Recently, Whitney Tilson sat down with Steve Forbes to talk about value investing, Warren Buffett and how to get out of an investment hole.
Interview video and transcript below:
Steve Forbes: Now selling short, there, talk about timing – Netflix. You were down on Netflix for a long time. And they finally fell apart, but sometimes you can’t ride the thing through.
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Whitney Tilson: That’s right.
Forbes: What lessons have you learned from that, other than sometimes it just doesn’t work?
Tilson: Yes, it’s very frustrating to have had the analysis correct on Netflix. We foresaw exactly what would happen to the company, in terms of rising expenses that would force them to raise prices and that would hurt subscriber growth, etc. But we had been too prescient in seeing it coming, and started to short the stock sort of on the way up.
So we ended up seeing incredible momentum behind the business and said, “You know, we just don’t want to be in the way of a freight train, in terms of the momentum of the business.” Shame on us for sort of not being clever enough, once that momentum was broken, to have piled back in – maybe after the stock had fallen from 300 to 250 – and then ridden it down.
The only good thing about that experience on the short side, other than a good lesson for other shorts in the future, is that we got to know the company super, super well. And when the stock fell apart – when they announced earnings last month and it fell 35% or so in a day, down to about $77 a share – because we’d done all that work on the company, even though we hadn’t had a position in the stock, long or short, for the better part of a year, we were able to act quickly and go in and buy a mid-sized position. It’s probably our tenth largest position today, call it a 4%-5% position.
So we actually think in the $70s, Netflix is really quite cheap. And that, at the end of the day, Reed Hastings is a very smart guy. He, by his own admission, shot himself in the foot in terms of how he handled the price increase. And the whole Qwikster thing was a debacle. But we think, at the end of the day, they offer great service, have 24 million by-and-large pretty loyal customers, and they should be able to stabilize the subscriber numbers and start growing up, and the stock will take off again.
So hopefully it will end up being a good lesson, but also one we’ll end up making quite a bit of money on. But there are other companies I’ll cite, too, just in the past week or so. Green Mountain Coffee Roasters was another one of these moon shots, trading north of 100 times earnings. Partly because of our lesson as to what happened with Netflix, we stayed in there and actually increased the size of the position. Stock was down 40% in a day a week or so ago.
Today’s example I’d cite is Salesforce.com, another good company trading just about 100 times pro forma earnings. They’re actually losing money. They’ve lost money the last five quarters on an operating basis. But even if you use the company’s – in our opinion – bogus pro forma earnings, trading at eight times revenues and over 100 times earnings, it’s really hard to lose money shorting a company trading at eight times revenues over 100 times earnings with a full size company, not some little tiny company or one that’s having a little cyclical downturn in earnings.
The company just reported earnings last night [November 17th] that actually weren’t too bad. But when you’re trading at 100 times earnings, “not too bad” isn’t good enough. It has to be perfect. There were a couple little flaws, a couple little signs that growth might be slowing a little bit. The stock’s down 10% today. So we’re going to stay in that one, as well.
Focus On The Macro
Forbes: Before we close with some more specifics on stocks, in terms of making your picks, how much weight do you put on the macro environment, and how much on individual securities?
Tilson: Well, it depends. For some stocks, the macro is a critical part of the investment theme. I would say that we would not own the financial stocks we own today. And we only own U.S. financials. We’re not interested at all in the European financials. They’re still in their 2008 phase.
Tilson: Way over-levered with a huge storm bearing down upon them. Whereas we think the U.S. financial sector sort of went through its valley of death, and has dramatically stronger balance sheets today, much lower levels of leverage. Deutsche Bank, last I looked, assets to tangible equity are levered about 49 to one. And JP Morgan’s 13 to one, Goldman’s 13 to one, right?