Keeping It Simple On The Short Side

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Includes: AVIV, CI, CRSP, DNOW, ESRX, FLNT, GILD, GNPX, HMNY, HTBX, LBCC, LFIN, NOV, OHI, OPK, PAGS, QCP, RAIL, RDVT, SESN, SGMO, SQ, TSLA, VTVT, WELL
by: SA Editor Daniel Shvartsman

Summary

Today's Editor's Notes reviews five short ideas that each have a way of keeping it simple.

Two of them stick to the basics of industry conditions.

The other three are harder-hitting pieces, but when you look underneath the story is relatively straightforward.

Welcome to Editor's 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. If you have thoughts, comment below or send me a direct message and let me know what you think. Your feedback will be super helpful as we develop this. I'm aiming to do this twice a week, tentatively Tuesday and Friday. Read Tuesday's edition here.

Today's edition focuses on the short side. It tests the idea that sometimes the simplest ideas are the best ones, looking at ideas of varying complexity but that all have a very basic underlying thesis.

Sometimes it's that easy. Source: dreamstime.

Short ideas

We published 13 short ideas from Tuesday to Thursday. Six are about Tesla (TSLA) and we'll skip them. One is about Hudson Technologies, which we have covered before (though hat tip to Rota Fortunae for what looks like a good call). One is about MoviePass owner Helios & Matheson Analytics (HMNY), which looks like fish in a barrel at this point - too simple to break down. That leaves us with five short ideas. Let's have a look.

FreightCar America: Exposure To Declining Coal Industry Is A Significant Risk Factor by Andri Capital

FreightCar America (RAIL) has been one of the few companies I've come across in recent years that is able to post a profit of some sort - on a net income basis 2014-2016, free cash flow basis last year - while trading below tangible book value. Of course, revenue has been sliding over the last three years, which may be one reason.

Andri Capital had initially covered RAIL as a potential long idea, but this time around, they touch on the elephant in the room - coal and its decline. RAIL makes rail cars to transport coal, and as Andri Capital points out this time around, a declining backlog for RAIL suggests coal isn't coming back yet. The company is at the point where gross margins are negative and revenue is declining 40% year over year, which is not a great point.

Without going too deep into it, there seem to be three risks to the short thesis - 1) coal turns around; 2) the company finds another end market besides coal fast; and 3) the company finds another use for its nearly $10/share in cash. I suppose I would be most worried about the last, but cash goes quickly.

Sentiment check - On Andri's first article, each of the comments was of the pointed 'what makes you think something is going to change' variety. We've published one long idea and one avoid so far this year, outside of these two articles.

Express Scripts Vulnerable Ahead Of President Trump's New Policy Outlines by Bull & Bear Trading

The pharmacy benefit manager (PBM) model is one of the more opaque in the healthcare industry, and it's difficult to understand the benefit it provides to consumers. That's at least the starting point for this piece from Bull & Bear Trading, which in light of President Trump's new drug pricing policy (due out today), could put Express Scripts (ESRX) in trouble as the most directly affected company. ESRX has been a short target in the past but it's also in theory being bought out by Cigna (CI) which makes it easy for the market to hold two different views here. ESRX is trading below where it was in the weeks before the deal was announced.

Sentiment check - Commenters cited the Cigna deal closing as reason to watch out for this thesis. We've published four long ideas against this short idea for ESRX so far this year. The short idea I had recalled above was this one.

Second Sight Medical Products: Riding The Cash Roller Coaster To Nowhere by Cliffside Research

Cliffside Research shares a very straightforward argument. Second Sight has had a history of raising capital, burning cash, and raising more capital, thus diluting earlier shareholders. They most recently did so via a private placement to their Chairman, but at the price of $1.48/share vs. the current price of ~$1.75. The Centers for Medicare and Medicaid Services (CMS) reimbursement rates are lower for 2018, which is likely to weigh on revenue. Lastly, the company is a long way from breakeven and not growing share fast, meaning the cycle is likely to continue.

Cliffside goes much further than that in this article, and then follows it up with an article this morning on the company's Q1 release (which wasn't great), but there doesn't need to be much more of a case. Per the earnings 8K, the company has ~$15M in cash after the private placement and posted an operating loss of nearly $10M in Q1. The math is not hard from there.

