by Amit Kumar
12. Marshall, M. (2006, September 15). Musk leads $10M Investment in SolarCity. Retrieved from http://venturebeat.com/2006/09/15/musk-leads-10m-investment-in-solarcity-to-provide-solar-for-all/
13. SolarCity (2012–2013). Form S-1, 10-K, 10-Q, and Investor Presentations. Retrieved from http://amda-14lqre.client.shareholder.com/index.cfm
14. Tesla Motors (2010–2013). Form S-1, 10-K, 10-Q, Blogs, and Investor presentations. Retrieved from http://ir.teslamotors.com/
15. Yahoo! (2000–2013). Form 10-K, 10-Q, and Investor Presentations. Retrieved from http://amda-14lqre.client.shareholder.com/index.cfm
16. Netflix (2009–2012). Annual Reports, Quarterly Reports, Presentations. Retrieved from http://ir.netflix.com
17. Kilar, J. (2012, January 12). 2011, 2012 and beyond (Hulu CEO Blog). Retrieved from http://blog.hulu.com/2012/01/12/2011–2012-and-beyond/
11. The Mechanics of Short Selling
1. Securities and Exchange Commission (2003, November 13). Proposed new regulation SHO. Retrieved from http://www.sec.gov/rules/proposed/34–48709.htm
2. Strauts, T. (2012, August 22). Don’t sell yourself short. Retrieved from http://ibd.morningstar.com/article/article.asp?id=565378&CN=brf295,http://ibd.morningstar.com/archive/archive.asp?inputs=days=14;frmtId=12,%20brf295
Index
Page numbers refer to the print edition but are hyperlinked to the appropriate location in the e-book.
accounting misstatements: basic guidelines and, 80–81; business model issues and, 94–96; case study on, 95–96; country mindsets and, 129–30, 132; expense classification, 83–84; fair market value, 86–87; financial statement due diligence for, 27–28; GAAP and, 80, 145; GAO and, 81–82; income statement divergence in, 87–88; industry-specific operating metrics and, 91–92, 93; losses and write-downs, 84–86; operating metrics types and, 88–91; recap, 96–97; restatements, 81–82; revenue booking, 82–83; Roberts on, 178–79; unusual transactions and, 94
accounts receivables, 85, 90
Ackman, Bill: on Buffett approach, 146; on CDS, 152, 158; on financial crisis of 2008, 152–53; on Herbalife, 147, 149, 150, 151, 157–60; on inefficiencies as opportunities, 147; on insurance issue-spotting, 151–52; interview with, 145–54; investigation of, 158; on leverage, 148; on liquidity, 145; on long and short comparison, 146–47, 149; on MBIA, 145, 149, 151–52, 158; on portfolio risk management, 148; on regulator responsiveness, 151–52; on short sellers, 150; on stress management, 150; on value traps, 153–54
acquisition costs, deferred, 84. See also mergers & acquisitions
Acthar, 20–22
activist investing: Ackman interview on, 145–54; Buffett on, 143–44, 147; CDS, 152, 158; inefficiencies and, 147; leverage and, 148; liquidity considerations in, 145; long and short, 146–47, 149; macroeconomic events and, 153; margin of safety in, 146; new generation of, 144; 1980s LBO era of, 137, 144; portfolio risk management in, 148; recap on, 154; value traps and, 153–54
advertising, 32–34, 206–7
AIG. See American Insurance Group
airline industry: leverage case study of, 50–54, 51, 52; privatization in, 130; value investing timing in, 132–33
Akerlof, George, 109
Alibaba, 204
Allied Capital, 157
allocation: cash increase, 134–36; optimized, 188–89
Amazon.com, 78–79, 165–68, 166
Ambac, 62, 151
American Airlines (AMR), 51, 53
American Insurance Group (AIG), 61–63, 65–66, 66
America Online (AOL), 32, 178–79
analysis. See due diligence
analyst downgrade, 170–71
announcements: company, 28–30; crowding and, 155–56, 159, 160, 196–97; investor, 18–20
AOL. See America Online
Apollo Group (APOL), 168–70, 169, 170
Apotheker, Leo, 29
Apple, 26, 83
Aristotle, 80
Arnold, John, 128
assets: fair market value of, 86; intangible, 85; NPAs, 91–92, 107, 161, 162, 164; surplus and salvage, 181–82; TARP, 107, 108, 163, 164
AT&T, 54–55, 75
auction marketplaces, 181–82, 198
Austrian school of economics, 137
automotive industry: Tesla Motors, 83, 199–203, 202; Volkswagen, 196, 197
Autonomy, 29, 85
Bakken Shale, 194–95
