by Amit Kumar
Greenlight Capital, 156
Greenspan, Alan, 137
Greenwald, Bruce, 133
growth: change and, 59–60; drivers, 8, 11, 72–73; folding strategy on, 194–96; holding strategy on tech stars, 197–203; industry cycle phase of, 26; poor profit margins and, 167–68; runaway determination, 175, 197–200; technology industry and, 198. See also broken growth
Harris, Lord, 69
Health Data Insights (HDI), 31
hedge funds incentive structure, 5, 124, 125
Herbalife (HLF): Ackman on, 147, 149, 150, 151, 157–60; case study on, 156–60, 158; investigations, 150, 152
Hewlett-Packard (HP), 29, 71
hidden options, 204–8
high-valuation companies, 5–10, 9
HLF. See Herbalife
HMS Holdings (HMSY), 30–31
Hoffman, Reid G., 199
holding period, 215, 217
holding strategy: F5 Networks case study on, 190–91; on hidden options, 204–8; on material developments, 189–91; Netflix case study on, 205–8; poker analogy of, 187; recap, 208; on star executives, 197–204; Tesla Motors case study on, 200–203, 202; Yahoo! case study on, 204
hotel industry, 93
Housing and Urban Development (HUD), 63
Howard Hughes, 149
HP. See Hewlett-Packard
HSBC, 43, 64
HUD. See Housing and Urban Development
Hulu, 206
Hurd, Mark, 29
hurdle rate, 216
Hurley, Chad, 199
Icahn, Carl, 159, 207
IMF. See International Monetary Fund
incentive structure: of hedge funds, 5, 124, 125; leverage and lack of, 45–46; operating metrics and, 92, 94
income statement divergence, 87–88
Incyte, 82–83
industrials metrics, 93
industry: analysis components, 11; competition and struggling, 46, 46–47; cyclical versus secular trends, 25–27; leverage-dependent, 56–57; operating metrics trends specific to, 91–92, 93
industry structural issues. See broken growth; value traps
insider transactions, 18–20
Instagram, 34
insurance industry: Ackman issue-spotting in, 151–52; AIG value trap case study, 61–63, 65–66, 66; call options like, 214; MBIA in, 62, 145, 149, 151–52, 158; Medicare/Medicaid, 20–22, 30–31; monolines in, 62, 151; operating metrics, 93; put options like, 211–13
intangible assets, 85
The Intelligent Investor (Graham), 119, 121, 126
interest coverage ratio, 91
International Monetary Fund (IMF), 141
Internet: Amazon.com, 78–79, 165–68, 166; AOL, 32, 178–79; auction marketplaces, 181–82, 198; dot-com bubble, 8–10, 32; eBay, 198; Facebook, 32–34; Google, 34, 70, 204, 217; holding strategy case study on, 190–91; messaging apps, 33, 34; mobile advertising, 32–34; Netflix, 205–8; newspaper industry and, 25–26, 71, 133; PayPal alumni, 198, 199; photo sharing, 33, 34; retail disruption by, 71–72; search, 70; video, 205–8; Yahoo!, 70, 204; YouTube, 206
interviews. See investor interviews
inventory: accounting, 83, 84–85; turnover, 90
investigations: Ackman firm, 158; Allied Capital, 157; as catalyst, 15, 17–18; Diamond-Pringles, 17; Herbalife, 150, 152; Office Depot, 44; SoGen International, 127
investment tax credits (ITCs), 74
investor interviews: with Ackman, 145–54; with Eveillard, 126–42; with Roberts, 171–80. See also Buffett, Warren; Graham, Ben
investors: announcements by, 18–20; meetings with, 28–30
Ira Sohn Conference, 153, 157, 165, 168
ITCs. See investment tax credits
Japan: credit downgrade of, 102–3, 104; Eveillard on, 136
Jobs, Steve, 26
junk bonds, 137–38, 144
Karr, Jean-Baptiste Alphonse, 119
Kellogg Company, 18
Keynes, John Maynard, 8
Keynesian policy, 139–40
Klarman, Seth, 123–25, 136–37, 139, 174
laser technology, 174, 175
last-in/first-out (LIFO), 83, 95
lawsuits, 87, 147, 193–94
LBOs. See leverage buyouts
LCC. See US Airways Group
Leap Wireless, 75–78, 76
leases. See operating leases
Lehman Brothers, 4, 54, 65, 99, 101
Levchin, Max R., 199
