The following is an excerpt from an email which Whitney Tilson sent to ValueWalk. For some context see 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
Whitney Tilson on Lumber Liquidators Holdings Inc (NYSE:LL)
Attached (and also posted at www.tilsonfunds.com/Shorting.pdf) is a presentation I gave last Wednesday at a breakfast hosted by the Harvard Business School Club of NY entitled Lessons From a Dozen Years of Short Selling, which also includes the latest version of my slides on Lumber Liquidators. Most of the stocks mentioned in the presentation are ones I’m currently short.
The ExodusPoint Partners International Fund returned 0.36% for May, bringing its year-to-date return to 3.31% in a year that's been particularly challenging for most hedge funds, pushing many into the red. Macroeconomic factors continued to weigh on the market, resulting in significant intra-month volatility for May, although risk assets generally ended the month flat. Macro Read More
3) Speaking of shorting, boy, a number of my favorite shorts have really been working recently – at last! My largest short going into last Friday,InterOil Corporation (NYSE:OIC), crashed 37% that day, and one of my largest shorts, Lumber Liquidators, fell 14% today. I guess even a blind squirrel finds a few acorns… ;-)
Speaking of InterOil, there are some curious parallels with K12 Inc. (NYSE:LRN). When I presented K12 at the Value Investing Congress on Sept. 17th, it had risen 71% YTD and become a nerve-wracking 3.4% short position in my fund – but I stubbornly refused to cover any of it. Three weeks and one day later, the stock blew up, falling 38% in a day.
Similarly, when I mentioned IOC during the Q&A at the Robin Hood Investors Conference on Nov. 21st, it had risen 56% YTD and become a nerve-wracking 3.4% short position in my fund – but I stubbornly refused to cover any of it. Two weeks and one day later, the stock blew up, falling 37% in a day.
Let’s hope LL and 3D Systems Corporation (NYSE:DDD), the two stocks I’ve really gone public with in the past month, follow the same trajectory! (LL appears to be well on its way…)
4) I posted an article this morning on Seeking Alpha entitled Why There’s More Downside for InterOil – see below or go to: http://seekingalpha.com/article/1887451-why-theres-more-downside-to-come-for-interoil (be sure to read the analysis by hawkeye901 that I re-posted in the Comments section):
After InterOil announced its long-awaited asset monetization deal with energy supermajor Total on Thursday night, the stock plunged 37% on Friday (before popping 10% today) because the deal failed to meet investors’ overheated expectations. So is it time to declare victory on what was my largest short position and move on? No. Though I took some profits today, I maintain a short position because I think there’s more downside to come for InterOil.
Rather than engaging in breathless speculation about InterOil’s future (fueled by the most clueless, conflicted “analysts” and venomous, anonymous message board trolls I’ve encountered in my career), it’s now possible – at last! – to analyze this company based on real information.
PS–Here’s a transcript of what I said about InterOil during the Q&A session following my presentation on Lumber Liquidators at the Robin Hood conference:
Moderator: Whitney, since you were nice enough to come with a short, would you mind if I asked you about another short, which you are public on and have written a lot about that I think is close to its all-time high? It’s a Papua New Guinea oil and gas exploration company which has a big market cap and basically no earnings and virtually no revenues to support it.
Me: Sure, it’s called InterOil – IOC is the ticker. Lumber Liquidators is one of my newest shorts; I think InterOil may be the oldest short in my book. It’s fluctuated between $50 and $100 for five plus years and is in the high $80’s right now. It has a $4.3 billion market cap for a company that’s done nothing but burn money for 15 years going around drilling wells in one of the world’s most corrupt and primitive countries. But now they are on the verge of a deal. On the conference call last week, the new CEO said “We are going to sign an asset monetization deal”. They’ve been promising one pretty much every quarter for the last five years and it’s all come to naught, but now they’re serious. By the end of this year, they’re going to sign a huge asset monetization deal and the stock has run up a lot on that news.
ExxonMobil is building a big LNG plant right nearby and if InterOil actually does have any natural gas, the logical thing to do would be to sell it Exxon. Exxon knows that and I think Exxon is perfectly happy to sign an offtake agreement – and that’s all it will be.
I think this is a buy-on-the-rumor, sell-on-the-news kind of story.
Moderator: It’s one of these odd ones where you’re kind of hoping for a deal so there’s something to analyze. If there’s no deal, which sounds likely based on what you said of the history, then by the beginning of next year, it’ll be the deal that’s coming by the end of 2014.
Me: Exactly. Investors seem to have an infinite capacity to believe a company that has consistently let them down, so if they actually sign a deal, people will see…
They’ve never run an extended flow test, which is what makes me skeptical about the size of the resource.
So I think there will be a deal that’s very back-end loaded and could cut the stock in half.
5) I published another article in Seeking Alpha this morning entitled My Analysis of Lumber Liquidators’ Updated Guidance, which is also below and posted at:http://seekingalpha.com/article/1887441-my-analysis-of-lumber-liquidators-updated-guidance:
After the close yesterday, Lumber Liquidators updated its guidance (see press release here) and released a new investor presentation (here). I believe this new information provides evidence to support the key pillar of my investment thesis (outlined in my original presentation, posted here): that margins will come under pressure, leading Lumber Liquidators to miss the exuberant expectations built into the stock price.
…Most importantly, LL guided to materially lower gross and operating margins relative to Q3 and the trend over the past 2+ years, as this chart shows: