I hope you had a good week.
US equities saw gains with the S&P 500 breaking out of its recent sideways consolidation. The dollar weakened with the notable beneficiaries being Euro and British pound which finally had some relief following heavy selling in recent weeks. However, in commodities gold and crude failed to stage a meaningful rally and remain under pressure. But the big action was to be found in a couple of the most shorted stocks amongst professional traders. MiMedx Group (NASDAQ: MDXG) plummeted almost 25% on Thursday, vindicating the highly regarded short seller Marc Cohodes who has been shorting the stock on suspicion of unethical practices including accounting fraud (listen to this podcast that I stumbled across last week to understand more).
And it wasn’t just obscure biotech names making the headlines. Tesla, perhaps the most discussed short idea on Twitter, saw a short squeeze on bears with the stock gaining almost 10% in a single day after CEO Elon Musk delivered confidently at Tesla’s AGM on Wednesday. With one comment suggesting that the loss making company may turn profitable in the coming year, it was time for us to evaluate the popular short thesis using our Company Analysis Checklist that we applied to some potential long ideas in Disney (NYSE: DIS) and TransDigm (NYSE: TDG) and featured in the blog last week.
The following slides are taken from this week's Trading Club video (for the full analysis, become a member of the Trading Club!), featuring the 5 factor model presented in detail by Lex in our Million Dollar Traders Course. Lets begin with a reminder of what we look for to evaluate a company - whether as a long idea, or a potential short trade.
The first thing we look at is the quality of the company’s management. For long ideas we often look at efficiency measures including the Return on Assets (ROA) and Return on Equity (ROE) which measure the management’s ability to generate profits on the company’s capital structure. This is also a consideration when evaluating a target from the short side, however, getting a feel for the characters involved in running the company is perhaps even more important. For example, Marc Cohodes apparently likes to look for CEOs sporting wigs (or a ‘toupee’) as an indicator of a potentially dubious character (although this may sound crazy, he has something of a track record in finding a positive correlation there). Now, whilst I don’t mean to offend anyone who may be wear a hair piece, it is meant to demonstrate the type of abstract perspective that will help you in getting a read on people, and their motives and biases that influence their decision making. Wigs anecdote aside, you are looking for unusual characters who may be acting in their own self interest rather than that of shareholders, and may be willing to engage in dishonest or illegal activities (like MiMedx supposedly has) to window dress their operation. In the case of Tesla, things appear for more innocent, although there have been numerous examples of hubris and unprofessional behaviour from their CEO Elon Musk (more on that in the Trading Club video released on the 6th of June).
We then need to assess the validity of the company’s products. Despite the revenue growth, Tesla has been dogged by reliability issues with many owners reporting multiple faults, in some cases across successive vehicles. (To preserve value for our paying members, I am showing only one of the slides without the full analysis and conclusion here).
Financial health is next. Tesla is highly levered and has an enormous cash burn. The company’s bonds are also regarded as ‘extremely speculative’ junk by Moody’s. We explore the implication of this in the full video. (I am showing only one of the slides to preserve value for our premium Trading Club members).
Valuation also matters, though perhaps to a lesser extent than when looking at companies from the long side. Here you can see the various valuation ratios for Tesla. Again, I discuss this in the full video. (I am showing only one of the slides without the full analysis and conclusion here).
Finally, the Checklist process also considers the geographical exposure of the company before attributing a score. Lots more about this in the Trading Club video too.
Which leads us to our conclusion. I have revealed a couple of the scores below, but left the remainder obscured in consideration of our paying members.
If you would like to learn more and find out what our Company Analysis Checklist concluded with Tesla, and also get immediate access to our 12 most recent weekly videos with much more, then check out our membership options. You can also register for our Million Dollar Traders online course which currently provides complimentary access to the Trading Club for 1 month to help you apply the concepts to the real world and get a feel for live markets. I am also on hand to help you with any questions that you may have about anything in either the course or our club videos. It really is great to be able to provide that level of access outside of expensive mentoring programmes that often cost upwards of $10,000 elsewhere.
I hope you found this interesting and wish you all a very pleasant weekend,
James Helliwell | Chief Investment Strategist
Disclaimer: Our service is intended for educational and informational purposes only and should not be considered investment advice. Do not make any decisions based on the articles and material presented on www.lexvandam.com and never trade with money you cannot afford to lose. We cannot be held responsible for your trading results. For more information, please check Risk Disclosure - T&C.