We’ve just learned about a previously undisclosed short position held by Lakewood Capital. Thee independent reliable sources tell ValueWalk that founder Anthony Bozza spoke today at a closed event at the Columbia Business School and pitching a short position on Pra Group. We’re told that one of his other pitches (although less interesting) is ZIOPHARM Oncology, which we covered in October. Bozza made his pitches during a short-selling panel at the student conference.

ValueWalk first reported the news on twitter earlier today:

Lakewood Capital’s Anthony Bozza pitches Pra Group short

Pra Group describes itself as “a global leader in acquiring nonperforming loans.” The firm’s website states that it returns capital to banks and creditors to enable them to price credit more “attractively.” The firm also states that it assists customers in resolving their debt and provides “a broad range of additional revenue and recovery services to return millions of dollars annually to business and government clients.”

Three reliable sources tell us that Bozza said Pra buys defaulted credit card receivables which take between five and seven years to collect. Further, the Lakewood Capital executive said the good debt it has bought during the last recession is beginning to roll off.

Pra’s earnings per share climbed from $1 to $4 a share, but now the firm is said to be facing an earnings cliff. Bozza is said to believe that the firm’s earnings will go back down to $1.50 per share and that Pra Group is a $30 stock with only $7 worth of book value. The Lakewood Capital founder has set a target price of $15 per share, and he apparently emphasized that he doesn’t think it is a fraud but rather that it is simply in trouble with a high valuation.

In short, PRA bought cheap loans during  the great financial crisis, as many firms had a lot of forced selling of these receivables from banks and others who exited the space. The firm tries to convince the person in default for 5-7 years to finally pay off the loans.  However, the space is far more competitive these days, so firms like PRA have to pay more for the same receivables.

Many attendees felt that the pitch was “weak” and after a brief sell-off following our tweets, the stock has rebounded a bit.

 

PRA-Group Pra Group
Pra Group

There is not much sell-side coverage on the firm but in November 2015 report, William Blair stated:

We believe that PRA reported reasonably solid fundamental results, though the headline EPS of $0.99 were below our estimate of $1.12 and consensus of $1.17. The primary reason for the miss was an $11 million impairment charge ($0.15 per share), which, like the prior quarter, was taken to slightly adjust the shape of the 2011 and 2012 collection curves that have been previously written up due to material outperformance.

The impairments equate to about 0.4% of receivables, in line with the historical average. Even with the $11 million of impairments, estimated remaining collections (ERC) was increased by $140 million. Under U.S. GAAP accounting, impairments are recognized immediately but the write-ups gradually work their way through the P&L statement.

Under IFRS accounting rules, PRA likely would have reported a material write-up. We believe a portion of the third-quarter impairment charge is tied to the CFPB settlement, but management did not quantify it. The CFPB settlement required PRA to stop collection efforts on $3 million of face value of debts.

Other firms speak at Columbia too

Other firms appeared with Bozza on the same short-selling panel. We’ve learned that Spruce Point pitched AMETEK at the same conference where Bozza spoke. ValueWalk covered that position in 2014.

Additionally, we’ve learned that Varna Capital pitched a short position on Sirona Dental. The hedge fund  sees a massive overcapacity in labs that manufacture crowns and believes that the Dentsply acquisition was desperate. We’ve also heard that the firm believes Sirona is training generalists to do implants over the weekend, which isn’t enough time. Additionally, our sources said Varna Capital claims the joint venture between Align and Sirona Dental doesn’t exist.

Ms. Svetlana Ilieva Lee is the Founder at Mr. Justin Theodore Hester is Chief Financial Officer and Chief Compliance officer at Varna Capital Management LLC. She founded the firm in June 2008. Prior to this, Ms. Lee was employed at Greenlight Capital LLC. She was employed at The Baupost Group, LLC and Perry Capital, LLC.

Lakewood Capital and PRA Group did not immediately respond for a request to comment.

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