This is the fourth of a four-part series recapping our coverage over the last six months. Click here for Part I, here for Part II, and here for Part III.
š Donāt forget: You can view the performance of all our picks via the āPerformanceā spreadsheet linked on our homepage.
TLDR:
This series aims to update on past picks, as well as some of the broader, lower-conviction ideas in our āResearch Notesā feature.
At Wednesdayās close, our average idea has eked out a 1% return. Both long and short ideas have outperformed the S&P 500, even comparing our short picks to a short of the index.
Weāre sticking with most of our calls, including TSLA after earnings; closing out our AVAV trade; and pounding the table for HLN.
We close with a case for long-term optimism in a still-difficult near-term market.
Performance Update
At Wednesdayās close, our 27 calls (weāve done two deep dives that leaned more toward coverage than high-conviction recommendations) on average have returned 0.97%.
Average alpha has been eight percentage points; the annualized figure now is 88 percentage points. Thatās skewed by some recent winners, but the first twenty ideas now have annualized outperformance of 21.4 percentage points.
Long ideas have outperformed the index by four points; short ideas by 18, and 8 against the inverse of the index.
As weāve noted in this four-part recap, we havenāt nailed every idea. But we take some pride in overall performance, and continue to work toward improving on it going forward. Here, we update the last tranche of ideas, all of which look intact to at least some degree.
Tesla
We provided an update on our June short thesis on TSLA in Part III of our recap, so weāll add just a quick note following the companyās Q3 report.
We still donāt agree with other bears that the company is a fraud1. We do agree that CEO Elon Musk tried to pump the stock on the Q3 call. TSLA stock still looks overvalued, and shares are heading to the market once the Twitter deal closes.
To our eyes, Q3 confirmed our thesis. With TSLA closing Wednesday down just 4% from our short call, we see further downside ahead. Speaking personally, Iām much happier to be short TSLA after earnings than before it.
PlayAGS
Our case for slot machine supplier PlayAGS in July was that the company was something of a counterintuitive buy. Gaming demand has historically held up much better in a recession than might be expected, and AGS stock looked cheap even after four quarters impacted by lingering pandemic restrictions and tighter budgets from casino operators.
That case looked brilliant the next month when Inspired Entertainment reportedly offered $10 per share for the company, 90% more than AGS traded for at the time of our recommendation. Unfortunately, at least in the near term, PlayAGS declined the offer. Shares retreated to our entry point before rallying over the past few weeks; theyāre now up 17%.
To be honest, weād have been happy had PlayAGS taken the offer. AGS stock was hit by the pandemic, certainly, but as we noted in our report the company struggled in 2019 as well. Thereās been uneven execution here, and a buyout would have taken risk off the table while still offering plenty of near-term reward.
Without an offer, and in this market, itās a bit nerve-wracking to own this stock into earnings (due on Nov. 8). Our long-term case can be right and yet have no bearing on the response to Q3 numbers.
But the Q2 report was solid, and the enterprise value is about 4% higher than it was when we made our recommendation. Weāre staying long for now, and hope to breath a sigh of relief next month.
Kulicke & Soffa
Our short case against āsemicapā K&S was based on a pending cyclical downturn in the semiconductor industry. The first leg of that case clearly seems to have played out. Chipmakers continue to post disappointing results. For its part, Kulicke & Soffaās fiscal Q4 guidance badly missed consensus estimates.
In that context, however, the results of the trade actually seem moderately disappointing. KLIC has declined 16% since initiation but trades about where it did at the beginning of July.
The second leg requires mid-term expectations to come down. They havenāt really: FY23 consensus EPS is roughly equal to Q4 guidance annualized. We see little evidence to suggest that K&Sā recent strategic changes suggest it can dodge clear cyclical pressures in the industry. If thatās not the case, earnings here are coming down in a hurry unless the cycle suddenly turns. History for both the space and for K&S in particular both suggest thatās exceedingly unlikely.