leverage: Ackman’s view of, 148; activist investing and, 148; balance sheet example of, 44; bankruptcy and, 52, 54, 56; Ciena Corporation case study on, 54–56; competition and, 46, 46–47; creditor versus shareholder loss in, 39–40; Eveillard’s view of, 132–33; executive incentives lack in, 45–46; financial versus operating, 41; industries prone to, 56–57; metrics, 41, 91; off-balance sheet items in, 41–43; Office Depot case study on, 44–50, 47, 48, 49, 189; profitability faults in, 44–45; reasons for needing, 38–39; recap on, 57–58; shareholder dilution example of, 45; Southwest Airlines case study on, 50–54, 51, 52; thrills and kills in, 43; valuation example in, 47, 48, 49
leverage buyouts (LBOs), 1980s era of, 137, 144
liabilities: contingent, 42, 87; deferred, 85–86; fair market value of, 86–87; off-balance sheet, 41–43, 87
Lieberman, Joseph, 171
LIFO. See last-in/first-out
liquidation, creditor versus shareholder in, 40–41
liquidity: Ackman and activist consideration of, 145; flushing out, 106–9; operating metric of, 90
Liquidity Services Inc. (LQDT), 181–82
litigation, 87, 147, 193–94
loans: as NPAs, 91–92, 107, 161, 162, 164; subprime crisis, 4, 42–43, 63–66, 66, 153; Title IV tuition, 169–70. See also leverage
Loeb, Dan, 159
long investing: by Buffett, 4–5, 133–34; executive incentives comparison in, 124, 125; short selling versus, 146–47, 149, 176–77
loss: accounting misstatements on, 84–86; of client, 20–23, 21, 181–82; creditor versus shareholder, 40–41; of product, 20–23, 84–85; of subsidy or executive, 20–23
LQDT. See Liquidity Services Inc.
LUV. See Southwest Airlines
Lynch, Peter, 11
M&A. See mergers & acquisitions
macroeconomic events: activist investing and, 153; black swan, 101–2; credit booms, 137–38, 144; due diligence on, 34–36; Roberts on, 180; value investing and, 137–38. See also financial crisis
Mallinckrodt Pharmaceuticals, 22
Malloy, John A., 199
management. See executives
Mannesmann, 32
margin of safety, 122, 123–24, 146
marketing: costs, 84; fraud, 147
marketing, multilevel. See Herbalife
marquee investors. See coattailing; contrarian bets
Marvell Technology, 87
Mayer, Marissa, 204
MBIA. See Municipal Bond Insurance Association
media operating metrics, 93
Medicare/Medicaid, 20–22, 30–31
meetings: Federal Reserve, 34–36; investor, 28–30
Merchant of Venice (Shakespeare), 38
mergers & acquisitions (M&A): due diligence on, 30–34; expensive, 31–34; issue postponement in, 30–31; Yahoo! revival by, 204
messaging apps, 33, 34
metrics. See operating metrics
MetroPCS (PCS), 75–78, 76
mining industry, 56–57, 57, 93
Mr. Market, 121, 141
mobile advertising, 32–34
money transfer industry: PayPal alumni, 198, 199; Western Union, 192–94, 193
Morgan Keegan, 107–9
mortgage subprime crisis, 4, 42–43, 63–66, 66, 153
Motorola, 23
Muller, David, 175
multilevel marketing industry. See Herbalife
Munger, Charlie, 122–23
Municipal Bond Insurance Association (MBIA), 62, 145, 149, 151–52, 158
Murdoch, Rupert,
137
Musk, Elon, 198–200, 199, 201, 202–3
naked short selling, 211
natural gas industry, 56–57, 57
Netflix (NFLX), 205–8
New Century Financial Corporation, 4, 64
News Corp, 137, 138
newspaper industry, 25–26, 71, 133
NFLX. See Netflix
Nokia, 23
nonperforming assets (NPAs), 91–92, 107, 161, 162, 164
Northwest Airlines (NWA), 51
Odland, Steve, 45
off-balance sheet items, 41–43, 87
Office Depot (ODP), 44–50, 47, 48, 49, 189
office supplies industry, 46, 46–47
offshore scandals, 127
Off Wall Street: background of, 171–74; client loss case study of, 181–82; holding strategy case study of, 190–91. See also Roberts, Mark
oil: crude, 34–36, 52–53, 54, 93; shale, 57, 194–95
Olayan, 69
opening trade, 210–13
operating leases: capital leases versus, 84; sale-type leases versus, 83
operating leverage: airline industry case study on, 50–54, 51, 52; financial leverage versus, 41
operating metrics: executive incentives and, 92, 94; industry-specific trends in, 91–92, 93; leverage, 41, 91; types of, 88–91
paired shorts: catalysts for, 16; defining, 14
Paulson, John, 3–4
PayPal alumni, 198, 199
PCP. See Precision Castparts
PCS. See MetroPCS
P/E. See price-to-earnings ratio
peak-to-trough corrections, 14
pharmaceutical industry, 20–22, 21
