The two ways to go bankrupt, as Ernest Hemmingway famously wrote, are gradually and then suddenly. The “gradually” phase of the process can take a good long while, sometimes years, but once a business starts to exhibit the two biggest symptoms of impending disaster–falling revenues and mounting debt–the “suddenly” part is all but inevitable. It came for the troubled biotech company Dendreon (ticker: DNDN) on Monday when it filed for Chapter 11 bankruptcy.
The move should have surprised exactly no one, and not just because I predicted it well over a year ago now on Seeking Alpha. Back in September, the company’s own management warned that it was probably going to wipe out its shareholders. But that didn’t stop credulous investors from buying Dendreon’s stock–incredibly, it didn’t dip below a dollar until earlier this month–or dubious stock boosters from feeding their hopes for a miraculous turnaround. Take a look at the headline on a Zack’s.com posting: “Why Earnings Season Could be Great for Dendreon.” The article, which gives DNDN a buy rating, is dated November 10, 2014–the exact same day the company announced that it had filed for bankruptcy.
Wednesday was a big day for my fund. Earnings season is upon us and two of our largest longs reported quarterly results. I expected both companies to smash analysts’ estimates. Sure enough, that’s exactly what happened. You’d think I’d be celebrating big gains in both stocks, but unfortunately, you’d only be half right.
Too bad this isn’t baseball. Batting .500 will get you into the Hall of Fame in that sport. In my game, though, it generally won’t get you too far.
The sky has been falling an awful lot lately. Every couple of days, something spooks investors into short-lived selloffs. First, everybody freaked out about Ebola. This week, the shooting in Canada’s capital tanked the Dow by two percent.
I can’t count how many temporary, news-driven declines like these I’ve lived through in my career. But I don’t know if I’ve ever witnessed such widespread “Headline Risk.” There are so many Chicken Littles out there with fingers poised nervously over panic buttons, I’m starting to think a better name for the phenomenon might be “Headline Opportunity.”
I rarely do anything when the markets veer over one percent in either direction in a single session. Most of the time, I wait to see if the movement carries over to the next day or the next week. But if I was inclined to act, I’d be a buyer during these downswings.
Last week, I took another trip to interview management teams in their corporate headquarters. All told for my career, I’ve met with more than 1500 executives across the US now. This particular trip took me to a number of companies in Dallas and its outlying areas. It was a fast-paced and tiring, but the most exhausting part of it came after I landed back here in the Bay Area.
I only live 22 miles from San Francisco International Airport but it took me an hour and a half to drive home. As I crawled through traffic over the Golden Gate Bridge, I couldn’t help but wonder why anyone would bother moving here. Sure, it’s beautiful, but it’s hard to enjoy the scenery when you’re sitting in gridlock–especially when you’re paying some of the highest real estate prices in the country, if not the world to do so.
First, some welcome good news during what has been a gloomy start to autumn: Publishers Weekly gave my forthcoming book Dead Companies Walking its first review–and it was very positive. Here’s an excerpt:
Hedge fund manager Fearon shares his take on why companies fail in this surprisingly entertaining mix of business guide and memoir. Fearon … isn’t shy about revealing some of his financial missteps … But, as he insists, his mistakes—and his observation of others’—have helped him recognize key warning signs of a company about to tank … The final takeaway of this spirited book is that “learning to love failure all over again” can help America recover the adventurous spirit that Fearon believes our economy needs.
The book’s two main messages are that failure is far more common in business and investing than most people want to admit and that even very smart people sometimes make very dumb decisions. As I readily and repeatedly admit in the book, I’m no exception. I’ve made plenty of boneheaded mistakes as an investor and a businessperson. And, apparently, I’m not done making them. This week I goofed big time.
