🐻The Bear Cave #9🐻
New Activist Reports on EHTH, IQ, IIPR, MRCC, ALGN, SEC Correspondence with SFIX, PTC, ACM, Marc Cohodes is short ALGN & TREX, and More (Issue #9)
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New Activist Shorts
Muddy Waters Capital questioned the churn metrics and revenue recognition of the health insurance marketplace, eHealth (NASDAQ: EHTH — $2.90 billion). Muddy Waters wrote,
“EHTH’s highly aggressive accounting masks what we believe is a significantly unprofitable business… We adjust 2019 revenue down by $128 million or 25%. We adjust 2019 operating profit down by $263 million due to subjective and misapplied mark-to-model accounting…”
Wolfpack Research suggested Beijing-based iQIYI Inc (NASDAQ: IQ — $12.7 billion) could be significantly inflating revenue, user metrics, profits, and cash. Wolfpack Research wrote,
“Our research shows us that iQIYI, Inc. (“IQ”) was committing fraud well before its IPO in 2018 and has continued to do so ever since… IQ does this by overstating its user numbers by approximately 42%-60%. Then, IQ inflates its expenses, the prices it pays for content, other assets and acquisitions in order to burn off fake cash to hide the fraud from its auditor and investors.”
Grizzly Research released a report on cannabis-focused REIT, Innovative Industrial Properties (NYSE: IIPR — $1.3 billion).
Glenn Chan criticized the accounting and underwriting standards at small-cap BDC Monroe Capital (NASDAQ: MRCC — $141 million).
Spruce Point Capital issued a “strong sell” opinion on Align Technology (NASDAQ: ALGN — $15.2 billion).
New SEC Correspondence with Stich Fix, PTC, and AECOM
Comment and response letters are publicly available letters sent between the SEC Division of Corporation Finance or Division of Investment Management and public companies concerning their SEC filings. You can find all SEC correspondence ordered chronologically here. Some investors believe comment letters can foretell future accounting issues. Below are some recent Bear Cave favorites:
In a letter to Stitch Fix (NASDAQ: SFIX — $1.54 billion) the SEC wrote,
“We note in your earnings calls that you discuss net revenue per client, success rates of items sent, and inventory turnover… please tell us your consideration of disclosing these metrics, or other key performance indicators used.”
Stich Fix responded, in part,
“The Company has evaluated its disclosure of inventory turnover. While management believes the Company’s inventory turnover rate is higher than many other companies in the industry and therefore contributes to investors’ general knowledge about the Company’s business model, management does not rely on the inventory turnover rate to manage the business consistently over time.”
The SEC’s letter to computer software maker PTC Inc (NASDAQ: PTC — $7.38 billion) read,
“We note your Adjusted Free Cash Flow measure excludes charges that required cash settlement. Such charges cannot be excluded from non-GAAP liquidity measures per Item 10(e)(1)(ii)(A) of Regulation S-K. Please remove this measure or explain how it complies.”
The company’s response was curt:
“The Company acknowledges the Staff’s comment and will not include the Adjusted Free Cash Flow measure in our future SEC filings.”
The SEC also asked for more revenue recognition disclosure from engineering firm AECOM (NYSE: ACM — $5.25 billion).
What to Read and Watch
Famous short-seller Marc Cohodes did an interview with Grant Williams from Real Vision. You can watch the full hour-long interview here (it’s worth it). Cohodes highlighted two new short ideas. Cohodes disclosed he is short dental company, Align Technology (NASDAQ: ALGN — $15.22 billion) saying,
“In a slowdown, the first thing people stop spending on is elective dental. That’s the first thing that goes… These guys are gonna get their a** handed to them (18:00).”
Cohodes also disclosed a short position in Trex Company (NYSE: TREX — $4.98 billion) saying,
“They make composite decking, aka plastic, [Trex] sells for about 20x EBITDA, earnings estimates are way too high, CEO just retired/resigned, they’ve been expanding, they just built new plants, they’ve had bottleneck issues, I think the estimates for Trex are ridiculously too high … I think Trex is just F**ked (41:15).”
Cohodes praised Bradley Safalow at PAA Research for highlighting the idea (subscription needed).
In a Bloomberg interview, Jim Chanos reiterated his short positions in Tesla (6:30) and Live Nation Entertainment (13:55) among others.
Carson Block of Muddy Waters Research went on a podcast with Chris Irons aka Quoth The Raven.
“The Managers of These Companies Are Corporate Sociopaths” (Institutional Investor Profile on Short Activist Gabriel Grego)
“Across the Atlantic, Gabriel Grego breathed a sigh of relief upon hearing the news. As managing partner of New York-based Quintessential Capital Management, the Italian native had become a target of lawyers, media, and internet trolls since posting research months earlier accusing Bio-On of accounting fraud and lying to investors…”
“I Never Traded on Confidential Coronavirus Information” (WSJ Op-Ed by Senator Loeffler)
“I’ve done everything the right way and in compliance with Securities and Exchange Commission regulations, Senate ethics rules and U.S. law… My family’s investment accounts are being used as weapons for an assault on my character at a time when we should all be focused on making our country safe and strong.”
You can also find a compilation of recent investor letters and interviews here.
Tweets of the Week
Until next week,
The Bear Cave