Sentiment Check - A couple bulls show up in the comment stream, but this is not as hard fought as a lot of the responses to these articles can be. We've only published one other article on the article since March 2016, which was bullish. Per Interactive Brokers, 100,000 shares are available for borrow.

Red Violet - Spin Off To $0.00 - Possible Russell 2000 Mistake + Questionable Management by Fuzzy Panda Shorts

Similar to the EYES case above, this short idea on Red Violet (RDVT) has a very basic premise - the company is losing a lot of money and doesn't have a lot of cash to live through that. It has two bigger twists to it - the stock may have been wrongly included in the Russell 2000 index, and thus may be shuffled out of it soon as it is too small for that index; and the company's management does not have the best track record. People who have read short ideas on Seeking Alpha over the years will recognize many of the names involved.

Sentiment check - the comments push back on some points in the article. The company is new so not much history there, but the parent company (FLNT) had mostly long ideas, with one short idea from 2015 that seemed to play out. Beyond the parent company, OPKO Health (OPK) and HMNY have the most overlap in users' follower lists.

We Believe Genprex Is A Disaster In The Making by Hindenburg Investment Research

Consider this the last of a piece with the RDVT and EYES ideas. In this case, Genprex (GNPX) shares an underwriter with companies such as Longfin (OTCPK:LFIN) and Long Blockchain (OTCPK:LBCC). The company has an early stage drug that has been around for a long time, per the author, and is not advancing fast. It also apparently has ties to promotional campaigns. Again this seems to be a simple story, but with its unique spin.

Sentiment check - in this case, the comments are all positive. Perhaps it has not had time to build a following? Users who do follow the stock most often have vTv Therapeutics (VTVT), Eleven Biotherapeutics (EBIO), and Heat Biologics (HTBX) on their lists.

Long Ideas & Dividend Ideas

We published 124 long ideas and 55 Dividend or REIT ideas. I'm not going to do a full breakdown, but here's a quick look at a few that caught my eye.

PagSeguro Is A Great Brazilian FinTech Growth Play by Edgar Torres H

This is our first article on PagSeguro (PAGS) since the company started trading (we had one prior to that). Torres starts with one of the most obvious risks - shareholders have no voting power, as 95.8% of voting power (and 60%) of shares is held by UOL, owner of this fantastically Brazilian website. Then there's the obvious upside - the company is growing revenue at a 100% clip in either $ or Reais terms. He compares PagSeguro to Square (SQ). Brazil is going through bumpy times politically, but that hasn't slowed PAGS yet.

Time To Buy NOW Inc. by UCLA Bruin Value Investing

I once owned a tiny position in NOW Inc. (DNOW) due to its spinoff from National Oilwell Varco (NOV). This happened right before the oil downturn, and I could never find a good reason to own it (I also sold the NOV position).

This investment club makes the case for owning it now. I'm not sure I follow the valuation - 14x EV/EBITDA in the base case seems optimistic - but the stock is going in the right direction along with the oil market. DNOW seems well managed but stuck in a low-margin business. Maybe they gained share during the downturn?

Sangamo: The Secondary Was Ill-Timed Or Not by Marty Chilberg

I find Marty Chilberg's work to be very good. We did a podcast about Crispr Therapeutics (CRSP) and Gilead Sciences (GILD), and he graciously corrected us on our omission of Sangamo Therapeutics (SGMO), which was already Gilead's partner in this space. Anyway, the stock is trading nearly 50% lower than it was when the Gilead news came out. Chilberg explains why he's still bullish.

The Market Is Discounting Another Bid For Quality Care Properties, Inc. by Bilbao Asset Management

A potential bake-off? Bilbao Asset Management argues that Quality Care Properties (QCP) might get another takeover bid. The REIT is trading roughly .5% above the agreed-to deal price with Welltower (WELL).

We also published five articles on Omega Healthcare (OHI) over the last few days. It may be worth doing a deep dive on the healthcare REIT to see what's going on. (That's another one I used to own, both independently and then after I sold it, as part of the Aviv REIT (AVIV) takeover. No position).

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Any simple short ideas catch your eye recently? Let me know below. Follow me if you want to get more of these posts. And if you have feedback on what would be more useful to see, or what type of ideas you want to find more of, get in touch, I'd love to hear from you.

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.