Last Wednesday, I published an article on Seeking Alpha praising the retailer J.C. Penney (ticker: JCP) and discussing why I covered my previous short position and bought a six figure position in the company. Today, at the company’s analyst day, management lowered guidance for same store sales growth for the upcoming 3rd quarter. Its stock promptly cratered. By day’s end, it was down just under 11 percent. Oof. That’s embarrassing–and expensive. Making matters worse, as I wrote last week, another stock in my fund–Trinity Industries–fell sharply after Jim Cramer predicted doom for the company. Add it up and I’m ready for October to be over already.
Bad runs are inevitable in investing. I’ve been through them before. The important thing is how you react to them. So, what am I going to do now? First, I’m going to stop crying. Then I’m going to do some serious thinking, and self-examination.
A lot of investors have been struggling this week with a consistently bad tape, but Wednesday was particularly painful around my neck of the woods. First thing in the morning, CNBC’s Jim Cramer told millions of viewers that a story in the Wall Street Journal was “disastrous” for one of the largest holdings in my fund’s portfolio, Trinity Industries (TRN). The stock instantly melted down and dropped almost 9 percent on the day, erasing months of solid gains. It dropped another 4 percent yesterday.
I respect Jim Cramer a great deal for his knowledge, his energy, and his charitable works. And I pride myself on never “promoting my book” by getting into pointless he said-he said debates about stocks. (When I say, “promoting my book,” I don’t mean my forthcoming book Dead Companies Walking–available for pre-order now!–I mean my book, as in my fund’s portfolio.) I’m not a “buy, tell, sell” guy looking to make a buck by convincing other people to copy my trades so that I can sell into a temporary rally. I hold my average investment 12-24 months, and I want my performance to be a function of my intellectual ability, not my skill at promoting myself or my fund. But in this case, I am genuinely confused by Mr. Cramer’s claims about Trinity and other railcar manufacturers.
Far from being disastrous, recent news only bolsters my confidence in the company.
In case you missed it, a foreign company nobody had ever heard of until recently staged a gigantic IPO this past week. But lost in all the hype and hoopla was a much more important development here at home: the beginning of the end of the US real estate slump.
New-home sales in the U.S. surged in August to the highest level in more than six years, a sign that the housing recovery is making progress.
Purchases of new houses jumped 18 percent to a 504,000 annualized pace, the strongest since May 2008 and surpassing the highest forecast in a Bloomberg survey of economists, Commerce Department figures showed today in Washington. The one-month increase was the biggest since January 1992.
The oldest adage in the investment game is, of course, “Buy low, sell high.” The second-oldest is, “Don’t fight the Fed.” And with the August housing numbers, the Federal Reserve’s monomaniacal six-year campaign to reconstruct the real estate sector from the ashes of the subprime catastrophe is finally starting to show results. At the same time, the stocks of major homebuilders like Pulte, KB Home and DR Horton are all down YTD.
Hear that knocking? That’s a little visitor named opportunity.
I glanced at a recent issue of the Stanford alumni magazine the other day. It featured an interview with former school president Gerhard Casper and an excerpt from his book on “addressing the challenges of higher education.” The piece was underwhelming, to put it mildly. There was the usual pabulum about school rankings, measuring outcomes, and fostering diversity. But there wasn’t a single word about the biggest problem facing higher education today:
It costs too damn much!
Our nation’s universities, public and private, have crushed an entire generation with debt. All told, young adults owe more than a trillion dollars in student loans. That’s a huge drag on our economic growth. And where is all that borrowed money going (besides the Wall Street banks that underwrite many of the loans)? It’s propping up one of the most backwards and wasteful industries in the world: academia.
Astronomers constantly scan the night sky for supernovas so that they can observe and study how stars die. It’s a fascinating process. Right now, a very large corporate supernova has begun and it is just as fascinating–and educational. Unfortunately, I was forced to cover my short position in the dying company because my prime broker now charges me an exorbitant “negative rebate” to short stocks. But I’m still watching from a distance.
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As a registered Republican, I’ve always felt that the private sector does a better job creating jobs than government. But not all right wing policies promote growth. Some limit growth. Two come to mind immediately: the blind opposition to government-funded healthcare and the opposition to raising the minimum wage, or at least allowing it to keep pace with inflation.