Whitney Tilson Updates His Short Squeeze Bubble Basket

Whitney Tilson’s email to investors discussing the market and macro overview; update on his Short Squeeze Bubble Basket.

Q2 2021 hedge fund letters, conferences and more

Market And Macro Overview

1) Markets moved moderately higher in August, with the S&P 500 Index rising 3%. This was its seventh consecutive monthly rise, bringing its year-to-date return to a healthy 20.8%.

The S&P 500 has now more than doubled since its March 2020 low – the fastest such gain since World War II – which has added nearly $20 trillion to shareholders' wealth. The market hasn't suffered even a 5% pullback in almost a year and has closed at a record-high 53 times in 2021, the most by this point in the year since 1964.

How can this be happening in the face of such dreadful headlines: an ugly pullout from Afghanistan, the COVID-19 pandemic continuing to worsen (leading many businesses to shelve plans to return to the office), plunging consumer sentiment, continued political gridlock, staffing shortages, supply chain disruptions, rising inflation, etc.?

There are three answers...

1. The economy is booming, which is turbocharging corporate profits. In the recently completed second-quarter earnings season, nearly 90% of companies exceeded analyst forecasts – the highest such level of "beats" on record, going back to 1994.
2. Investors believe that the U.S. Federal Reserve will keep interest rates at rock-bottom levels, possibly for years to come.
3. Investors also believe that the federal government will continue spending heavily to keep the recovery going.

As a result, while many famous investors and prognosticators are warning of an imminent market collapse, I – and my colleagues Enrique Abeyta and Berna Barshay – remain constructive in the short and intermediate term.

That said, the degree of investor enthusiasm – and the resulting foolish risk-taking – is building as the market marches steadily higher... so we are carefully monitoring dozens of indicators – and, more important, applying our team's collective 100-plus years of experience – to gauge when to get more defensive.

Short Squeeze Bubble Basket Update

2) I called the top of the meme stock bubble on the day it peaked in my January 27 e-mail and named 25 stocks that, I wrote:

... are highly likely to underperform going forward. In fact, I'll stick my neck out even further and say that I think today will be the top. They remind me of the eight "bankruptcy bubble" stocks I named in my June 9, 2020 e-mail, which collapsed by an average of 74% in the subsequent five weeks (see the performance table in my July 17 e-mail).

Since then, 21 of my "Short Squeeze Bubble Basket" stocks (84%) are down, and even with Hertz (OTCMKTS:HTZZ) and AMC Entertainment (NYSE:AMC) up 192% (until I closed it out) and 120%, respectively, the average decline is 28% versus a 21% gain for the S&P 500 Index – 49 points of underperformance.

At one point, the basket was down more than 50%, but then rallied, which gave me another bite at this rancid apple. Thus, exactly three months ago in my June 2 e-mail, I wrote:

I never would have believed it, but the recklessness of a segment of retail investors appears to have no bounds in this market...

After falling by more than 50%, the 25 stocks in the "Short Squeeze Bubble Basket" that I identified in my January 27 e-mail have rallied and are now "only" down 28% on average (versus a 12% gain for the S&P 500 Index).

This type of short-term rally is to be expected, and for stocks like these, this is an opportunity to add to a short or put position because it's clearly a dead-cat bounce.

Thus, I'm officially calling another short-term top – but since I don't have time to re-do my work on all 25 stocks, this time I'm only going to name the 10 most obvious turds in the basket:

Company	6/1 Price
GameStop (GME)	$249.02
AMC Entertainment (AMC)	$32.04
BlackBerry (BB)	$11.56
Bed Bath & Beyond (BBBY)	$27.26
Koss (KOSS)	$24.15
Nikola (NKLA)	$15.44
Workhorse (WKHS)	$9.63
Nano-X Imaging (NNOX)	$26.71
GSX Techedu (GOTU)	$18.08
Plug Power (PLUG)	$30.89

Mark my words: these stocks will fall 25% within a month (probably much sooner), 50% within three months, and 75% within a year. I will be tracking them and will report back to you periodically.

As promised, I am reporting back to you...

As you can see in the table below, while these stocks have underperformed badly, declining 14% on average versus an 8% gain for the S&P 500, they haven't fallen the 30% I predicted. But give them time... I continue to believe that these stocks are all turds...

Best regards,

Whitney

P.S. I welcome your feedback at [email protected].