Whitney Tilson Tilson 2016 Letter below

Also see

2016 Hedge Fund Letters

Q1 2017 Letters

Tilson Q1 Letter: Fannie And Freddie “could appreciate 4-10 times” But Risks Remain High

Short Positions
Here are brief updates on four of our 10 short positions, ranked in descending order of size:

Wingstop

Wingstop is in the chicken wing restaurant franchise business, with 949 restaurants in 40 states (93% of units) and 6 countries. Wingstop is a decent company with reasonable growth prospects, but its business is largely undifferentiated and faces ferocious competition from all sides. It has only proved that its business and brand work in two states, yet its valuation assumes that it can scale rapidly across the U.S. and abroad, a highly questionable proposition. Given that the stock is currently priced for perfection at 56x earnings, 32x EBITDA and 11x revenues, if I’m wrong, it has little upside – and if I’m right, look out below… For further details, see my presentation at the Robin Hood Investors Conference last November.

Exact Sciences

Exact appeared to well on its way to bankruptcy less than a year ago, but instead rose from the ashes after the U.S. Preventive Services Task Force issued its final colorectal cancer screening recommendations, which granted the company’s colon cancer test equal standing among the many other included screening tests. The company has spent massive sums on marketing, including a national television campaign, but this has only resulted in modest growth, far below what is needed to justify this company’s $2+ billion market cap, because the test is much too expensive, offers minimal benefits (somewhat better cancer detection, but at the cost of a much higher false positive rate) and, most importantly, customers don’t like having to poop in a bucket and then mail it to the company. I continue to believe that it’s a $3 stock at best, for reasons I outlined in this article and in my latest presentation at the Robin Hood Investors Conference.

Herbalife

On July 15th, Herbalife’s stock rose sharply when it announced a settlement with the FTC in which it agreed to pay a $200 million fine and overhaul its business, which the FTC found to be a pyramid scheme (though it carefully avoided using those two words). I anticipated the settlement and stock’s reaction, so had only a small position, and used the rally to add materially to our short position in the mid-$60s (the stock ended the year at $48.14). I think the settlement agreement has real teeth, so Herbalife will have to clean up its predatory business, leaving only its legitimate business, which I believe is quite small and certainly can’t support the company’s nearly $6 billion enterprise value. In addition, Herbalife recently disclosed that it is still being investigated by the Securities and Exchange Commission for its “anti-corruption compliance in China,” its primary growth market which accounted for 20% of its sales in 2016.

World Acceptance

World Acceptance, a predatory subprime installment lender, rallied after Trump’s election on hopes that the new administration would rein in the Consumer Financial Protection Bureau, which has been investigating World for years and which, on August 7, 2015, notified the company that “the staff of CFPB’s Enforcement Office is considering recommending that the CFPB take legal action against the Company [because it] violated the Consumer Financial Protection Act of 2010.” I’m surprised that the CFPB has taken so long to act, but when it does, I expect that it will take strong action to rein in World. In the meantime, the company is trying to stave off regulatory action by ending the worst of its abuses, which is causing the business to suffer: in the fourth quarter, revenues and earnings per share fell 6.4% and 35.3%, respectively, which is why the stock fell 25% in January.

Full letter below

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