Recap: Kase Short Selling Conference

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About: Arcadis NV (ARCVF), Includes: AAXN, ACHC, APHA, CARG, CBRL, CIOIF, EBIX, ELSSF, ERFSF, HIIQ, HXGCF, INSY, KBH, MIK, MOMO, PHM, SIG, TLRY, WMK
by: SA Bulls & Bears
Summary

Cannabis stocks decline after short-sellers identify Aphria and Tilray as targets.

Ebix is identified by two presenters. Retail stocks are popular targets.

Carson Block discusses the morality of shorting "bad" companies and calls health care "ground zero" for short-selling.

by Nathaniel E. Baker

Whitney Tilson's Kase Learning hosted a full-day conference in New York today, where more than a dozen short-sellers presented best practices and actionable ideas. This recap focuses on the market-moving ideas first, followed by some of the broader lessons presented by participants.

Gabriele Grego, Quintessential Capital Management: "The Black Hole"

  • Short idea: Aphria (APHA)
  • Thesis: The company's C$700 million acquisition spree is a scheme to defraud retail investors. Aphria has been acquiring worthless assets, funneling money to shell companies controlled by insiders.
  • Quoted: "We only go after catastrophic situations, typically fraud."
  • Link to report

Sahm Adrangi, Kerrisdale Capital Management: "A Short For All Seasons"

  • Short idea: CarGurus (CARG)
  • Thesis: A commoditized business that can't compete on margins if it keeps offering discounts to dealers and spending to stay relevant to drive CAGR. The stock trades at a large premium to its peers, which have better ad positioning.

Chris Brown, Aristides Capital: “My Big Fatty Reefer Vetting”

  • Short idea: Tilray (TLRY)
  • Thesis: The company's trailing revenue is $32.5 million and its market cap is about $9.5 billion. The IPO lockup expires Jan. 15. Marijuana is a commodity and commodity prices come down over time. The base case around $60/share once the IPO lockup expires and it will drop from there.
  • Quoted: "The biggest risk to our short thesis is someone making a brutally stupid $4 billion investment."

Viceroy Research: “Goodwill Hunting: The Alchemy of Creating Profits”

  • Short idea: Ebix (EBIX)
  • Thesis: Red flags include a switched story line, accounting discrepancies, a growing unbilled receivables balance, rapid change of company auditors, an unnecessarily intricate and opaque subsidiary structure, and a poison pill orchestrated by the company's CEO.
  • Quoted: “The biggest risk is the business starts paying down its debt. We don’t think that’s a huge risk at this time.”
  • Link to report.

Mads Thamsborg, Bodenholm Capital: "A Roll-Up Gone East"

  • Short idea: Ebix (EBIX)
  • Thesis: Company has huge leverage, deterioration in rollup, bungled strategy, and a high number of accounting discrepancies.
  • Quoted: "Ex-employee feedback is basically very consistent: Ebix does not do a lot of due diligence on the businesses they are acquiring.”

Matthew Earl, ShadowFall Capital & Research: “Arcadis – A Bridge Too Far”

  • Short idea: Arcadis (OTCPK:ARCVF)
  • Thesis: The company is probably understating its average debt by up to 366 million euros, overstating its EBITDA by up to 30 million euros, is close to breaching its covenants, and employing so-called “cookie jar accounting.”
  • Quoted: “We see a lot of similarities with Carillion” (OTCPK:CIOIF), a construction company that was liquidated last year.

Ben Axler, Spruce Point Capital: “What’s Left to Short After a 10% Market Correction?”

  • Short idea: Weis Markets (WMK)
  • Thesis: Poorly positioned supermarket with intensifying competitive environment.
  • Quoted: “We love to find companies that have poor governance.”

Keith Rosenbloom, Cruiser Capital Advisor: “A Dead Man’s Hand?”

  • Short idea: The Michaels Companies (MIK)
  • Thesis: Secular headwinds, insiders are selling. Framing is 15% of revenue but about 33% of their income.
  • Quoted: “This is their problem: There are lots of people offering less expensive, online framing.”

Sunny Puri, Anson Funds: "The Apple Doesn't Fall Far From The Tree"

  • Short idea: Axon Corporation (NASDAQ:AAXN)
  • Thesis: The company's leadership has been implicated in securities issues in the past. The business's diversification away from their core taser line shows the limits of their model, and the valuation is still too high.

Dan David, F.G. Alpha Management: "Don't Quit Your Day Job"

  • Short idea: Ideal Bike (8933.TW)
  • Thesis: David's talk was about his education on Chinese stocks, the making of China Hustle, and his experience lobbying and then running for Congress. As a side idea, he pointed out Ideal Bike, which sank over $30M into a subsidiary that recently declared bankruptcy, which will wipe out a lot of the company's equity value.

Victoria Hart, Pinnacle View Capital: “Bah Humbug”

  • Short ideas: Cracker Barrel (CBRL). Pulte Homes (PHM), KBH Home (KBH)
  • Thesis: Milennials aren't buying homes at the rate of past generations. Cracker Barrel is losing market share to casual restaurants and isn't connecting with milennials
  • Quoted: "Last cycle, Homebuilders peaked two years ahead of the broader market, in 2005."

Anne Stevenson-Yang, J Capital Research: "The Link Between Chinese Online Streaming Sites And Money Laundering"

  • Short idea: Momo Inc (NASDAQ:MOMO)
  • Thesis: The company's growth is opaque, subject to regulatory risk around risqué streaming content, and a tightening of the money supply could hit it hard with 40% downside.
  • Quoted: "If you're a smaller money launderer, 25% is the going rate to go through these companies."

Matthew Kliber, Gracian Capital LLC: "Anything But Brilliant"

  • Short idea: Signet (NYSE:SIG)
  • Thesis: The company has bounced back, but its Q2 numbers relied on one-time effects. The company outsourced its credit financing, which is leading to tighter terms and causing a reset in revenues.

Carson Block, Muddy Waters Capital: “ActivISM Short Selling”

  • Thesis: Healthcare is ground zero for short-selling. Called out Acadia Healthcare (ACHC), Insys Therapeutics (INSY), and Health Insurance Innovations (HIIQ).
  • Why now? The environment for shorting is a little better, risk aversion may be returning. There’s a political element as well, as people are looking at government and saying it’s not working. The message of regulation through the market will work.
  • Block recommended naming names. Who are the individuals behind a company that is overvalued or fraudulent? Short-sellers should identify analysts behind a bullish report, CIOs or portfolio managers behind an investor's holding. Approach analysts, send them information even if they don’t accept it.
  • Quoted: "I would suggest dropping the rhetoric about the regulators coming and appeal instead to the decency of the common people who own the stock."

David Berman, Berman Capital: “The Wishful Thinking Theory”

  • Thesis: The spread between the sales growth rate of three companies (Apple, Samsung, Amazon) and US retail sales growth rate has widened (7.3% versus about 4.5%). Traditional retail numbers have improved along with these SAA stocks. But the inventory/sales growth ratio versus the stock price is bad for retail stocks.
  • Quoted: “You’re going to want to be a bear on retail sometime soon.”

Mark Hiley, The Analyst Research: "Roll-up And Blow-Up: Calling Time On European Carpet Baggers"

  • Short ideas: Hexagon (OTC:HXGCF), Elis (OTC:ELSSF), Eurofins (OTCPK:ERFSF)
  • Thesis: Companies that use the Schuldschein debt market often are doing so as a last resort, which is worth watching as short seller flags. European companies have been rolling up businesses based on low debt and the ability to smooth out earnings, but that's going to turn soon enough.

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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.