- 1) The shares of one of my largest short positions (~3%), Exact Sciences, crashed by more than 46% yesterday. Below is the article I published this morning on SeekingAlpha, explaining why I think it’s still a great short and thus shorted more yesterday. Here’s a summary:
- The U.S. Preventative Services Task Force’s Colorectal Cancer Screening Draft Recommendation issued yesterday is devastating for Exact Sciences’ only product, Cologuard.
- I think this is the beginning of the end for the company.
- My price target for the stock a year from now is $3, so I shorted more yesterday.
Also, attached are the slides I presented on it at the Robin Hood Investors Conference a year ago (also posted at: www.tilsonfunds.com/EXAS.pdf).
2) After the close today, Lumber Liquidators announced a settlement with the DOJ over its Lacey Act violations, and it turns out that the predictions I made two years ago were exactly right. Here’s the slide from when I first presented this short idea at the Robin Hood Investors Conference two years ago (on Nov. 22, 2013), when the stock was at $115.36 (I’ve posted the entire presentation, as well as subsequent ones at www.tilsonfunds.com/LL.pdf; in addition, I’ve posted the 18 articles I’ve published on LL since the 60 Minutes story aired on 3/1 at: www.tilsonfunds.com/LLTilsonarticles.pdf):
As I predicted, the company got off with little more than a slap on the wrist in terms of a fine, but we now know that it was, in fact, buying illegal wood, so coming under investigation, which pressured the company to buy legally, disrupted its supply chain and materially impacted margins, which was a significant contributor in the stock’s complete collapse.
A couple of quick thoughts:
- a) As Lumber Liquidators admits in its press release, the settlement announced today has nothing to do with the much bigger poisoning-customers-with-formaldehyde issue:
The Company is continuing to cooperate with other agencies, including the Consumer Product Safety Commission, CARB, Securities and Exchange Commission and U.S. Attorney’s Office for the Eastern District of Virginia, with respect to additional ongoing inquiries and legal proceedings unrelated to today’s announced settlement.
- b) On the first page of the 8-K the company just filed – but notably absent from the press release (gee, I wonder why?) – is this paragraph:
LLI also has agreed in the Plea Agreement to implement an environmental compliance plan (the “Compliance Plan”) for a
probation period of five years. If LLI fails to implement the Compliance Plan within three months of sentencing, it has
agreed to cease the importation of hardwood flooring until the DOJ determines that the Compliance Plan has been
satisfactorily implemented. During the first four years, LLI has agreed to engage an outside consulting firm to conduct
audits of compliance with the Compliance Plan and certain requirements of the Lacey Act.
In the rest of the 73-page document, there are enormously detailed compliance requirements.
This reinforces my point above: the real cost of this settlement isn’t the fines but the scrutiny and the costs associated with it. Whatever Lumber Liquidators has done to date to clean up its supply chain, it will have to do much more going forward under this agreement because both the DOJ and “an outside accounting and/or environmental consulting firm” will be crawling all over the company for the next 4-5 years.
In light of this, I think it’s highly unlikely that Lumber Liquidators will be able to rebound anytime soon to even the low end of its historical operating margin in the 4-9% range, as shown in this chart:
But overall it does look like Lumber Liquidators got off easy, which is why the stock is up 10% after hours. Maybe I’ll get lucky and the stock will bounce enough for me to short more…
3) My friend Chris DeMuth in an article he published yesterday showed the stock charts of the six short ideas I’ve posted on SeekingAlpha: WRLD, LRN, LL, IOC, DDD and UNIS. I had no idea they’d done so well: among these utter bags of crap, the best performer, LRN, is down 58% and the worst, LL, 84%, and the average decline is 70%. (It is a coincidence that my price target for EXAS, $3, happens to also be a 70% decline from its current price.)
4) A spot-on Heard on the Street yesterday on GE:
GE’s industrial businesses, for example, have fairly strong defensive qualities. And about 83% of the company’s industrial operating income comes from recurring services, rather than equipment sales. While Trian bemoaned the previous “lost decade” for shareholders, and said the company’s profit margins could use some improvement, the fund made clear it believes in the business.
…Trian’s plan will require some patience. GE would likely need to finish its divestiture to consider additional balance-sheet leverage, according to Morgan Stanley. Even so, Trian’s leverage target of two times earnings before interest, taxes, depreciation and amortization doesn’t seem overly ambitious for a pure industrial company.
5) Below are two in-depth articles by the WSJ and Bloomberg about how pretty much every drug company, not just Valeant and Turing, has been jacking up prices at a rapid clip for many years. Here’s an excerpt from the WSJ article:
A result of this pricing power is that across 30 top-selling drugs sold by pharmacies, U.S. revenue growth has far outpaced demand in the past five years, according to a Wall Street Journal analysis of corporate filings and industry data. Revenue growth averaged 61%, three times the increase in prescriptions.
Attention has focused lately on new drugs with eye-popping prices and on a few whose price a new owner abruptly raised several-fold. But what many drug companies rely on for sales growth is a pattern of steady increases, year in and year out, on older medicines. Wholesale-price increases for the 30 drugs analyzed by the Journal averaged 76% over the five-year stretch from 2010 through 2014. That was more than eight times general inflation.
And here’s one from the Bloomberg article:
A single, 5,000 percent price hike on an anti-parasitic drug made by Turing Pharmaceuticals garnered national media attention. But it’s just one of hundreds of smaller price increases drug companies make in the U.S. each year, a tactic the industry uses to generate more revenue from older medications.
Pfizer Inc., the nation’s biggest drugmaker, has raised prices on 133 of its brand-name products in the U.S. this year, according to research from UBS, more than three-quarters of which added up to hikes of 10 percent or more. It’s not alone. Rival Merck & Co. raised the price of 38 drugs, about a quarter of which resulted in increases of 10 percent or more. Pfizer sells more than 600 drugs globally while Merck has more than 200 worldwide, including almost 100Tags: whitney tilson