Welcome to Editors’ Notes! I aim to sort through the ideas we publish each day and highlight a few that may be of interest to readers, along with comments that may add a helpful gloss. They’re not necessarily best or worst ideas, just ones that catch my eye and may be worthy of study.
I’m planning to post this once or twice a week, but I’m most interested in seeing what you as readers think about it and what you find useful. Happy to build on this from there. If you have thoughts, comment below or send me a direct message and let me know what you think.
We have published nine short ideas so far this week. Six covered Tesla (TSLA), and we’re going to skip those in this article. I want to break the other three down.
JD’s Recent Results Benefit From Accounting Discretion, Not Fundamental Improvements by Mithra Forensic Research, published Tuesday.
Mithra Forensic Research analyzes stocks through careful assessment of their financial statements. JD.Com (NASDAQ:JD) is their third stock covered, after Vipshop (NYSE:VIPS) and BTG plc (OTCPK:BTGGF) (OTC:BTGYY). BTG is more or less flat in the year since the article came out, but VIPS dropped 55% over the next year and is in a similar space to JD, Chinese internet retail.
The piece here is laser-focused on the accounting. Specifically, the argument is that JD has grown Cash Flow from Operations only because their accounts payables have grown, and that revenue is boosted by financing and loose credit to customers. The author extrapolates that valuing the company based on cash flows is difficult since adjusted CFO would be negative, so one has to value on revenue, and that adjusting for the financing-fueled revenue would drop the multiple 45%.
The valuation effort is slim, but the accounting points are interesting. Good discussion with a couple of bullish contributors pushing back on points.
Sentiment Check - 58 comments as of this writing, with some but not too many immediately dismissive comments. (‘Is this Andrew Left in disguise?’ reads one). My sense is the broader consensus on financial Twitter is bullish JD, but the stock has been up and down over the last year. 11 different authors have written up a long idea for JD this year, and this is our first short idea on the stock this year.
Snap: Sell Any Price Spike Related To The Q1 Report by Bull & Bear Trading.
Writing an article right before earnings runs the risk of it having a short shelf life, at least in a specific sense. This piece said Snap (NYSE:SNAP) was a short but watch for any spikes after earnings as a chance to short. Instead, SNAP has dived almost 20% pre-market (at 8:40 am).
But this offers a good distillation of the short case. The key paragraph:
Snap's previous business model focused primarily upon a younger millennial demographic, which unfortunately for Snap paid little attention to ads on the platform and had limited purchasing power. Outsourcing of key items like server space has caused the company significant expenses for the maintenance of users. And as the most affluent markets have become saturated with social media competitors all vying for the same limited number of daily user minutes, acquisition costs for new users have climbed. Further evidence of the inept management at Snap has been on full display with the widely despised redesign of their platform. Impacting the user experience negatively with a very unpopular redesign had to have been initiated and approved by the top of Snap's management. This means that CEO Spiegel would be directly responsible for another questionable, key business decision at Snap.
For the flip side, check out this deep dive on Snap, which argues it has a long-term edge in content.
Sentiment Check - 17 comments, many after the earnings report came out, with mixed sentiment. I count 13 authors who have written cautiously or negatively on SNAP this year, vs. 4 positive.
Inpixon: If This Sketchy Deal Is Legal The Public Markets May Be In Deep Trouble by Hindenburg Investment Research
This isn’t really a short idea - Inpixon (NASDAQ:INPX) has a $3M market cap - but it is a curious market tale. The essence, as I understand it, is that INPX told some investors semi-privately in a registered direct offering that they were going to release news about pivoting to the blockchain, closed the offering, then released the news, causing a not surprising price spike and opportunity to sell shares into it. The offering was very dilutive, among other things.
We’ve published 94 long ideas over Monday and Tuesday. While there are plenty of usual suspects - TSLA got 3 long ideas over that time, and Intel (NASDAQ:INTC) and ConocoPhillips (NYSE:COP) got a couple of shouts - here are a few things that interested me.