balance sheets: Eveillard’s view of, 129–30; leveraged, example of, 44; leveraged, liabilities excluded from, 41–43, 87; misstatements on fair market value, 86–87; misstatements on losses and write-downs, 84–86; off-, 41–43, 87
Banco Popular (BPOP), 160–65, 161, 162, 163, 164
banking: credit booms and, 137–38; deposits, 7; money transfer industry, 192–94, 193, 198, 199; operating metrics, 91–92, 93; subprime mortgage crisis, 4, 42–43, 63–66, 66, 153. See also financial crisis
Bank of International Settlement (BIS), 140–41
bankruptcy: broken growth and, 77; of Circuit City, 85; creditor versus shareholder loss in, 40–41; of Drexel, 144; of Eastman Kodak, 40, 40; forcing, 137; junk bonds and, 138, 144; of Leap Wireless, 77; of Lehman Brothers, 4, 54, 65, 99, 101; leverage and, 52, 54, 56; of PCS, 77; of Pope and Talbot, 131; SPV protection in, 42; subprime crisis and, 64, 65–66; Summit Technology, 174, 175; value traps and, 64, 65–66, 67
BC Partners, 44, 45, 47
Bear Stearns, 65
Bell Laboratories, 73
benchmark risk, 216
Berkshire Hathaway, 4–5, 143
Bernanke, Ben, 103–4
Bezos, Jeff, 167–68
Bhagavad Gita, 209
biotechnology industry, 19
BIS. See Bank of International Settlement
black swan events, 101–2
bonds, junk, 137–38, 144
books: on investing, 11; textbook rentals, 78–79
borrowing stocks, 209
Botha, Roelof F., 199
Boyar, Mark, 172–73
BPOP. See Banco Popular
broken growth: bankruptcy from, 77; overview, 72–73; from regulations, 73; solar case study on, 73–75; telecom case study on, 75–78, 76; textbook rental case study on, 78–79
Buffett, Warren, 11, 121, 127, 187, 216; Ackman’s comments on, 146; on activist investing, 143–44, 147; Berkshire Hathaway and, 4–5, 143; Eveillard’s comments on, 128, 129, 130, 131, 133–34; on executive secular cycle failure, 26–27; Graham compared to, 128; long investing by, 4–5, 133–34; on quality and competence, 122–23; on short selling, 3, 123, 134; on subprime crisis, 4
business model issues: accounting misstatements and, 94–96; hidden options and, 204–8; inefficiency, 147; star executives leveling out, 197–200; strength and weakness evaluation of, 130–31
CAL. See Continental Airlines
call options, 214–15
capital leases, operating leases versus, 84
Carnegie Mellon University, 87
Carpetright (CPR), 67, 68, 69
Cascade Limited, 69
case studies: on accounting misstatements, 95–96; on AIG, 61–63, 65–66, 66; on airline industry, 50–54, 51, 52; on Amazon.com, 165–68, 166; on Apollo Group, 168–70, 169, 170; on Banco Popular, 160–65, 161, 162, 163, 164; on broken growth, 73–79, 76; on Carpetright, 67, 68, 69; on Ciena Corporation, 54–56; on client loss, 181–82; on coattailing, 156–60, 158; on contrarian bets, 156–70, 158, 161, 162, 163, 164, 166, 169, 170; on data centers, 190–91; on Diamond Foods, 95–96; on Facebook, 32–34; on F5 Networks, 190–91; on financial crisis, 99, 101, 107–9, 108; case on folding strategy, 192–96, 193; on food industry, 23–24, 24, 25, 95–96; on Herbalife, 156–60, 158; on HMS Holdings, 30–31; on holding strategy, 190–91, 200–203, 202, 205–8; on insurance industry, 61–63, 65–66, 66; on Lehman Brothers, 99, 101; on leveraged businesses, 44–56, 47, 48, 49, 189; on Liquidity Services Inc., 181–82; on M&A, expensive, 31–34; on M&A, issue postponement, 30–31; on Netflix, 205–8; on Office Depot, 44–5
0, 47, 48, 49, 189; on Off Wall Street, 181–82, 190–91; on pharmaceutical industry, 20–22, 21; on Pilgrim’s Pride, 23–24, 24, 25; on production issues, 23–24, 24, 25; on Questcor, 20–22, 21; on railcar industry, 194–96; on Regions Financial, 107–9, 108; on solar industry, 73–75; on Southwest Airlines, 50–54, 51, 52; on star executives, 199–203, 202, 204; on subsidy loss, 20–22; on telecom industry, 75–78, 76; on Tesla Motors, 199–203, 202; on textbook rentals, 78–79; on Trinity Industries, 194–96; on value traps, 61–63, 65–66, 66, 67, 68, 69; on Western Union, 192–94, 193; on Yahoo!, 204
cash: allocation increase, 134–36; flow, 87–88, 145; ratio, 90
CDS. See credit default swaps
