Market Musings - November 3, 2017

We begin a new blog series today: Market Musings, giving our (hopefully not too random) thoughts on recent goings-on in the markets and to document our stock market views and long/short ideas for posterity (knock on wood, not in a way that looks foolish retrospectively). So without further ado, we present Market Musings, Volume 1, Edition 1...

1. Public Service Announcement - Just as a friendly reminder that stocks don't always go up, we offer up to readers the following as a PSA (from 88 years and 1 week ago):

2. Herbalife (HLF) Earnings - In more positive news, HLF reported quite abysmal Q3 2017 earnings last night after market close (link here):

Volume points were way down in most regions YoY, including down 16% in North America, down 9% in Mexico, down 7% in South and Latin America and down 3.5% in China:

In our humble opinion, HLF is an example of a company that exploits (rather than serves) its customers, similar to (for example) Valeant (VRX) and the polar opposite of a company such as (for example) Amazon (AMZN). The only thing that has propped up HLF's share price over the past 5 years has been massive debt-fueled stock buybacks (inevitably a recipe for disaster in the long run). We are short HLF via our Pershing Square Holdings (PSHZF) long position--and today was a good day in that respect, with the company's stock down over 5% at last check:

3. Tesla (TSLA) Earnings - Speaking of abysmal, TSLA announced its earnings a couple days ago (link here):

Despite the cheery headlines at the top of the earnings PR about orders and deliveries, TSLA's actual Q3 numbers in the PR (starting, ahem, about two-thirds of the way down) were just, well, "ludicrously" bad. TSLA lost another $619 million in the quarter (almost $650 million worse than Q3 2016(!)), bringing YTD losses to a whopping $1.29 billion, with no end to the money hemorrhaging in sight:

We dare anyone reading this to even try to spend (let alone lose) $671,376,000 in 90 days, or $7,450,000 per day. It takes a serious amount of work to do that, folks. TSLA's cash (out)flows are even worse, with the company blowing through over $4 billion in cash from operations and investing activities so far in 2017, or almost $15,000,000 per day ($621,000 per hour for every hour this year so far). Yikes:

Now that the company has almost $22 billion in total liabilities (aka OPM, or other people's money) versus just $3.5 billion in cash (as of September 30, 2017), there is literally no further room for error; yet, shockingly, the company appears completely inept at scale-level auto manufacturing (if you don't believe us, just listen to the Q3 earnings conference call, one of the most bizarre we have ever heard yet--go on, listen, we dare you).

The market marked down TSLA's insanely high stock price a bit following the earnings disaster (and we believe there is huge additional downside ahead for TSLA gamblers & speculators, aka "longs"):

4. Apple (AAPL) Earnings - An example of a certifiably "good" company, i.e., one that delights its customers routinely (unlike HLF), Apple reported earnings last night (link here):

Results were almost ming-bogglingly strong, with the company registering $10,700,000,000 in profits in Q4 of FY 2017, or almost $120,000,000 in profits per day. Holy smokes, Batman. And Q1 of FY 2018 is expected by the company to be even stronger than the first quarter of last fiscal year, with the following company expectations:

This is pretty crazy stuff--unprecedented actually. $84,000,000,000 in revenue in 90 days on the low end??? Based on this guidance, we would expect AAPL to generate at least $11/share in earnings in FY 2018 (or ~$56 billion in aggregate), meaning that with a current enterprise value (EV) of around $760 billion, AAPL's 2017 earnings-to-EV yield remains a relatively high 7.4% (meaning the stock still looks fairly cheap). In response to Q3's strong earnings, the market has boosted AAPL's share price to almost $174 at last glance (and we are pleased to be long):

5. Scientific Games' (SGMS) Vertical Climb - SGMS has gone from about $5/share in mid-February 2016 to a recent level of $48.50/share, a vertigo-inducing rise of 845% in under 22 months:

The company reported Q3 earnings two days ago (link here). Given the company's past history of stock price booms and busts (for example, it went from $28+ in March 1994 to $1.13 in March 1997 [down 96%] and from $38 in October 2007 to $8 in September 2012 [down 80%]), longs should be quite fearful right now, in our view. No doubt, however, they feel smugger and safer than ever. Perhaps longs should heed the following Buffett aphorisms, namely (1) "You pay a very high price in the stock market for a cheery consensus", and (2) "Speculation is most dangerous when it looks easiest". The company carries over $8 billion in debt on its books versus negative $2 billion in shareholder equity, quite a risky balance sheet:

But, hey, it's a bull market, why worry? Don't be such a buzzkill, bro! Seriously, we think SGMS is worth examining further as a possible short opportunity / market hedge. To be continued...

6. Warrior Met Coal (HCC) $11/Share Special Dividend - The following announcement caught our eye recently:

For a company with a stock price under $27/share, an $11.21/share dividend is quite unusual. Even more eye-catching is the fact that HCC made $4.52/share in net income and paid $3.61/share in dividends in just the first half of 2017 (link here):

Note that the company just went public in April 2017, at $19/share (see IPO prospectus here). Clearly some additional DD on HCC is required, which on the surface appears to be insanely cheap--no doubt there is more to this story. Here is the stock chart since the IPO: