I recently wrote two articles about Valeant Pharmaceuticals. After considerable amount of research, my thesis is set to be extremely bearish on Valeant. With the pressure to reduce the drug prices, the company will not be able to generate enough cash flow to pay off its astronomical amount of debt. Today, the company dropped by double-digit percentages on even lower guidance. I am not surprised. If the company is fully honest, which I question, there is simply no way for the old numbers to keep up.
The U.S. government just released the job report and it did not look promising. I believe Yellen is too dovish to force the planned interest raise, once again. I am frankly disappointed in the performances and some of the recent hesitant decisions by the Fed. It has delayed the inevitable interest raise for way too long. The government is waiting for the economy to “recover” and “do better.” However, I honestly do not see how much better they want, and what & when “good enough” is in their definition. On numbers, the U.S. economy is stable enough and jobs are slowly increasing. Banks on the other hand are not doing well because of the lowered interest rates and inflation is becoming more and more threatening as days go by. Due to a variety of reasons, one of which is the delay in raising interest rates, I see a generally bearish market. I believe the stocks have been artificially protected and shielded from a higher interest rate for too long; and it has grown to be quite overvalued. I do the same screening and most of the attractive deals I used to see are now out of my comfort zone. I predict that the market will either correct on its own before any talks of interest raise or it will have a small crash around November when the Fed puts its feet down and finally raises the interest rates. If Trump wins the Presidency, which I think is more likely than the media has been expressing, the market will definitely react in an unfavorable manner.
Therefore, I have decided to put a larger focus on the short side, to 1) hedge against some of my long positions (more overvalued, but I still like some of them) 2) to turn profits on some of predicted declines.
Here in this article, I will count down a few trash in disguise, and explain why & how they will be the biggest losers in the market.
- Valeant Pharmaceuticals. For the countless reasons I have listed, I do not believe the stock will ever be undervalued. I cannot see the fair value being anything but zero.
- Cornerstone On Demand (CSOD). This is my new favorite bear. The company is in the talent management and solutions industry. I am generally bearish about industries like this. I believe there is no moat. Worse, competitors with limited cash power can do tremendous damage, even force bankruptcies. This company has been trending higher on a “strong” (what I think is extremely weak) quarterly report that was filed on May 6th. Goldman’s coverage and its buy rating gave a further boost to the price and the stock is now at its 52 week high at 42.60. However, I believe the price is completely unjustified and it has no basis to be this high. First of all, the company is losing money on its GAAP and breaking even on its Non-GAAP. I do not care about its non-GAAP numbers since the company has a tradition and history of making acquisitions. For companies like this, I believe the GAAP numbers are much more convincing than some “mysteriously adjusted” non-GAAP. Secondly, the company has a debt to equity issue of 3100%! Yes, you saw that correctly. The company is mostly financed by debt and has almost no equity. My next logical question is, “is the company generating enough cash to pay for its debt?” Since 2013, the year Cornerstone accrued on most of its long term debt, the company has been losing cash. This alone would be reasonable since the debt is so large, the company has to make similarly large interests payments and debt payoffs. However, the scary thing is that the company has a negative net income and it is only able to show a positive operating cash flow because of depreciation addbacks and some stock compensation. Neither is the true solution to the problem. The company also has had an increasing cap-ex in the recent years. With a negligible cash amount, and a vastly limited power to generate income and cash, the company will soon be in trouble. As of now, the put options are not pricey. I have bought 100 put contracts with an average price of $1.8, expiring on Nov. 19th with a strike price of $42. That means, I will start to profit if the stock drops down 40 and the profit can be quite intriguing if the market realizes how much of a hole CSOD is in fact in.
- (LNKD) We all know what LinkedIn does. I have never been bullish on LinkedIn, not when it was 200 USD/share, not when it was $100, and certainly not now when it is $135. I see a good, socially benefitting business that no one will ever be willing to pay for. It is cool, but it is just not a good cash-generating business. I do not believe the company has any moat. I believe if Facebook ever as much as slightly moves towards the professional networking business (which if it were good, Facebook inevitably would), the entire business model will be crushed into ashes. The company is losing money on its income statement. It is investing in R&D heavily, but I cannot imagine more profitable solutions being invented. I think the company has over-estimated the importance of professional networking and will slowly realize that professional networking itself will not be able to stand stably in the market. Most of the users are younger in age, and as a result will not be able to bring in tangible revenues for the paid advertisers on the site. This is another key downside. Without ad revenue, the company will slowly die like Yahoo. The difference is that LinkedIn does have a paid/premium membership. Again, from my experience with the website, I see no tangible benefits with a paid membership. The premium membership largely offers gimmick features which would be cool to have, but without a solid base product, will have very limited impact in convincing users to pay.
(I have either, or a combination of, short, put, or naked call positions in all three listed. However, I write the article to express my sentiment and logic, which are the reasons for my investment decisions. There is no causation effect between my investments and the articles I write.)