Whitney Tilson’s email to investors discussing Sahm Adrangi short CARG; China comments; GE; McKinsey; Sheryl Sandberg; Israel; Matt Rose, Tesla.
1) Another speaker from our shorting conference two weeks ago, Sahm Adrangi of Kerrisdale Capital, gave us permission to share the video and slides from his pitch of CarGurus (CARG).
David Einhorn Buys Three New Stocks: These Are The Names And Theses (Q3 Letter)
David Einhorn's Greenlight Capital funds returned 5.9% in the third quarter of 2020, compared to a gain of 8.9% for the S&P 500 in the same period. This year has been particularly challenging for value investors. Growth stocks have surged as value has struggled. For Greenlight, one of Wall Street's most established value-focused investment funds, Read More
2) A friend who’s lived and invested in China for many years sent me these interesting comments in response to an article I sent to my China email list, China’s Economy Slows Sharply, in Challenge for Xi Jinping
Yes – things here are challenging – though more it seems from a general sentiment perspective than the day-to-day actual financial results folks are experiencing. That being said, poor sentiment and future outlook could over time become self-fulfilling – especially if the current trade/nationalistic rhetoric/actions continue to deteriorate.
In the manufacturing-related businesses that we are close to (like those discussed in the article), we have actually seen strong results to date with much of their 2018 businesses being dramatically front-loaded in anticipation of a worsening trade situation. Essentially they have completed their year’s work early, and in most cases with significant gains over last year in terms of total expected 2018 revenues and profitability. While 2018 looks quite good, there is a great deal of concern for 2019, and many of these companies have been focused on developing/implementing alternative plans for the coming year to manage their business either through diverting production to factories outside China or markets other than the United States.
For more domestically focused businesses, we have seen mixed results. Definitely a slowdown in large scale discretionary purchases like autos or homes, though day-to-day consumption continues to expand significantly. [A leading domestic sportswear brand] for example, has experienced substantial (mid/high teen) growth this year at retail (including through 3Q) with significantly higher growth in terms of online revenues. Overall there continues to be quite robust consumption growth and a relatively positive outlook going forward. That being said, the capital markets have been off dramatically since the mid-January 2018 highs, and this has taken its toll on overall domestic sentiment.
Important to keep in mind that 2017 was a big year for China, with the equivalent of nearly $1.2 trillion in additional GDP, the highest level of absolute economic growth ever experienced to date in China, equivalent to the size of the entire Mexican economy. The China-related capital markets had a banner year in 2017 as well. In early 2018, the Chinese government felt things were getting overheated and started their deleveraging campaign to calm things down. The resulting capital markets decline and RMB depreciation were well on their way when the trade war/United States-China relations challenges started gathering momentum in the summer.
While I’m generally optimistic over the medium-/long-term for continued economic growth here in China, I am quite concerned that the rhetoric on both sides of the trade dispute and more generally overall United States-China relations is misguided and getting out of control. This is not in either country’s interest and most unfortunate given all of the areas that the two countries need and should be working more closely together (trade, energy, environment, public health, regional security).
We certainly live in interesting times…
3) Some very long and insightful articles over the weekend. Let’s start with the WSJ, GE Powered the American Century—Then It Burned Out. Excerpt:
The leadership meeting usually left executives refreshed, reassured that the foundation of GE’s success was not the power turbines or the jet engines so much as the people in that room, managers groomed in Crotonville who believed they could enter any industry, anywhere and dominate it.
4) How McKinsey Has Helped Raise the Stature of Authoritarian Governments, NYT. Excerpt:
One of McKinsey’s state-owned clients has even helped build China’s artificial islands in the South China Sea, a major point of military tension with the United States.
Its clients have included Saudi Arabia’s absolute monarchy, Turkey under the autocratic leadership of President Recep Tayyip Erdogan, and corruption-plagued governments in countries like South Africa.
In Ukraine, McKinsey and Paul Manafort — President Trump’s campaign chairman, later convicted of financial fraud — were paid by the same oligarch to help burnish the image of a disgraced presidential candidate, Viktor F. Yanukovych, recasting him as a reformer.