photo sharing, 33, 34
Pilgrim’s Pride Corporation (PPC), 23–24, 24, 25
Pitney Bowes, 71
poker analogy, 187
Pope and Talbot, 131
PPC. See Pilgrim’s Pride Corporation
Precision Castparts (PCP), 94–95
price, value versus, 122–23
price-to-earnings ratio (P/E), 6, 7
PricewaterhouseCoopers, 62
pricing, way of, 122, 123
Pringles, 17–18, 96
product: analysis components, 12; expense classification misstatements for, 83–84; inventory accounting, 83, 84–85; inventory turnover, 90; launch announcements, 29; loss of, 20–23, 84–85; production issues with, 23–24, 24, 25; revenue booking misstatements for, 82–83; write-downs, 84–85
profit margins: Amazon.com growth and poor, 167–68; gross versus operating, 89; leverage faults in, 44–45
publicization, 155–56, 159, 160
Puerto Rico, 161, 163–64
put options, 211–13
pyramid schemes, 147, 149, 150, 151, 156–60, 158
quantitative easing, 102, 103, 105–6, 106
Quantum fund, 98
Questcor Pharmaceuticals, 20–22, 21
Rabois, Keith, 199
railcar industry, 194–96
real estate investment trusts (REITs), 93
real estate mortgage crisis, 3–4, 42–43, 63–66, 66, 153
Regions Financial (RF), 107–9, 108
Regulation FD, 28
regulations: broken growth from, 73; litigation, 87, 147, 193–94; short selling abuses and, 210–11
Regulation SHO, 211
reinvestment economics, 11
REITs. See real estate investment trusts
repeated shorting, 179–80
Research in Motion, 189
resources, for analysis, 11
restatements, accounting, 81–82
restaurant industry, 93, 131–32
retailers: Amazon.com, 78–79, 165–68, 166; Internet disruption of, 71–72; operating metrics, 93; Walmart, 165–66, 167, 182
return metrics, 89–90
revenue: booking misstatements, 82–83; income statement divergence, 87–88
RF. See Regions Financial
risk management: Ackman on, 148; in activist investing, 148; benchmark, 216; on call options, 215; after credit downgrade, 106–9; on crowded shorts, 196–97; on put options, 212–13; in value investing, 126, 139–40. See also folding strategy; holding strategy
Roberts, Mark: accolades for, 171–72; on accounting misstatements, 178–79; background of, 172–74; early ideas of, 174, 178–79; on follow-ons and high profile, 181; on holding or folding, 179; on macroeconomics, commodities and value traps, 180; on repeated shorting, 179–80; research evolution of, 175; on short strategies, 177–81; on short versus long ideas, 176–77
Rodriguez, Bob, 136
runaway determination, 175, 197–200
Russell 1000 index, 197
Sacks, David O., 199
safety, margin of, 122, 123–24, 146
sales: accounts receivables, 85, 90; costs, 84
sale-type leases, operating leases versus, 83
salvaged asset auctions, 181–82
Sanborn Map, 143
S&P. See Standard & Poor
SEC. See Securities and Exchange Commission
secular trends, cyclical versus, 25–27
Securities and Exchange Commission (SEC): abuse restrictions by, 210–11; Ackman firm investigation by, 158; Allied Capital investigation by, 157; Diamond-Pringles investigation by, 17; form filing with of, 18; Herbalife investigation by, 150, 152; Office Depot investigation by, 44; Regions Financial settlement with, 107; Regulation FD of, 28; responsiveness of, 152; SoGen International fund investigation by, 127
Security Analysis (Graham), 11, 120
sell-in versus sell-through, 82–83
Shakespeare, William, 38
shale oil, 57, 194–95
Shapland, Darren, 69
shareholders: creditors versus, in bankruptcy or liquidation, 40–41; dilution example, 45
shipping industry: leverage dependence of, 56; postal value traps in, 71
short equity funds, 218
short ideas. See due diligence
short selling: abuses, 210–11; Ackman on, 150; activist investing on, 146–47, 149; Buffett on, 3, 123, 134; call options versus, 214–15; categories of, 13–15, 16; closing trade in, 213–15; crowded, 155–56, 159, 160, 196–97; dividends taxes, 217; duration or holding period for, 215, 217; equity funds, 218; Eveillard on, 132–37; fundamental analysis aspects for, 10–13; Graham on, 120–21; long investing versus, 146–47, 149, 176–77; mechanics recap, 218–19; naked, 211; opening trade in, 210–13; players, 216; put options versus, 211–13; repeated, 179–80; Roberts on, 176–81; success recap, 182–83; suitability for, 218; types of, 209–10; value investing versus, 123–24, 130–31, 134–35
