Whitney Tilson’s email to investors discussing Enrique Abeyta on CNBC; Stick a fork in Nikola Corporation (NASDAQ:NKLA); Short report on Brookfield Property Partners; Carson Block and GSX Techedu; Penumbra’s Catheter Fail; Theranos’ Holmes May Pursue ‘Mental Disease’ Defense.
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1) My colleague Enrique Abeyta was on CNBC last Thursday, where he explained why he's still bullish on stocks... and special purpose acquisition companies ("SPACs"). Here's a link to watch the four-minute segment.
Stick A Fork In Nikola Corporation (NKLA)
2) In Friday's e-mail, I wrote about the bearish report on electric-vehicle company Nikola (NKLA) published by Nate Anderson of Hindenburg Research.
I followed up in yesterday's e-mail with the company's response, Nikola Sets the Record Straight on False and Misleading Short Seller Report, which I characterized as "lame."
Today saw two new developments...
First, Bloomberg reports that the U.S. Securities and Exchange Commission ("SEC") "is examining the company to assess the merits of a short-seller's allegations that the electric-truck maker deceived investors about its business prospects." This is deliciously ironic in light of Nikola (NKLA)'s calls for the SEC to investigate Hindenburg.
This reminds me of when MBIA (MBI) successfully persuaded the SEC and the New York Attorney General (led by the then-feared Eliot Spitzer at the time) to investigate Bill Ackman and me back in 2003, after Bill released a bearish 55-page report, Is MBIA Triple A? (To this day, the report remains one of the best – and most prescient – pieces of analysis I've ever read.)
While the investigations were no fun (to say the least!), they gave us the opportunity to turn the tables on MBIA by walking the regulators through the company's many nefarious acts. For more on Bill's multiyear battle with MBIA, I highly recommend the book Confidence Game: How Hedge Fund Manager Bill Ackman Called Wall Street's Bluff.
Second, Hindenburg issued its reply this morning – We View Nikola's Response As a Tacit Admission of Securities Fraud – and it's devastating. It begins:
Last week, we issued a report that presented extensive evidence of a litany of material false statements made by Nikola's Founder and Executive Chairman, Trevor Milton.
We included 53 questions at the end of our report that we believe shareholders deserve answers to. The company promised a full point-by-point rebuttal, but then only responded to 10 of our questions.
Of those 10 responses, the company debunked nothing. Instead it either confirmed or sidestepped virtually everything we wrote about, and in some cases raised new unanswered questions.
A friend e-mailed me this summary:
Game, set, and match.
Stick a fork in it.
At this point, I almost feel sorry for Trevor and Nikola. They have nothing standing between themselves and indictments, other than divine (government?) intervention. Is Trevor one of those "geniuses we have to protect" (as Elon Musk appears to be)? Perhaps not.
I agree, and confidently predict that General Motors (GM) will end the partnership with Nikola (NKLA) that it announced last week, Nikola's stock will collapse, and Milton will end up behind bars for securities fraud.
3) Nate Anderson is one of roughly two dozen short-sellers I've followed closely enough over the years to have respect for their work (I know most of them personally as well).
Another is Keith Dalrymple of Dalrymple Finance, who just sent me this 12-page report, The End of the Dividend and Negative Equity, on related real estate entities, Brookfield Property Partners (BPY) and Brookfield Property REIT (BPYU).
Unlike Nikola, I don't have a strong opinion on Dalrymple's report as I haven't analyzed these two Brookfield companies personally, but I thought it was worth passing along.
Carson Block and GSX Techedu
4) While Nikola's stock has plunged in the aftermath of the Hindenburg report, this doesn't always happen. Just ask one of the best known activist short-sellers, Carson Block of Muddy Waters Research, who issued a report back in May calling Chinese online education provider, GSX Techedu (GSX), a "near-total fraud." Here's his summary:
- We are short GSX because we conclude that it is a near-total fraud.
- We conclude that at least ~70% of its users are fake, and we think it's quite likely that at least ~80% of its users are fake.
- Our conclusions are based on GSX's own user and attendance data files (i.e., this is not from "scraping" data). We downloaded GSX's data from more than 200 paid K-12 classes covering 54,065 unique users.
- In addition, a former GSX manager corroborated our analysis, and explained various details of GSX's extensive bot operation.
- Based on the near total faking of users, we assume that the fraudulent portion of GSX's revenue is at least equal to the percentage of fraudulent users, although it would not surprise us if the ASP on the real portion of GSX's business is fraudulently inflated too.
- We conclude that GSX is a massive loss-making business. Without users, there is no revenue. We also conclude that GSX greatly understates expenses. Regardless of how one cuts it though, GSX is an almost completely empty box.
- Amazingly, Chairman Chen has found a way to make GSX shares even more dangerous for long holders – he has pledged at least $318 million of stock. Long holders of GSX face the risk that the margin lenders will be forced to aggressively sell the stock, crashing the price.
At the time, GSX shares were trading around $33 – and then proceeded to soar to more than $130 in early August before settling back to today's level around $100 this morning.
The pullback is no doubt due in part to the stock's preposterous valuation – it's still trading at nearly 35 times trailing 12-month revenue – but also because the company disclosed (buried deep in its latest quarterly earnings report) an investigation by the SEC's Division of Enforcement as well as an "an internal independent review" led by the Audit Committee of the Board of Directors.
While Carson has taken a lot of pain on this short, he still thinks he'll be proven right – and I agree. Mark my words: he will have the last laugh here...
Penumbra's Catheter Fail
5) My friend Roddy Boyd of the Foundation for Financial Journalism isn't an activist short-seller, but he does the same thing as an insightful and courageous journalist.
He has an incredible long-term track record of exposing numerous corporate frauds and scandals, so I suggest signing up here to receive an e-mail when the Foundation posts something new.
Yesterday, Roddy published his latest report on high-flying medical-devices manufacturer, Penumbra (PEN): Penumbra Inc.'s Catheter Fail: Broken Tips and Lost Lives.
6) I almost fell out of my chair when I read this Bloomberg headline last week about Theranos' disgraced former CEO, Elizabeth Holmes: Theranos' Holmes May Pursue 'Mental Disease' in Her Defense.
Fortunately, the judge doesn't seem to be buying this nonsense, but if Holmes gets away with it, it will be her ultimate con – and Exhibit A of white privilege!
I wonder if Trevor Milton will try a similar defense when his time comes?