This past week, I doubled my long position on Fitbit. I think I got in at a lucky price of $41.72. Technical traders are looking at the charts and historical swings and some are predicting it will go lower, others not so sure. I doubt it will go lower (but could be wrong) in part because I'm going to try and eliminate one of the possible reasons why Fitbit is being shorted. The reason is quite simply because two of the largest sources of financial information in the world are publishing incorrect figures for Fitbit's Price to Earnings ratio. I'm talking about Yahoo Finance and Finviz.
Before I go any further, I will point out that I am not a professional investment advisor, have no certifications and wouldn't presume to advise anyone about how to invest or even make money. Do not take anything I write as an inducement to buy or sell anything. Seek professional investment advice.
I am am amateur investor perhaps not unlike you (retail). In fact, I'm only recently taking an interest in investments and what causes stock prices to go up and go down. So, I anticipate making many fundamental, embarassing mistakes about basic investment concepts. Count on it. I do. But help me learn. All I can say is when I do make a mistake, I will quickly publish a correction. I ask only that anyone pointing to a mistake help me out by pointing to an authoritative source.
I got interested in Fitbit because I heard about the IPO and was intrigued that a company already turning profits was going public. I don't know the ratio of profitable to unprofitable IPO's is but I knew I needed to pay attention. I got in at $30.40 by setting a limit before the market opened of $32. Lucky guess on my part. But it gave me 1000 shares long.
What happened next is ordinary markets trying to determine what the fair value of the publicly traded shares. Ups/downs but settling above $40 and flirting with $50/share.
Embolded by my selection, I tried to trade about 1500 additional shares off and on over the next few weeks. This is basic timing the market 101, drive money off a cliff behavior....for an amateur like me. What I realized was I'm not good at predicting short term market behavior. Although I did make a few bucks on Amazon and Under Armour trading on earnings. But the strategy I employed there hurt me on Facebook and Fitbit. So I learned I'm in over my head on trading...for the time being.
As Fitbit tracked through $30/share to $40/share, we got the typical short view of Fitbit being overvalued. You know the drill. Market cap is too high. Price to earnings ratio is too high. That bothered me so I started looking into it and found that alot of websites had Fitbit's PE at 180+.
Think about that for a second. These websites were saying that the price per share that you pay into Fitbit would be repaid back to you in earnings 180 years later. Not great.
But what I found was these websites were using Fitbit's Q1 2015 earnings as part of their calculation. What they were supposed to be using was the standard trailing twelve months earnings (NYSE:TTM). They weren't. They still aren't and I'm quite frankly pissed off about it. I could show you alot of screenshots to back up my assertions or emails I sent to these organizations and Fitbit itself but I will spare you.
So here we go.
What's happening now post Q2 earnings report? Finviz and Yahoo Finance are taking the wrong earnings numbers from Fitbit's latest earnings release and using it to incorrectly calculate the PE ratio. Allow me to illustrate.
The key question is where are they obtaining the .47 EPS? Well, I suppose there are a gazillian ways they could arrive at a wrong number but when I look at the SEC filings of Fitbit a logical origin emerges:
They are grabbing it--likely--from the period of performance ending June 30 2015 and 2014. Readers, this is not the trailing twelve months. It is the trailing six months, pretend the prior six months don't exist and then add to it the subsequent six months. Why is that a big deal?
BECAUSE IT LEAVE OUT CHRISTMAS!!!!!!!!!!!!
Now in and of itself, Christmas may not be a big deal. But Fitbit disclosed in it's S1 prior to IPO that 50% of its sales occur in Q4. That means its Q1, Q2 & Q3 numbers equal Q4.
Easier to digest:
The Yahoo Finance and Finviz PE ratio therefore is reflective of 33.3% of Fitbit's actual earnings performance . So, if you feel like $42.68/share is a fair price and you are investing in earnings because you looked at Yahoo Finance and Finviz before investing, boy, do I have some good news for you.
When you utilize the actual trailing twelve months earnings, you find Fitbit has reported .82/share. Where did I obtain this number? Reuters? Thompson's Financial? Nasdaq? No, I used Fitbit's SEC filings and a 2Q15 Supplemental document Fitbit provided with its press release.
In the Supplemental, we find the trailing twelve months earnings that professional financial publishers like Yahoo Finance and Finviz should be able to locate in their sleep. I'm two things right now. Hugely upset and second, worried, I'm missing something so basic. Remember, I'm an amateur investor, maybe like you, not a financial metrics publisher like Finviz or Yahoo Finance. I'm angry enough about this to report it to the SEC but unsure of my own conclusions.
