clearing out the inbox (part two)

This is part two of my responses to some of the emails, messages, and tweets I’ve received in recent weeks. Part one was posted on Monday.

A number have readers have contacted me wondering about specific stocks. I generally don’t like to comment on companies I haven’t studied, so I have been reluctant to offer my thoughts on most of them. However, I thought it might be worthwhile to respond to this tweet from Thomas Yarbrough (@tmyrbrgh):

“Scott I’m loving the book. I have two short ideas for the blog. Skinny Pop BETR 6x sales declining share and … PFPT Proofpoint who does email security for half the fortune 500 but still can’t turn a GAAP profit lots of debt too”

Like I did in my response to Aleks in the last post, I’ll start with the second question, because it’s easier to answer. I’m not familiar with Proofpoint, but if what you say about it is true, I’m intrigued!

I’m a little more skeptical about Skinny Pop (AKA: Amplify Snack Brands). It’s hard to imagine BETR as a potential dead company walking. Coal might not exist as a viable product in the near future. But popcorn? Who doesn’t love popcorn? I don’t see it going away. More importantly, Amplify/Skinny Pop is a newly public company and I’m always leery about going long or short on fresh IPOs. There are so many eyeballs on them, it’s difficult to get a unique angle or edge.

Americans tend to know a lot about the stuff that’s right in front of us, the headlines of the moment, and yet we quickly forget the headlines that happened a few years ago. In Dead Companies Walking, I call this tendency “Historical Myopia.” In the investing world, it means everybody’s got an opinion about stocks that just came public or stocks that are always in the news. Take Tesla. It’s very hard to make money investing in a company like that on the long or the short side because everybody’s got an opinion about it and there are just too many eyeballs on it every minute of the day.

For this reason, I prefer to analyze companies that aren’t in the spotlight anymore. Remember hydrogen power stocks like Ballard (BLDP)? A few years ago, they were the ones being obsessed over and they were all through the roof. Now, they’re all at two bucks or less. I’d say forgotten names like that are probably better potential shorts to study than stocks like Skinny Pop.

The last message I’ll respond to this time around came from a young finance student in Indiana named Dave, who asked me three great questions:

“1. One of your main strategies is meeting with the management of your potential investments. How can the small investor supplement meeting with management? Financials can only say so much, it seems like your interaction with management teams yields a lot more information.

2. My goal so far has been to work in equity research on Wall Street. The end of the book was rather critical of Wall Street. Where should students look to work after graduation where they can gain solid investment management skills while avoiding the conflicts of interest present on Wall Street?

3. Is there anything that you did as a student that prepared you well for the investment world? What would you recommend for a current student?”

First off, visiting with managements can give you a great deal of information, but it’s not mandatory. Full disclosure: while I’ve visited more than 1500 companies in my career and enjoyed writing about some of the more memorable exchanges I’ve had with executives in Dead Companies Walking, a third of my fund’s current short positions are in companies I never physically visited. Traveling to their offices simply wasn’t necessary.

The bottom line is stocks go up for three reasons and down for two.

They go up because 1) they beat their own internal guidance or Street guidance; 2) they’re discovery stocks, meaning they have good news that few people anticipated or knew about in advance because they were not widely studied or covered; or 3) they’re benefiting from a secular shift in our society or world. They go down because 1) they miss numbers; or 2) they have too much debt and/ or their revenues are in decline.

Keep these factors in mind while you’re analyzing investment opportunities and you should do fine.

As for good places to start your career outside of Wall Street, you might consider working in the trust department of a large or regional bank. That’s what I did when I first started out and it was great experience. If you do what everybody else does and go to New York or San Francisco, you’re in a zoo of competition. It’s you and thousands of other MBAs from famous schools killing each other to get noticed. On the other hand, the trust department of a bank in Idaho or Washington or Indiana that has a couple billion in assets would probably be thrilled to hire a young eager beaver out of business school.

And while you’re still in school, I would recommend taking courses in applied finance, if possible, and courses in exotic parts of the investment business like commodities or options or futures. When I was an undergraduate, I took a course on the securities industry and wrote a long paper on one of the biggest defaults in the history of commodities exchanges. It was about a guy who had shorted potato futures and couldn’t deliver the potatoes. Even though I knew I was never going to trade potato contracts, or anything like them, writing that paper was one of the best things I did in college. It taught me a ton about investing.

Okay, that was fun. Let’s do it again. Please send me more questions, comments, and/or complaints and I’ll post another round of responses when I can. And, again, if you haven’t had a chance to purchase a copy of Dead Companies Walking, it’s still for sale. All of the profits I earn will go to help disabled children.


2 thoughts on “clearing out the inbox (part two)

  1. Vinz

    BOX is in a similar position as PFPT. selling to most of the fortune 500, never profitable and with a relative high debt. They tried to hire me before the IPO and when I asked them to show me the balance sheet they refused. When I asked if they were profitable and if not what was the strategy to become profitable they refused to respond.
    Before 1999, usually venture funded companies had to show 4 profitable QTRs before going public. They remind me of the dot-com mania. PFPT is probably a better short though, BOX CEO at least is buying his shares, while no insider is buying PFPT.
    BOX was a better short at $22 in Jan 2015, but still at $12 it looks to me a too generous valuation for a company that is nowhere to be profitable and will probably never be.

    Reply
    1. Roland

      I wouldn’t be so sanguine about BOX on the short side. They have little debt ($40mm) relative to their enterprise value ($1.6B) or cash ($200mm). Their negative cash flow has been funded by equity issuances, and they have reduced expenses while their revenue are still growing. If their revenue stops growing and they don’t reign in expenses and/or starts building up debt to finance negative cash flow, then it would be a better short, but for now, the jury is still out.

      There are easier shorts than this one. By the way, I have no interest on this fight (either long or short).

      Reply

Leave a Reply

Your email address will not be published. Required fields are marked *