Spruce Point Capital’s email to investors discussing that they will issue a unique new short idea tomorrow.
Q4 2019 hedge fund letters, conferences and more
First off, we hope everyone is staying healthy and well during these unique and challenging times.
The depth and magnitude of our current economic situation is unprecedented. Yet, if you've been a loyal Spruce Point follower over the years, you'll appreciate why we've been skeptical, hard pressed to buy stocks at inflated multiples, and not surprised by the depth and speed of the stock market rout. We believe it's a function of too much leverage with too low interest rates, capital misallocation, and a decline in mechanisms that lack human judgement in the financial system. Corrections are necessary for long-term prosperity as they root out businesses that are non-economic, and hold poor managers accountable for wasteful capital spending. While we hope for a speedy recovery for those afflicted by the current environment, our base case is not for a "V" shaped recovery, but more "L" shaped. As a result, we still see significant alpha to be generated from short ideas. Notably, we favor situations where a business was obscuring strain even before the crisis intensified.
A Unique New Short Idea
With this in mind, tomorrow we profile a unique new short idea that Spruce Point has been following for a long time with extreme skepticism.
Warren Buffett famously said that when the tide rolls-out, you know who is swimming naked.
We will show you why we believe the current crisis has exposed a gaping hole in the Company's balance sheet. While analysts tout the defensive nature of the Company's business, none have conducted a forensic analysis to see how the Company's business has changed today vs. the prior financial crisis a decade ago. What becomes evident to us is that it will fare materially worse as its end markets and geographic focus have shifted. Our forensic work will show why the Company has been facing escalating strain even before the pandemic's spread intensified globally in the past few months. We support our claims with detailed photographic evidence that clearly illustrates the problem.
With few analysts covering the stock, we explain why the "consensus" view is wishful thinking, and why recent management behaviors also suggest that it sees an end game to its share price prosperity. Given the magnitude of the hole we believe exists in the Company's balance sheet, investors should gain little confidence from taking the Company's financials at face value. Many years ago, its Chief Accounting Officer sprung accounting errors and a material weakness at her prior company.
The full contents of our report will be available on our website. We also encourage readers to follow us on Twitter @sprucepointcap where we will have exclusive content.
Thank you very much for your continued interest in our investment research.