Excerpted from Whitney Tilson’s email to investors

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Whitney TilsonPer my recent email, I’ve been finding it exceedingly difficult to find any stocks to buy, but I did find one recently and established a position in Staples (SPLS). I’m not pounding the table on it, but there’s a decent upside/downside equation I think in light of its low valuation (0.3x sales, <5x EBITDA) and a business that’s declining more slowly than I would have expected. As this chart shows, after a sharp decline from 2012-14, both revenue and operating income has nearly stabilized:

Below is a good write-up of it from ValueInvestorsClub.com (an excellent web site that I’ve been a member of for 15+ years). Here’s the opening:


On April 4th, the WSJ disclosed SPLS is in early stage talks with private equity firms to explore a sale of the company.  I believe there is a strong likelihood (75%) that the talks will lead to a deal as private equity takes advantage of the public markets’ misperception and mispricing of SPLS as a secularly challenged retailer.  In the event these early talks do not lead to a deal, the intrinsic value of the company supports 10% or less downside in the shares.


It has been a tumultuous and transformative past 12 months for Staples.  The ODP merger was blocked on antitrust grounds, fifteen months after signing.  SPLS’ CEO since 2002 stepped down and left the board.  A new CEO with 25 years of experience at the company (after 5 years at Bain Consulting) took the helm and wasted no time leaving her mark:  SPLS exited its unprofitable European operations, announced a $300mm 3-year cost-savings program (already achieved $100mm, beating $70mm guidance with “visibility” into another $100mm in 2017), began transitioning the small/mid B2B delivery business to a paid-membership model, and in Q4 2016 reclassified their operating segments by stripping all delivery business (staples.com) out of the retail segment and into their North American B2B segment.


The new segment disclosure shows SPLS generates 63% of segment EBITDA from its larger, growing N. American delivery business and only 37% of EBITDA from its smaller, shrinking retail business.  Combined segment EBITDA is unchanged for three years while the quality of the EBITDA improves as the mix shifts toward the contract and delivery business.  NA delivery business sales have been unchanged largely due to an underlying mix shift of its own:  sales of ink/paper/printers are in secular decline while SPLS has been growing “BOSS” (beyond office supplies) categories high single digit / low double digit percentage each quarter.


2) Following up on my last email, here’s a link to video of the forum last week featuring two of the greatest businessmen in the world today (and both among the people I most admire and respect), Warren Buffett and Jorge Paulo Lemann: www.youtube.com/watch?v=Co3GFCqQInw (63 min)


3) Speaking of Buffett, here’s some interesting history:

In the mid-1960s, the man who would become the most successful investor of all time dipped his toe into advertising. Berkshire Hathaway acquired major positions in two agencies, McCann-Erickson and Ogilvy & Mather. As Warren Buffett explained his strategy: “I like royalty-based businesses.” At that time, ad agencies were still compensated by commissions on media purchases.

4) An interesting article showing why it’s so hard for active managers to beat the indices:

The effect Heaton is referring to is the subject of a five-page paper he published in 2015 with colleagues Nicholas Polson and Jan Hendrik Witte; Hendrik Bessembinder of Arizona State University recently expanded their findings. In short: The distribution of returns in the stock market is bizarrely lopsided. Often, equity benchmarks are so reliant on gigantic gains in just a handful of stocks that missing them—as most managers do—consigns the majority to futility. “Your intuition is that you can randomly pick stocks and start at zero,” Heaton says. “But the empirical fact is if you randomly pick, you are starting behind zero.”

What Heaton and his colleagues didn’t realize when trying to solve the riddle of chronic underperformance is that someone already had done it, for the most part, in a 1998 study, “Why Active Managers Underperform the S&P 500: The Impact of Size and Skewness,” published in the inaugural issue of the Journal of Private Portfolio Management. One of the original authors of the study is Richard Shockley, an associate professor of finance at Indiana University. At the time of publication, Shockley and his colleagues were investigating their observation that the drag from manager fees and the cost of managing a portfolio didn’t explain the degree of consistent underperformance by mutual funds to their benchmarks. The culprit as they saw it: the concept known as positive skew.

The implication, like it or not, is that a concentration of outsize gains in a minority of index members is tantamount to a death sentence for anyone who gets paid for beating a benchmark. It’s a pattern of returns that virtually ensures everyone outside of an indexer owns mostly deadbeat stocks. “It gets very little attention,” says Rob Arnott, the Research Affiliates co-founder and smart-beta pioneer who’s no stranger to pontificating in the academic realm. “The focus is often on the random walk and the coin toss analogy, and the impact of skewness is overlooked.”

5) Krugman with some very interesting statistics and arguments:

Why does public discussion of job loss focus so intensely on mining and manufacturing, while virtually ignoring the big declines in some service sectors?

Over the weekend The Times Magazine published a photographic essay on the decline of traditional retailers in the face of internet competition. The pictures, contrasting “zombie malls” largely emptied of tenants with giant warehouses holding inventory for online sellers, were striking. The economic reality is pretty striking too.

Consider what has happened to department stores. Even as Mr. Trump was boasting about saving a few hundred jobs in manufacturing here and there, Macy’s announced plans to close 68 stores and lay off 10,000 workers. Sears, another iconic institution, has expressed “substantial doubt” about its ability to stay in business.

Overall, department stores employ a third fewer people now than they did in 2001. That’s half a million traditional jobs gone — about eighteen times as many jobs as were lost in coal mining over the same period.

And retailing isn’t the only service industry that has been hit hard by changing technology. Another prime example is newspaper publishing, where employment has declined by 270,000, almost two-thirds of the work force, since 2000.

So why aren’t promises to save service jobs as much a staple of political posturing as promises to save mining and manufacturing jobs?

6) A fascinating and troubling article and great piece of journalism. But of course Trump would shut down OSHA if given the opportunity…Sad! Inside Alabama’s Auto Jobs Boom: Cheap Wages, Little Training, Crushed Limbs, www.bloomberg.com/news/features/2017-03-23/inside-alabama-s-auto-jobs-boom-cheap-wages-little-training-crushed-limbs. Excerpt:


Alabama has been trying on the nickname “New Detroit.” Its burgeoning auto parts industry employs 26,000 workers, who last

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