In addition to the reading links below, I follow a couple of funds for my stock research and ideas.
One is Prescience Point Capital.
The other is Kerrisdale Capital.
To learn how pros think about and analyze stocks, these two are some of the best examples.
Top value fund managers are ready for the small cap bear market to be done
During the bull market, small caps haven't been performing well, but some believe that could be about to change. Breach Inlet Founder and Portfolio Manager Chris Colvin and Gradient Investments President Michael Binger both expect small caps to take off. Q1 2020 hedge fund letters, conferences and more However, not everyone is convinced. BTIG strategist Read More
Today, I got an update from Prescience on their short position for Kellog’s (K).
Considering it’s a C in the Action Score to begin with, it’s not a company that has crossed my screen one time this year. But at the same time, who even thinks about shorting cereal?
Without duplicating the content of Prescience, the thesis digs into the fundamental flaws of the company.
They summarize it as:
- Revenue growth is a facade, reversal of years of extended DSOs will wreak havoc on growth expectations and cash flow in FY'2019
- CAO resignation immediately before guidance cut & working capital "unwind" is highly suspicious
- FY'2018 adjusted EBIT & earnings growth guidance slashed; K's explanation for the miss doesn't make sense
- Multiple executive departures immediately preceding poor results is highly suspicious
- North America re-org/supply chain buildout leads to more obfuscation and a likely scapegoat for poor FY'2019 performance
- K remains more levered than meets eye; dividend cut/credit downgrade risk remains high
- Shares are still dramatically overvalued
What I like about short sellers is how they never take an answer from management at face value.
My weakness and one of the reasons why I do not listen to conference calls is I can easily get suckered into charsimatic leaders. I've had a couple of occasions where I made big bad bets by trusting in management talk.
Investors who practice the long and short side of investing are able to dissect questions and information which shows how much of an expert they have become on the company.
In this Kellogg investment, the team at Prescience looks at signals from fundamentals analysis, signals about management, financial shenanigans played, correlation between management and the numbers and so on.
Do read it for yourself. It's the first link.
Quick Thoughts on Some Stocks
With the Nasdaq falling, here are some quick thoughts:
Alibaba (BABA): I wrote about buying BABA. I still hold the same thoughts. I haven't been too worried about the current situation with the US and the trade impact. I think that's the overarching fear holding back most of the Chinese companies. But Chinese tech I still find to be much cheaper than US counterparts. If the market continues lower, companies like Tencent and Baidu will be tempting. I also think that US investors focus on the wrong things with China. Obviously the media has a lot to do with it as it will give the western view of China.
Amazon (AMZN): I still believe Amazon is on the slightly expensive side. They can grow into their valuation for sure, but for the price right now, there are better alternatives unless it drops to $1300 range at which point, I may consider picking up shares.
Note that with any stock, proper position sizing is needed. As much as I love Buffett, I don't have his acumen and have found through experience that sometimes my best ideas were the worst. As my margin of error is much wider than Buffett, I limit my positions so that it doesn't come back to haunt me.
Barnes & Noble (BKS): Like Sears, this one was obvious from a mile away if you stepped into any of their stores. Every BKS I visited, employees either had nothing to do or the younger ones were too busy fooling around. Prices are 20-30% higher than what you'd find on Amazon for literally anything. Their front displays for the Nook had zero interest. Nothing differentiated them from any other failing bookstore.
Walmart (WMT): The company continues to chug along like a champ. Being the low cost provider with easy access and working to increase their online offerings and omnipresent shopping continues to draw shoppers. I find myself looking up Walmart regularly for things I need in a pinch or what I think I'll need coming up. The recent market fluctuations hasn't bothered them much.
What We're Reading in the Media
- KELLOGG COMPANY | K – UPDATE
- A Value Investor’s Guide to Growth Stock Investing
- Goehring & Rozencwajg Interim Special Report on the Oil Sell Off
- GE Credit Crunch Ripples Across Wall Street (registration required)
- These Chinese Bondholders are Being Paid in Ham Instead of Cash
- How This All Happened - The story of how America evolved from 1945 to 2018 (PDF)
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