Once again, I’d like to thank everyone who has emailed, messaged, or tweeted at me since my book Dead Companies Walking came out. I’ve tried to reply directly to as many folks as possible but running my fund has taken up most of my time and attention, so I thought I would post my responses to a few interesting questions, comments, and criticisms I’ve received in recent weeks here. Unfortunately, I couldn’t fit everything into one post, so I had to break my responses up into two parts. I’ll post the second half on Wednesday.
First up, an email from a reader named Greg:
“I am a private investor who has been investing on the long side for most of my career. I’ve almost finished your excellent book, ‘Dead Companies Walking,’ and it has inspired me to start trading the short side as well. My immediate question is: Where do you find all the good ideas? It’s fairly easy to find long ideas in places like Value Investor’s Club (of which I am a member), or the published portfolio lists of hedge fund managers. But where do you get quality short ideas? Thanks for your help with this!”
Two high profile commodity companies filed for bankruptcy last week. The first was St. Louis-based coal producer Peabody Energy (BTU). Peabody was the latest coal producer to file, following Arch Coal, Alpha Natural Resources, Patriot Coal, and Walter Energy. BTU quickly fell below $1 on the news. Just a few years ago, Peabody’s market capitalization exceeded $20 billion. On Wednesday, Houston offshore oil producer Energy XXI (EXXI) joined Peabody in bankruptcy court. Four years ago, EXXI was a $32 stock. On Thursday, the day after it announced its bankruptcy filing, it closed at 12 cents.
Ever since oil cratered to $26/barrel on February 11th, prices have steadily inched higher. West Texas Intermediate has now climbed into the $40/barrel range. Not surprisingly, energy stocks have kept pace, with many service companies and independent producers hitting year-to-date highs. Unfortunately for some energy firms, however, this recovery will probably be too little, too late.
Shake Shack, like GoPro and Fitbit, was once a high-flying, wildly valued cult stock whose shareholders loved the company’s products. Yesterday, that affair ended abruptly, with SHAK falling $5 to $37 on disappointing guidance for 2016. The former fast casual darling is now down 60 percent from its $97 peak last May. Investors who look at price, and not valuations, might think this is a good entry point.
Last week, USA Today reported that an unbelievable 359 stocks on major exchanges are now below one dollar, up from 222 just two months ago. To put that number in perspective, twenty years ago only 60 stocks on major exchanges were “hat sized,” or trading for fractions of a buck. At the end of 2008, during the worst depths of the financial crisis, there were only 242 sub-$1 stocks:
With yesterday’s 300-point collapse, the Dow is now down 7.3 percent since January 1st. Other indexes have cratered as well. The smaller company Russell 2000 has shed over 11 percent. In the midst of this carnage, investors are understandably searching for “safe haven” stocks that generate dividends, are inexpensive, and offer less volatility than the overall market. Unfortunately, these ports in the storm are few and far between at the moment. People are looking for any excuse to sell stocks right now, which means anyone looking to buy has to be particularly sensitive to headline risk.
Today no sector faces greater headline risk than the biotechnology and pharmaceutical space, especially companies that have engaged in price gouging. In this toxic environment, names like Valeant, Shire, Vertex, BioMarin, and others are the financial equivalent of the Zika virus.
My last post generated a fair amount of negative feedback on my Yahoo Finance page and on Twitter. There’s nothing quite like waking up in the morning and being called an idiot (and worse) by all sorts of strangers on the internet. I understand that people have strong feelings about Fannie Mae and Freddie Mac, but I have to say, the vitriol of the comments took me by surprise.
Setting aside whether it was fair (or legal) for the government to change the bailout terms for Fannie and Freddie, my main point in writing about the two giant GSEs seemed rather straightforward: the low-priced stocks and preferred shares of Fannie Mae and Freddie Mac are extremely risky investments. If Washington formally nationalizes these companies (or does so informally, as it seems to be doing right now), there is a good chance that their stocks will go to zero. Sure, the big hedge funds and their armadas of lawyers might prevail in court and win the return of the companies’ dividends to shareholders. But even if that happens, it will probably take years. As I wrote in the last line of the post, “There are easier ways to make money.”
The broader lesson of the GSEs for both retail and professional investors can be stated in four words:
After last year’s better-than-expected holiday season, I cautioned investors not to get too hopeful about the seemingly endless supply of retailers looking to rebound. With local stores starting to put up Christmas lights again, it seems like a good time to revisit that advice and check back on the sector. How has retail fared in 2015?
Pretty much the same as 2014, 2013, 2012, and just about every year for the last decade. That is to say: quite poorly.
I’m always amazed—and a little horrified—at how poorly my industry treats its customers. Unlike many service professions, the licensing requirements for financial advisors are minimal, and far too many so-called “wealth managers” manage their own wealth first by promoting what John Bogle calls “salesmanship over stewardship.” Like real estate agents or used car salesmen, they push big ticket, financially destructive products with sizable embedded commissions.
But as incompetent and flat out dishonest as folks in my business can be, John and Jane Q. Public are often their own worst enemies. Through greed, gullibility, or gross negligence, people routinely blow large sums of their hard-earned savings. These five mistakes are, by far, the best ways to torch your net worth:
I do not short debt. But, on paper at least, shorting the sovereign debt of poorly managed European nations not named Greece sure seems like a great investment right about now. Aside from the negligible cost of the coupon, the downside to shorting the bonds of places like Portugal, Spain, and Italy seems to be almost nil. We’re talking about heavily indebted countries with aging populations and staggering unemployment, and yet, thanks largely to QE measures, their bond yields are shockingly low. This is clearly an unsustainable situation. QE will have to end eventually and if EU leaders finally develop a backbone, yields might return to double-digit levels more quickly.
Geez. I’m almost talking myself into this idea. Then again, it’s impossible to predict when (or if) the global pandemic of bailout fever will finally end.