In other words, KLIC still seems to be pricing in a relatively quick rebound that does not seem to be on the way. A strong balance sheet ā almost $13 per share in cash and no debt ā limits potential upside from a short, but even at $37 thereās room for more downside here.
Scholastic
This summer, we highlighted Scholastic as a fascinating story, rather than a compelling near-term opportunity. In June 2021, M. Richard āDickā Robinson, Jr., the companyās chief executive officer, and the son of its founder, passed away suddenly.
After an incredible 101 years under just two CEOs from the Robinson family, control surprisingly passed to Dick Robinsonās ex-girlfriend, fellow SCHL executive Lole Lucchese.
With family control ended, the thought was, and is, that Scholastic could wind up for sale, or at least run in a way more conductive to minority shareholder returns. With attractive assets including Manhattan real estate, thereās clear room to the upside if there indeed is a shift in strategy.
Again, in July we didnāt think SCHL stock was quite cheap enough to play that thesis, in large part due to a post-earnings rally leading into publication. Since then, however, shares have fallen 22%.
Itās exceptionally difficult to see why. And we wonder if weāve missed a piece of news surrounding Luccheseās controlling stake. (Weāve looked in detail, and havenāt seen anything.) Fiscal Q1 earnings last month led to a sell-off, but the report was fine in context and full-year guidance was reaffirmed. Absolutely nothing in the release supports the recent sell-off.
In a market where long ideas still arenāt easy to find, SCHL is defensive and reasonably valued with a potential catalyst. Weād advise investors to take a close look at these lower prices; we will do the same.
Ranpak Holdings
PACK kicked off a run of poorly-timed calls on leveraged plays. The idea is now our second-worst with a 36% decline since publication.
The stock is down big since our recommendation but nothing has really changed. In fact, since publication nothing has really happened. There have been no SEC filings, and only one press release, relating to a minor product introduction.
Yes, interest rates continue to rise, a mid-term headwind for a leveraged business that will need to refinance at some point. Expectations around the macro picture in Europe (half of revenue) have weakened.
But the question is whether the market is telling us something, or missing something. Itās probably the former, but in this kind of market itās difficult to tell. Investors willing to take on risk should take a long look here.
Ardagh Metal Packaging
Our bull call on AMBP was essentially PACK redux. Both companies are leveraged; both went public via SPAC mergers; both have near-term worries about European exposure and long-term tailwinds from sustainability (paper packaging for Ranpak, aluminum cans for Ardagh).
And both have tanked on no news: AMBP is down 23% since publication. Here, too, weāre not convinced the short-term selling necessarily negates the long-term case. Here, too, risk-tolerant investors should review our thesis.
AeroVironment
We argued for a short of AeroVironment into earnings last month. The trade has worked well, moving lower almost as soon as we hit publish. Part of our thesis was that this is a historically volatile stock that looked ready for a reversal. And so weāre closing it now with an ~18% return.
Harley Davidson
Down 15%, we still like a short of Harley-Davidson ahead of earnings next week. As we predicted, spin-off LiveWire (in which Harley still owns a controlling stake) has fallen off a cliff after its SPAC merger (-29%). Thereās going to be an exceptionally ugly quarter here at some point. It may not be this quarter (weāre talking pre-announcement ugly) but itās exceptionally difficult to see how demand holds up in the mid-term. Weād like to highlight an āinauspiciousā dealer survey from Baird earlier this month as well.
Lightning Round
Our more recent calls look essentially unchanged. Here are some quick notes on each:
Six Flags is down 17%, which isnāt terribly surprising after soft results and considering macro fears and a leveraged balance sheet. But our thesis was that the market was misunderstanding the cause of those results. We still believe thatās the case.
Haleon plc posted a solid report in its first quarter as a public company. The company still needs to navigate through currency and European macro issues, but at essentially the same price continues to look like a solid, long-term buy.
Dole plc has not played out. But as we argued there should be some mid-term defensiveness here and a recent bounce might suggest a bottom. Weāre not giving up on this one yet.