Simmons, Russel, 199
SIVs. See structured investment vehicles
Skechers, 85
smartphone makers, 22–23
Smith Barney, 127
Snapchat, 33
Société Générale, 126–27, 128–29
Sodexo, 131–32
SoGen International fund, 127
SolarCity, 199–200
solar energy industry, 73–75, 199–200
Soros, George, 98, 159
Southwest Airlines (LUV), 50–54, 51, 52
Sovaldi, 22
soybean futures, 23–24
SpaceX, 198
Spain, sovereign CDS in, 112, 114
special-purpose vehicles (SPVs), 42–43
Sprint, 75
Standard & Poor (S&P) 500: CDS correlation to, 112, 114; credit downgrade, 101–3; historical corrections, 99, 100, 101; litigation of, 87; TED spread correlation to, 36, 111, 113; VIX correlation to, 111–12, 113
star executives: business model leveling for, 197–200; early-stage growth with, 197–203; holding strategy on, 197–204; PayPal alumni, 198, 199; revival by, 203–4; Tesla Motors case study on, 199–203, 202; Yahoo! case study on, 204
Sterne Agee conference, 162
Stoppelman, Jeremy, 199
strengths evaluation, 130–31
stress management, 150
stru
ctural issues. See broken growth; value traps
structural shorts: catalysts for, 16; defining, 13; due diligence on, 14, 16
structured investment vehicles (SIVs), 42–43, 64
subprime crisis, 4, 42–43, 63–66, 66, 153
subsidies: ITCs, 74; loss of, 20–23; solar, 74
Summit Technology, 174, 175
surplus asset auctions, 181–82
surveys, 19, 177
Swensen, David, 130–31
Swiss Air, 132–33
Swiss banks, 137–38
Swiss Reinsurance, 61
tactical shorts: catalysts for, 16; defining, 13–14
TARP. See Troubled Asset Relief Program
tax: deferred, 85–86; ITCs, 74; low effective rate of, 130; treatment on dividends, 217
TCBY, 171, 173
technology industry: bio-, 19; computers, 26, 29, 71, 189; disruption by, 70–72, 203; dynamism of, 203; growth and, 198; laser, 174, 175; litigation in, 87; smartphone makers, 22–23; stars, holding strategy on, 197–204. See also Internet
TED spread, 36, 111, 112, 113
telecom: broken growth case study in, 75–78, 76; leverage case study in, 54–56; messaging apps, 33, 34; networks and carriers, 54–56, 75–78, 76; operating metrics, 93; smartphone makers, 22–23
Tesla Motors (TSLA), 83, 199–203, 202
textbook rentals, 78–79
Thiel, Peter A., 199
threat analysis, 13
threshold securities, 211
timber industry, 130–31
Time Warner, 32
timing, way of, 122, 123, 132–33
Title IV loans, 169–70
T-Mobile, 78
Trinity Industries (TRN), 194–96
Troubled Asset Relief Program (TARP), 107, 108, 163, 164
Truman, Harry S., 98
TSLA. See Tesla Motors
turnover metrics, 90
unemployment, 110
United Airlines, 51, 53
United Kingdom: accounting mindset comparison of, 130, 132; British pound exchange rate, 98; Carpetright value trap case in, 67, 68, 69
United States: accounting mindset comparison of, 130, 132; Department of Defense, 181–82; Department of Energy, 200; Japan credit downgrade comparison to, 102–3
University of Phoenix, 169, 169–70
US Airways Group (LCC), 51
valuation: analysis components, 12; basics, 6, 7; high-valuation due diligence, 5–10, 9; leverage example of, 47, 48, 49
value, price versus, 122–23
value investing: cash increase in, 134–36; CDS, 136–37; Eveillard interview on, 126–42; financial crisis and, 138–41; Graham and Buffett comparison in, 128; Graham’s career in, 119–20; Graham’s strategy on, 120–21; hedge fund incentives and, 124–25, 125; key concepts of, 122–23; macroeconomic events and, 137–38; margin of safety in, 122, 123–24; price versus value in, 122–23; recap on, 141; risk management in, 126, 139–40; selling in, 132–34; short selling versus, 123–24, 130–31, 134–35; Société Générale and, 126–27, 128–29; strength and weakness evaluation in, 130–31; way of pricing in, 122, 123; way of timing, 122, 123, 132–33