change, 59–60
channel checks, 19, 177
Chanos, Jim, 3, 27–28, 168–69
Chen, Steve, 199
Chicken & Egg (CHEGG), 78–79
chicken industry, 23–24, 24, 25
Churchill, Winston S., 59
Ciena Corporation (CIEN), 54–56
Circuit City, 85
Cisco, 8, 9, 10
Citigroup, 43
client loss, 20–23, 21, 181–82
closing trade, 213–15
coal industry, 56–57, 57
coattailing: analyst downgrades and, 170–71; case study on, 156–60, 158; contrarian bets or, 153–54
Columbia Threadneedle, 188
commoditization, 26, 180
Compass catering, 132
competition, leverage and, 46, 46–47
CompUSA, 174
computer industry, 26, 29, 71, 189
Continental Airlines (CAL), 51
contingent liabilities, 42, 87
contractual commitments, 42, 87
contrarian bets: on Amazon.com, 165–68, 166; analyst downgrades and, 170–71; on Apollo Group, 168–70, 169, 170; on Banco Popular, 160–65, 161, 162, 163, 164; coattailing or, 153–54
Cornfeld, Bernie, 127
corn futures, 23–24, 24, 25
cost of goods, 83
CPR. See Carpetright
credit booms, 137–38, 144
credit default swaps (CDS): Ackman and activist investing in, 152, 158; AIG value trap and, 61–63, 65–66, 66; Spain and S&P 500 correlation to, 112, 114; value investing in, 136–37
credit downgrade: AIG, 65–66; financial crisis of 2008, 99, 101–3; Japan, 102–3, 104; risk after, 106–9
creditors, investors versus, 40–41
crowded shorts, 155–56, 159, 160, 196–97
crude oil: airline industry and, 52–53, 54; inventory, 34–36; refiner metrics, 93
currency exchange rates, 98
customer analysis, 12–13
cyclical trends: operating metrics for, 91–92, 93; secular versus, 25–27
DAL. See Delta Air Lines
data centers, 190–91
debt: accounts receivables and, 85; bailouts, 65–66, 102; cash ratio and, 90; to EBITDA examples, 23, 48, 49, 50, 55; leverage ratios, 41, 91; liabilities deferred, 85–86; liabilities excluded from, 41–43, 87
deferred acquisition costs, 84
deferred revenue, 83
deferred taxes and liabilities, 85–86
Dell computers, 26, 71
Delta Air Lines (DAL), 51
Department of Defense contracts, 181–82
Department of Energy, 200
derivatives, 210, 211–13
DeSimone, John, 157
Diamond Foods (DMND), 17–18, 95–96
dilution, shareholder, 45
disclosure: of players, 216; requirements, 19
Disney, 87
disruptive technology, 70–72, 203
distribution networks, 204–8
dividends: shareholder dilution and, 45; taxes on, 217
DMND. See Diamond Foods
Dodd, David, 120
dot-com bubble, 8–10, 32
downgrade, analyst, 170–71. See also credit downgrade
Drexel, 144
due diligence: on client loss, 20–23; on company announcements, 28–30; on cyclical versus secular trends, 25–27; on executive loss, 20–23; on Fed meetings, 34–36; on financial statement issues, 27–28; fundamental aspects of, 10–13; on high-valuation companies, 5–10, 9; on insider transactions, 18–20; on investigations, 15, 17–18; on investor announcements, 18–20; on M&A, 30–34; on macroeconomic events, 34–36; on production issues, 23–24, 24, 25; on product loss, 20–23; recap, 36–37; on structural shorts, 14, 16; on subsidy loss, 20–23
DuPont model, 89
earnings announcements, 28–30
earnings before interest, taxes, depreciation, and amortization (EBITDA), 41, 91; examples of debt to, 23, 48, 49, 50, 55
earnings per share (EPS), 7
Eastman Kodak, 40, 40
eBay, 198
EBITDA. See earnings before interest, taxes, depreciation, and amortization
ECB. See European Central Bank
economics: Austrian school of, 137; cycle analysis, 13; downturn indicators, 110–11; fear indicators, 111–12, 113, 114, 114; Fed meetings and, 34–36; indicators, 35. See also macroeconomic events
education industry, 168–70, 169, 170
Einhorn, David, 156–57, 165
Eisman, Steve, 168–69
electric vehicles, 83, 199–203, 202
energy industry: coal, 56–57, 57; crude oil, 34–36, 52–53, 54, 93; ethanol boom, 195; natural gas, 56–57, 57; operating metrics, 93; shale oil, 57, 194–95; solar, 73–75, 199–200
Enron, 3, 27–28, 42, 129, 172, 178
EPS. See earnings per share
equity: funds, 218; return metrics on, 89–90
ethanol boom, 195
European Central Bank (ECB), 105