So here I am, a retail investor calculating PE=52 and Yahoo and Finviz say it is 90+. Now, sophisticated investors have access to excellent analysis. Me? I have access to Ameritrade which also sucks when it comes to analyst reports. But, I do get to see S&P Capital IQ's report by Angelo Zino, CFA. Here's what he says:
AAngelo and I are on the same page when it comes to PE ratio. His calculation is better than mine.
Now for a few disclaimers. Fitbit's IPO filings and their Q2 earnings are a bit incongruent in my opinion. I'm not certain how to make sense of the change in number of oustanding shares. I know I should be able to figure it out--what with employee stock options etc--but I can't. My email to investor relations resulted in an admonition to seek professional investment advice. :-) I encourage you to parse it and let me know what it means exactly:
When I divide a GAAP earnings number by the total outstanding number of shares, I want to find a GAAP EPS. Not sure Peter appreciates what I'm looking for based on his response. Wasn't aware that Fitbit went public on April 1. Thought it was June 18.
Let me wrap with a follow up. My thesis here isn't that those going short derive their key decisional data from Yahoo Finance and Finviz and then place the short bets, although it is very possible that many unsophisticated investors do! What I'm saying more specifically, is the shorts may be betting on unsophsticated investors like me to misunderstand the PE ratio and thereby shy away from Fitbit when in fact, it is actually in good shape for a company growing revenue $250%/year which is like saying the PE ratio will be 13 in a couple years (assuming the share price doesn't change--which wouldn't happen).
It appears Yahoo Finance has more or less fixed their PE ratio calculation. Observe:
Correct me but I think the ttm earnings are actually .82 not .78. Oh well.
Sadly, even FINRA has the wrong PE ratio for Fibit....FINRA being the "self-regulation" arm of Wall St. :-)
Even when websites publish Fitbit's PE ratio as NA that too is wrong as found here on marketwatch:
The PE ratio isn't Not Available. It isn't Not Applicable. It is available and applicable.
Look at this atrocious pathetic effort by CNN Money. PE Ratio 294!!
That's as of today August 12, 2015! Why even post any data at all about a stock if you can't get PE ratio right? Seriously.
NASDAQ.com doesn't appear to have it incorrect but they havent poblished it either.
Even Jim Cramer's Thestreet.com has published an incorrect PE ratio and the guy has gone through on TV that the PE ratio is actually pretty good for a company like Fitbit. Again from August 12, 2015:
Wall street journal? N/A = wrong. It is available.
Here's CNBC. Won't report the historical earnings Fitbit filed with the SEC but CNBC will tell us what the future earnings are. Brilliant. No?
What about big newspapers like NY Times? Washington Post? Wrong. and Wrong.
SSame with Bloomberg:
Ok, that's probably enough sources to prove we have a major disconnect here if anyone anywhere is concerned about the average retail investor who relies on the PE ratio to make an investment decision.
The reason why we should be concerned about this is because since the IPO, institutions everwhere have been stockpiling Fitbit hand over fist. In fact, 3 hedge funds have filed 13-G reports to the SEC indicating they now each own over 5% of the Fitbit float. I estimate, in part using Whalewisdom.com and examining SEC 13F filings that possibly 40% of the float is now owned by Institutions. Whalewisdom hasn't fully updated for the July 31 filings and so I wouldn't be surprised if well over half of float is institutionally owned.
So while the average retail investor has been unable to scour the web and find any reliable PE ratio data for Fitbit, Wall St has basically bought up most of the shares. See the problem?
Of course, all the early press around Fitbit was geared towards overvaluation, stock price increase, etc. Ordinary viewers then went to validate this concern using all of the above websites and lo and behold the data all confirms the concern with one small problem. The data is wrong.
Disclosure: I am/we are long FIT.
Additional disclosure: As I stated in my article, I am not a professional analyst. I could be mistaken about key concepts and invite corrections which will be quickly applied to my article. Since I am an amateur, you would be a fool to invest based on my insights. Check with your advisor before making any significant moves.
Additionally, I disclosed that I have investigative journalist skills. Typically, journalists identify themselves because journalism is inherently public in nature. As I am not operating as a per se journalist, I prefer not to disclose this. This is a credibility hit for sure. Factor it into your interpretation of my work. Perhaps over time, if readers appreciate my insights, maybe I'll disclose my identity but for the moment, I'm comfortable identifying as a newbie retail investor.