Whitney Tilson in his email discusses why Wayfair is my largest short position – as we first reported yesterday; Platform Specialty Products could rebound; updated Berkshire Hathaway slides and maybe financial markets have been wrong all along.

1) I just published the article below on Why Wayfair Is My Largest Short Position. Here’s a summary:

  • In an article on its web site yesterday, the New York Times revealed that Wayfair was, until very recently, likely selling toxic, formaldehyde-drenched Chinese-made laminate flooring to at least a handful of customers.
  • The formaldehyde problem, by itself, isn’t a major issue; rather, it’s compelling evidence to me of Wayfair’s gross incompetence and/or a business that’s completely out of control.
  • I am also short Wayfair because it has one of the worst business models I’ve ever seen. Competing head-to-head vs. Amazon, Home Depot, Target, Williams-Sonoma, etc., I think the company’s odds of ever reaching breakeven, much less earning a profit, much less earning enough of a profit to justify a $4 billion market cap are close to zero.
  • I predict that Wayfair’s stock will be below $10 within a year.

I will have lots more to say when I present this idea at the Robin Hood Investors Conference this coming Monday afternoon, starting at 3:55pm. If you’d like to attend, there are still tickets available (see: http://investors.robinhood.org) – and it’s for a wonderful charity. I hope to see you there!

Despite crushing revenue estimates when it reported Q3 earnings this morning, the stock is down ~10.5% so far today.

2) A nice article in this weekend’s Barron’s about Platform Specialty Products, one of my largest positions, whose stock has gotten whacked in recent months. I’ve been buying more.

The shares, which began trading in New York at about $15 hit a high of $28 in June, but have since fallen 60% to a recent $11.70, as investors have grown uneasy with leveraged operations. Lost in the selloff, however, is Franklin’s enviable track record of making roll-ups work. The stock could stage a rebound in the next 12 months.

Difficult conditions in agriculture, Platform’s largest market, and a strong dollar have hurt business. Investors also were dismayed by the Oct. 23 announcement that CEO Dan Leever would retire. Ackman’s involvement, given his travails with Valeant Pharmaceuticals (VRX), might have contributed to the free-fall.

Still, concerns over West Palm Beach, Fla.–based Platform appear overblown. The departure of Leever could be a plus, as he admitted that he wasn’t the right leader to bring the businesses together.

3) Berkshire reported decent Q3 earnings last Friday and I’ve updated my slide presentation and posted it at www.tilsonfunds.com/BRK.pdf. I peg intrinsic value at $267,000/A share, 33% above the current of $200,682. The most interesting bit of analysis, courtesy of my friend Glenn Tongue of Deerhaven Capital, is on page 14:

Berkshire’s Financials Don’t Currently Reflect $7.7 Billion ($4,700/A share) of Value in Kraft Heinz

  • On June 7, 2013, Berkshire invested $8 billion in preferred stock and $4.25 billion in equity in the buyout of Heinz, alongside 3G.
  • On July 6, 2015, Heinz merged with Kraft. In connection with this transaction, Berkshire invested an additional $5.26B in the new company.
  • Upon the merger, Berkshire’s two equity investments totaling $9.51 billion were converted into 325 million shares of the new Kraft Heinz Company, worth $23.2 billion at the current share price of $71.43.
  • Thus, the total investment, including the $8 billion of preferred stock, is currently worth $31.2 billion, yet it is only carried on Berkshire’s balance sheet (under the line item “Investments in The Kraft Heinz Company“) at $23.5 billion, or $7.7 billion ($4,700/A share) less.
  • This amount should be added to the calculation of intrinsic value.

I will be speaking about the company tomorrow at the Berkshire Hathaway 50th Anniversary Symposium in NYC (which is sold out, sorry).

4) A provocative article:

Is the value premium disappearing? The answer to that question could shake the foundations of the asset-management industry.

…There are signs that this is happening. Although value stocks did well in the early 2000s, they have dramatically underperformed since the crisis, even though the market has boomed. Of course, that might simply be a particularly long period of underperformance — we might expect to see value bounce back soon enough. But in fact, the decline has been going on for quite a bit longer than that — the value premium has been falling since the mid-1990s. Coincidentally, that is exactly when the Internet and computerized trading systems made it possible to invest in stocks much more cheaply, and to gather information much more easily.

That would mean that markets are getting more efficient — at least, in this one particular way. But it would also mean that market efficiency takes a very long time to establish itself. If big, systematic mispricings such as the value premium can survive for decades before they are finally traded away, it means that other flaws in the market might be equally long-lived. For example, the momentum factor — another mainstay of standard finance theory — might also be a market flaw that will eventually be shown the exits.

If the market is that inefficient, it also means that stock prices are, in some deep sense, “wrong” — that they are not the best available estimate of a company’s value. That would suggest we should be relying on markets less than we do for things like executive compensation. So watch to see if the value premium comes back. If it doesn’t, it means it might never have been about risk in the first place.

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Whitney Tilson: Why Wayfair Is My Largest Short Position

Whitney Tilson

Nov. 10, 2015 8:49 AM ET  |  About: Wayfair (W)

Disclosure: I am/we are short WAYFAIR. (More…)

http://seekingalpha.com/article/3670336-why-wayfair-is-my-largest-short-position

Summary

  • In an article on its web site yesterday, the New York Times revealed that Wayfair was, until very recently, likely selling toxic, formaldehyde-drenched Chinese-made laminate flooring to at least a handful of customers.
  • The formaldehyde problem, by itself, isn’t a major issue; rather, it’s compelling evidence to me of Wayfair’s gross incompetence and/or a business that’s completely out of control.
  • I am also short Wayfair because it has one of the worst business models I’ve ever seen. Competing head-to-head vs. Amazon, Home Depot, Target, Williams-Sonoma, etc., I think the company’s odds of ever reaching breakeven, much less earning a profit, much less earning enough of a profit to justify a $4 billion market cap are close to zero.
  • I predict that Wayfair’s stock will be below $10 within a year.

The New York Times has broken a story I’m involved with that major U.S. public companies, including Wayfair and via Wayfair, Wal-Mart (I’m sure they will be horrified to learn), were, until the Times reporter called, likely selling toxic, formaldehyde-drenched Chinese-made laminate flooring seven months after the 60 Minutes story aired that has destroyed Lumber Liquidators. Wayfair is my largest short position by far.

Here are some excerpts  from the article below (I’m mentioned a couple of times):

As Lumber Liquidators continues to struggle in the aftermath of a safety crisis over its Chinese-made laminate flooring, a much smaller flooring company has been drawn into the spotlight.

The hedge fund manager who publicly accused Lumber Liquidators of selling wood with dangerous levels of formaldehyde is leveling the same claims against Ark Floors,

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