Whitney Tilson’s email to investors discussing GameStop Corp. (NYSE:GME) ripping; AT&T Inc. (NYSE:T) dying.
GameStop Corp Ripping
This Tiger Cub Giant Is Betting On Banks And Tech Stocks In The Recovery
The first two months of the third quarter were the best months for D1 Capital Partners' public portfolio since inception, that's according to a copy of the firm's August update, which ValueWalk has been able to review. Q2 2020 hedge fund letters, conferences and more According to the update, D1's public portfolio returned 20.1% gross Read More
Short-sellers are getting clobbered, as the number of shares short (66.4 million) exceeds the total number of GameStop Corp shares outstanding (65.2 million)!
It's a good lesson about the danger of getting into crowded shorts...
3) Much better on the short side are dying big-cap companies, which I call "melting ice cubes."
Telecom giant AT&T (T) is a great example... Enrique knows it better than I do, so I asked him for his latest thoughts on it. Here's what he told me in an e-mail...
AT&T has been one of my favorite subjects for pretty much the past decade, mostly because I think there's a huge disconnect between people's perception of safety and the financial risk with the stock.
I've been on the record that the equity value of this stock is eventually zero. It doesn't mean the company itself isn't worth anything, but rather that the debt holders (the company holds more debt than Ireland!) will end up owning whatever the value ends up being...
Recent news reports about AT&T selling all or part of its stake in DirecTV highlight one of the biggest strategic mistakes that the company has made. Speculation is that DirecTV is being valued in the $15 billion to $20 billion range, equal to somewhere around 3.5 times enterprise value ("EV") to earnings before interest, taxes, depreciation, and amortization ("EBITDA"). As a reminder, AT&T paid $67 billion for this just five years ago. And AT&T currently trades at an EV/EBITDA ratio of 8 times, so this deal would be massively dilutive on pretty much every metric, including free cash flow ("FCF").
So why is AT&T looking to sell DirecTV? Mostly because the business is getting crushed. Revenues were down 13% year over year in the second quarter, and things are likely going to get a lot worse from here.
Lastly, AT&T shareholders should be terrified of a Joe Biden presidency and a Democratic sweep of Congress. I'm bullish on the stock market overall in such a scenario, but for AT&T, it could be devastating. The company could lose as much as $2 billion of annual FCF from higher taxes and in other ways.
To be clear: I don't think the folks in AT&T's management and board are bad people or complete idiots. They've just had the wrong focus in a big way. And that focus is the dividend...
The only way that this stock isn't a zero sometime in the next five years is to cut that dividend to zero (or close to zero) immediately. Absent that, I think the company continues its long, slow slide into bankruptcy.
AT&T will have to slash its dividend one way or the other, so it might as well act preemptively to try to control its own destiny...
Thank you, Enrique!