $100.47, up about 7% for the day but far from the $146.74 price they were at before his Oct. 21 report.
Mr. Left on Monday suggested that specialty pharmacies could be Valeant’s “secret strategic channel” and speculated that they would be used to an improper end, but he didn’t present evidence of illegality.
Valeant has said it has found “no evidence whatsoever” of illegal activity but also set up a board committee to look at its relationship, since terminated, with a specialty pharmacy.
Meanwhile, Mr. Left is facing legal action from Hong Kong securities regulators, who allege he published false information about a Chinese property developer in 2012. A Hong Kong tribunal recently dismissed Mr. Left’s application to stay the proceedings against him, securities regulators said Monday.
Mr. Left said Monday of the Hong Kong developments that he has “tried and will continue to be respectful to the process during the hearing.” He said his actions on Valeant and the Hong Kong issue were “two completely different matters.”
“All the information that I printed [in] 2012 was completely true to my best possible knowledge,” he added.
I know Andrew Left – not well, but we’ve met a few times and spoken and emailed numerous times about lots of stocks over many years. While he is a lunatic (in the best sense of the word; I have yet to meet a dedicated short seller who isn’t!), he is very smart, has a good nose for hype, malfeasance and absurd overvaluation, and there is no doubt in my mind that, whether he’s right or wrong (and his track record shows that he’s right far more often than he’s wrong), he sincerely believes everything he says and writes. We live in a free country, with free speech enshrined in our Constitution, so as long as he genuinely believes it, he can say whatever he wants as far as I’m concerned and shouldn’t have to fear personal attacks much less lawsuits and/or regulatory investigations.
I felt the exact same way (and said so publicly) about David Einhorn when he went after Allied Capital and Lehman Brothers; Bill Ackman and MBIA and Herbalife; Jim Chanos and Enron; etc., etc., etc.
(Note #1: I am not taking sides in the ongoing thermonuclear war regarding Valeant. I long ago (thankfully) put Valeant in my “too hard” bin, so I’ve just been watching from the sidelines. All I know is that this is going to be an incredible case study someday.)
(Note #2: It amazes me how many people are rapidly forming a strong opinion and wading into this stock, whether long or short. It’s hard for me to believe that even 1% of them have some sort of informational or analytical edge, in which case they should join me on the sidelines rather than try to be a hero. I have a very healthy ego (as you will see from my marathon adventure – below and attached), but I’m beginning to think that it might be below average in this testosterone-laden industry – LOL!)
Activist shorting used to be incredibly rare – I used to be able to count on one hand the number of investors (nearly all hedge fund managers) who did it (myself included), and even among these folks it was very rare. Now, somebody publishes a bearish thesis on a stock more than once a day on average! (I know this because I get an alert from a very useful subscription service I use called www.activistshorts.com; email the founder, Adam Kommel, at[email protected] and he’ll set you up with a free trial.)
I firmly believe that our markets are massively better off with the rise of “activist shorting” – even when I’m on the receiving end of such an “attack.” For example, I understand that there’s a short theses going around regarding Platform Specialty Products (PAH), which is my 2nd largest position (it was my biggest winner last year, and has been my biggest loser this year) and which perhaps explains the 16% short interest. But I feel no animosity toward those with a negative view on the company/stock – in fact, even though it might cause the stock to decline, I’d wish they’d make public their short thesis so I could: a) better understand it; b) maybe decide to change my view (or at least position sizing – which could mean making it larger if I conclude that the short thesis is especially lame); and/or c) have the opportunity to publicly rebut the short thesis, as I did with GGP in 2009.
In that instance, on December 14, 2009, a fund called Hovde Capital published a 38-slide critique of my (and Bill Ackman’s) largest long position at the time, entitled: General Growth Properties Fool’s Gold: We Think Current Equity Investors Will Be Disappointed in the Company’s Reorganization (posted here:www.marketfolly.com/2009/12/short-case-for-general-growth.html). Within days, the stock of GGP, which was in bankruptcy, plunged from $12 to $7, which was a real lump of coal in my stocking at the end of the year (especially when I was trying to recover from 2008).
GGP had started 2009 at a mere $1.29, so Hovde had no doubt taken hideous losses (I heard they’d established their short position in the $3-4 range) and I thought that they might be trying to drive it down to recoup some of their losses at the end of the year. But I didn’t accuse them of this – or make any other personal attacks nor impugn their motives. Instead, I welcomed the debate, writing:
Before proceeding, we want to make clear how much we enjoy the debate and think our markets would be much healthier if there were a similarly detailed exchange of viewpoints for EVERY stock!
It turns out that Ackman and I were proven correct – this is how the stock has done since then (plus there have been healthy dividends, plus shareholders got shares of HHC (which I still own) when GGP emerged from bankruptcy, which are up ~4x), so this has been a grand slam:
But that’s not the point: from a societal/market perspective, it doesn’t matter who was right or wrong. What matters is that there was a healthy, fact-based debate from which everyone learned.