Jim Roumell is one of the better known authors on SA, and I’ve learned a lot from reading his ideas on SA and elsewhere. This piece is an excerpt from a quarterly letter. Oxford Square Capital (NASDAQ:OXSQ) is a BDC, and trades below NAV. Not much new there - a lot of BDCs are trading below NAV and the sector has struggled recently (I own a couple of other ones in my portfolio). What’s interesting is that OXSQ has grown NAV over time, which is not trivial, including a reported increase in Q1 announced this week.
In looking at this, I saw comments from Nicholas Marshi on a few news articles. Marshi is one of the preeminent experts on BDCs on Seeking Alpha and wider afield. He cites concerns over the company’s coverage of the dividend (NAV is growing due to realized/unrealized gains, not core investment income), but more to the point suggests that the company is underleveraged, which could foretell a merger.
The stock trades at .82 NAV and maintained a 12.75% yield with its latest dividend announcement. Interesting story.
Sentiment check - Prospect Capital (PSEC) and Oaktree Specialty Lending Corp. (OCSL) are the companies most frequently mentioned in articles alongside OXSQ, and PSEC and Annaly Capital Management (NLY) are the ones most frequently in readers’ portfolios, along with OXSQ.
Xerium (NYSE:XRM) is in the paper industry, making rolls and equipment that are then used in the production of paper. While that doesn’t seem like a growth industry, it can make for special situations, which is what we have on our hands.
Looking for Diogenes wrote it up this week, citing a few key points that make it an interesting speculation:
The company ‘has determined that there may be opportunities to accelerate value recognition or unlock additional value through strategic actions’ due to the expensive debt it has on its books.
That is primarily 9.5% notes due in 2021, which account for nearly 5x the company’s market cap.
Barington Capital Group filed a 13D. The firm is a 5% holder in XRM
Recent options data shows an outsized call position was taken, suggesting expectations of a binary event.
Private equity, institutional, and insider ownership are all significant.
This followed an article by Veni Vidi Emi (so a theme of classically inspired contributors) a week prior which had some sleuthing about the company’s notes - they are significantly cheaper to call after August. So that may weigh in on the timing of any major event.
Sentiment check - XRM has been an obscure value investors’ favorite, with coverage dating back to 2010, nearly all of it positive. Interestingly, the stocks that most often show up with XRM in a portfolio are Albany (AIN), another textile-related player, and then RigNet (RNET) and Burlington Stores (BURL).
Cactus: Still The Best Way To Play Recent Oil Boom by Pinxter Analytics
Call me late, but it seems like we’re back into the boom phase of the oil cycle. I wasn’t aware of Cactus (WHD) until seeing this headline. The company IPO’d earlier this year, and appears to have been founded in 2011. They make “engineered wellheads and pressure control equipment,” so a classic supplier to drillers and E&P companies. Pioneer Natural Resources (PXD) and Devon Energy (DVN) are or have been 10% customers for them. They report Q1 earnings next Thursday.
Pintxer argues they are the way to play the oil cycle. This article reviews the Q4 report from March and finds it confirms their prior thesis, which is that WHD is a leader in the industry and valued less than peers like OIS and NOV.
I don’t find the valuation case compelling, but there may be something to look at. The company posted positive Free Cash Flow each of the last three years and should be debt-free post IPO. Commenters have raised concerns about the limits of growth when they have 26-27% market share already, but there may be some wonkiness here due to the IPO and where it is on the market’s radar, which could open an opportunity.
Sentiment check - For example, the stock it shares the most company with in SA readers’ portfolios is PagSeguro (PAGS), another recent IPO. Nine Energy Service (NINE) and FTS International (FTSI) are next on the list, and more likely as industry peers.
Here are a few headlines that I found interesting:
- Tractor Supply - The Growth Story Is Back On Track by Michael Rogus
- 10.3% Bond Yield To Maturity And 30% Capital Appreciation Potential From A Clear Arbitrage With Hedging Reaction by Arbitrage Trader
- Applied Materials: Leader In Materials Engineering Solutions With A Big Discount by Gan Kien Keng
- Archrock Is Grabbing The Cash Flow For A Potential Payout Leap by Long Player
Any of these ideas or any others catch your eye? Let me know below. Any and all feedback welcome. Thanks for reading!
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.