Whitney Tilson Goes Short Exact Sciences (EXAS)

Whitney Tilson Goes Short Exact Sciences (EXAS)
Whitney Tilson

The 10th Annual New York Value Investing Congress takes place in New York on September 8th and September 9th 2014. ValueWalk will be providing coverage of the event- below is a summary of a presentation by Whitney Tilson on his favorite investment idea (short and long).

Whitney Tilson is the Founder and a Managing Partner of Kase Capital, which manages three value-oriented hedge funds. He is the co-founder of Value Investor Insight, co-authored More Mortgage Meltdown and The Art of Value Investing, and was a contributor to Poor Charlie’s Almanack. He is Chairman Emeritus of the Value Investing Congress.

Whitney Tilson on His Favorite Idea

12 reasons not to short. Taken from his book. Conclusion: shorting is a really tough thing to do, avoid it. Despite that, he still does it mainly because it offers insurance (as long as it’s cheap) and provides a good hedge. Other reasons:

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  • You can make money if you’re good at it
  • Having a short book allows more aggressive investing on the long side (noted his long position in Tetragon Financial Group Limited (AMS:TFG), airline stocks, Hertz Global Holdings, Inc. (NYSE:HTZ))
  • Provides cash when you need it most
  • Psychic rewards (mentally satisfying)
  • Keeps mind occupied so no stupid decisions in the long book
  • Most investors expect hedge funds to have a short book

General feelings on shorting are conflicting: horrible business and has cost him a lot, but finding a lot of attractive shorts. Believes the world will continue to muddle along for a few years.

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Where to find ideas: talk to other short sellers, investing conferences (VIC, Ira Sohn, etc.), ValueInvestorsClub.com, Citron, screens, newspapers.

Big lessons: Be diversified in shorts and try to match long and short positions. Position sizing is important, 2.5% short positions will get you killed. Can take a long time for shorts to play out. Highlighted Ackman’s presentation on MBIA Inc. (NYSE:MBI) which took 5 years to materialize. Thinks NFLX and TSLA are a bad short at any price.

Looking for “Titanics” such as Herbalife Ltd. (NYSE:HLF), Neustar Inc (NYSE:NSR), K12 Inc. (NYSE:LRN), World Acceptance Corp. (NASDAQ:WRLD). Look for obvious bubbles like 3D printing, SaaS, biotech, especially third-tier “me too” players.

Last year’s idea LRN was trading at 50x earnings with regulatory and accounting issues. Following his pitch, stock missed estimates and dropped 50%. Hasn’t covered and still thinks it’s a good short today.

Other stock presented last year was LL. Raided by authorities for buying wood from illegal suppliers. Down 50% from presentation. Still short as wheels are coming off and valuation still rich.

Whitney Tilson’s Current idea – Exact Sciences

Molecular diagnostic company with zero revenue or profits. Not fraudulent or unethical but so much hope built into stock price makes it attractive short. Colon cancer has one of highest mortality rates and lowest detection rates. Trouble is with the colonoscopy, very expensive and invasive, need alternative methods.

EXACT Sciences Corporation (NASDAQ:EXAS) has developed Cologuard. Compared with other test, FIT, results appeared favorable. Problem is that the tests conducted by EXAS were misleading. Reimbursement rates may not be as high as anticipated. Drug does have FDA approval.

After doubling in the past few months, feels the stock could drop by more than 50% on upcoming CMS rate announcements.

Whitney Tilson’s Workshop Audio

Whitney Tilson: Lessons From a Dozen Years of Short Selling by ValueWalk

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