Euro zone crisis, 98, 105, 112, 114
Eveillard, Jean-Marie: accolades for, 126; on accounting mindsets, by country, 129–30, 132; on balance sheets, 129–30; on Buffett approach, 128, 129, 130, 131, 133–34; on cash allocation increase, 134–36; on financial crisis, 137–41; on gold and Keynesian policy, 139–40; on Graham approach, 128, 129, 132, 139; interview with, 126–42; on Japan, 136; key takeaways from, 141–42; on leverage, 132–33; on short selling, 132–37; at Société Générale, 126–27, 128–29; on strength and weakness evaluation, 130–31; on way of timing, 132–33
exchange rates, 98
executives: incentive and operating metrics, 92, 94; incentive for hedge and long-only, 124, 125; incentive lack and leverage, 45–46; insider transactions, 18–20; loss of, 20–23; management team analysis, 13; secular cycle failure of, 26–27. See also star executives
expense classification misstatements, 83–84
Facebook (FB), 32–34
fair market value, 86–87
Fannie Mae, 63, 65, 153
fear indicators, 111–12, 113, 114, 114
Federal Communications Commission Auction, 75
Federal Reserve (Fed): bailouts by, 65–66, 102; Bernanke opinion and, 103–4; ECB compared to, 105; meetings, due diligence on, 34–36; quantitative easing by, 102, 103, 105–6, 106; Yellen nomination for, 109–10
Federal Trade Commission (FTC), 152, 159, 160
F5 Networks, 179–80, 190–91
Fidelity, 173
FIFO. See first-in/first-out
Financial Accounting Standards Board, 84
financial crisis: case studies on, 99, 101, 107–9, 108; dot-com bubble, 8–10, 32; economic indicators of, 110–11; Euro zone, 98, 105, 112, 113; Eveillard’s comments on, 137–41; fear indicators and, 111–12, 113, 114, 114; Great Depression, 103–4, 120; historical S&P 500 corrections, 99, 100, 101; investment strategy in, 98–99; Japan, 102–3, 104; Puerto Rico, 161, 163–64; recap, 114–15; value investing and, 138–41
financial crisis of 2008: Ackman’s comments on, 152–53; airline industry leverage and, 54; bailouts, 65–66, 102; black swan status of, 101–2; central bank credit risk after, 106–9; central bank lending room in, 105–6; credit downgrade from, 99, 101–3; quantitative easing i
n, 102, 103, 105–6, 106; subprime mortgage securities and, 4, 42–43, 63–66, 66, 153; TED Spread versus S&P 500 in, 36; value traps and, 63–65
financial leverage, operating leverage versus, 41
Financial Security Assurance (FSA), 151
financial statements: analysis of, 12; common issues with, 27–28; restating, 81–82. See also balance sheets
First Eagle Global Fund, 126
first-in/first-out (FIFO), 83
First Solar, 74
Fisher, Phil, 11
float, 19
folding strategy: on crowded shorts, 196–97; on exceptional growth rate, 194–96; on material developments, 191–94, 193; poker analogy of, 187; recap, 208; Trinity Industries case study on, 194–96; Western Union case study on, 192–94, 193
food industry: Diamond Foods, 17–18, 95–96; Pilgrim’s Pride, 23–24, 24, 25; Pringles, 17–18, 96; Sodexo, 131–32; TCBY, 171, 173
Form 4, 18
Form 10-b5, 18
Form 13, 18
France: Société Générale of, 126–27, 128–29; Sodexo of, 131–32
Franklin Templeton, 69
Freddie Mac, 63, 65, 153
Frontpoint Partners, 168–69
FSA. See Financial Security Assurance
FTC. See Federal Trade Commission
GAAP. See generally accepted accounting principles
gain-on-sale approach, 3
GAO. See General Accounting Office
Garmin, 85
Gates, Bill, 69
gearing, 41
General Accounting Office (GAO), 81–82
General Growth, 149
generally accepted accounting principles (GAAP), 80, 145
Germany: accounting mindset of, 129–30; British pound exchange rate and, 98; solar panel industry in, 74
Gilead Sciences, 22
gold, 139–40, 153
Gold Kist, 23
goodwill, 85
Google: Facebook and, 34; short interest, 217; Yahoo! and, 70, 204
Graham, Ben: Buffett compared to, 128; career overview, 119–20; Eveillard’s comments on, 128, 129, 132, 139; The Intelligent Investor by, 119, 121, 126; Security Analysis by, 11, 120; on short selling, 120–21; value investing strategy of, 120–21
Graham, Katherine, 143
Grantham, Jeremy, 129
Great Depression, 103–4, 120