5) The Rise, Lean, And Fall Of Facebook's Sheryl Sandberg. Buzzfeed. Excerpt:
It wasn’t until November — and the New York Times investigation — that Sandberg became the focal point for external and internal blame. She reportedly pushed for others to take the fall for actions she’d approved or overseen, including opposition research intended to “slime various and sundry detractors,” as Kara Swisher put it, including George Soros. “So now come the calls for her comeuppance.”
The logic makes sense: Why blame Zuckerberg? He’s just a kid. Blame the adult in the room. Blame the unicorn. But optics make that blame difficult, or at least difficult to act on: As one anonymous Facebook employee explained, “One does not simply fire the author of Lean In and pretty much the sole female executive in top leadership.”
And so Sandberg soldiers on, even as employees increasingly turn against her, however privately. Externally, Swisher and others have interpreted the critical pile-on against Sandberg as sexist, or ammunition for those retrograde few arguing that this is what happens when women attempt to “have it all.” Others have pointed to the ways in which her fate exemplifies the hollowness at the heart of leaning in: Sandberg’s advice has always centered on getting a seat at the table, Molly Roberts argues, and then keeping “everything exactly the same,” from how Silicon Valley conceives of women to how Facebook considers its responsibility to society at large. Within this paradigm, “leaning in” is fundamentally about abdicating responsibility or desire for substantive change.
Back in 2013, one of Sandberg’s former professors was trying to explain her appeal and aura to Brad Stone at Bloomberg Businessweek. “One time my wife said, ‘There are so many things that you want to be envious about and hate her. And you just can’t.’”
6) Good to see inbred corporations and boards in Israel being shaken up: The Tycoons Ruled Israel. Then Came Billionaire Paul Singer. Excerpt:
The tycoons had amassed so much power that by 2013 about half the value of Israel’s stock exchange was effectively run by 20 families. A new law at the time sought to limit their influence by splitting conglomerates that owned major financial and industrial companies. But while some started to reduce stakes, their influence in boardrooms endured.
7) An interesting (and rare) in-depth interview with Matt Rose, who will retire in April after six years as Executive Chairman and 13 prior years as CEO of Berkshire Hathaway-owned BNSF Railway. Buffett said of him: “It was a very lucky day for me and for Berkshire Hathaway when I met Matt Rose. Under Matt’s management, BNSF has become a major source of profit and pride for Berkshire. And, as a citizen, Matt has been an exemplar for corporate leadership.” Matt Rose: “Less is NOT better”. Excerpt:
I think we’re at a tricky time now. The Street—I’m talking about sell-side analysts—has been extremely aggressive with the publicly traded railroads. They’re saying that less is better. Less capital is better. Fewer market opportunities are better. Fewer unit trains are better. It’s all about lowering the operating ratio. I disagree with almost all of that. I truly believe that every industry, every business, needs growth.
Vantuono: So you would say less is not better?
Matt Rose: Absolutely. It’s not. Let me tell you why. If you go back to the 1980s, you saw where some railroads had a singular focus on operating ratio. And the easiest way to reduce operating ratio is to take out track and reduce maintenance expenses. That’s really not the covenant, if you will, we have with our regulator, the STB, and even public policy makers. The Staggers Act wasn’t, “Railroads, haul only what you want to haul on your network.” It’s “Haul everything, and you have the ability and the flexibility to differentially price on your network.” That’s the deal, and it’s in the public’s best interest to move more tons to the railroad network, not to move tons off the railroad network.
So, I think we’re going into an interesting period where that will all be sorted out. I can’t tell you how it’s all going to work out, but there’s going to be a lot of activity.
…BNSF’s mission has simply been to provide a great service through the heartbeat of the railroad—capital investment. Expand the railroad. You see every year that we do expansion in our company, and then provide service that’s going to get more customers to use our railroad in more locations.
… Vantuono: How do you view hedge funds coming into our industry? Do you think it’s been beneficial, or not? Is the hedge fund era over, if there was a hedge fund era?
8) Yet another article documenting Musk's erratic (at best) behavior: Dr. Elon & Mr. Musk: Life Inside Tesla's Production Hell. Wired Magazine.