Adobe is back where it traded after the recommendation we made following the acquisition of Figma; we like it here.
TDCX has bounced nicely since our call, as has Advantage Solutions. TDCX still should benefit from tech outsourcing; we argued ADV had a chance to triple so weāre not backing away even after a quick 24% rally.
European Wax Center has plunged 11.5% since our short call on Sunday; it seems likely that a 4.5% decline on Wednesday came in sympathy with the crash in Olaplex Holdings. Olaplex showed that aesthetics customers are starting to pull back. If the same trend hits EWC, the stock is likely heading below $10, for another 30% downside.
Are We Nearing A Healthier Market?
Weāll close out with some guarded optimism.
On Saturday, February 20, 2021, Bloomberg reported that Churchill Capital IV was in talks to merge with electric vehicle startup Lucid Motors at a $15 billion valuation. Churchill IV stock roared into that weekend, moving from $10 to $52.
Two days later, the stock gained another 8.4%, after climbing as much as 19%. At the close, Churchill itself had a market capitalization of nearly $12 billion; diluted fully for warrants and founder shares, the SPAC had a valuation about equal to that reported by Bloomberg for the combined company.
The most logical explanation for the Monday rally was that many investors were buying the Churchill SPAC without really understanding how SPACs worked. The merger was officially announced after the close Monday. Over the next two sessions what was then CCIV stock lost more than half its value.
In retrospect, that rally in Lucid looks like it marked the top for the most speculative growth names. The ARK Innovation ETF hit its peak exactly one week earlier, and in the week of the CCIV sell-off lost 15% of its value. (Itās declined another 74% since.)
An Insane Friday
On Monday August 8 of this year, we highlighted insane trading in the market three days earlier. The news that Friday was not nearly as big but there was a broad cross-section of nuttiness that as a whole compared to the illogical LCID rally 18 months earlier.
And as with LCID, thereās a sense that the insanity marked the end of a speculative craze. (In this case, ARKKās three-month high came a week later; the ETF has dropped ~32% since.)
Carvana rose 40% after an ugly earnings report; itās down 68% since.
Magic Empire Global Limited, a Hong Kong-based underwriter, saw its initial public offering price at $4 and close at $97.
Traders were trying to find the next AMTD Digital, which earlier that week hit a market cap of $310 billion.
Though we saw crazy trading in the thin-float IPO of EV manufacturer Atlis Motor Vehicles last month, all three have since fallen back to Earth (if not quite fair value).
Redbox Entertainment rallied 27% on a continued attempt to engineer a āshort squeezeā despite a takeover offer. AMC Entertainment gained 19% after a soft earnings report. Redboxās deal indeed closed, and AMC last week hit its lowest level since February 2021. GameStop too is near the lows.
It seems insane to claim that this market is getting healthier. But for those of us who see a key function of the public equity markets as guiding the correct allocation of capital, the market is healing, as painful as that process has been.
The weekly, if not daily, drumbeat of muttering, āyou have got to be fā-ing kidding meā at random headlines of 30 percent-plus, no news, stock moves truly has faded in recent weeks.
Weāre returning towards the messy, imperfect, but at least modestly more rational process of, you know, analyzing fundamentals and macro trends and cash flows and pricing stocks accordingly. (Count me among those who never would have predicted it would take this long to get back here.)
No doubt, weāll still see some pockets of insanity on the way. But increasingly it seems that days like August 8th are, thankfully, mostly in the past.
Tickers mentioned: ADBE 0.00%ā, ADV 0.00%ā, AGS 0.00%ā, AMBP 0.00%ā, AMC 0.00%ā, AMTD 0.00%ā, AMV 0.00%ā, ARKK 0.00%ā, AVAV 0.00%ā, CVNA 0.00%ā, DOLE 0.00%ā, EWCZ 0.00%ā, HKD 0.00%ā, HLN 0.00%ā, HOG 0.00%ā, INSE 0.00%ā, KLIC 0.00%ā, LCID 0.00%ā, LVWR 0.00%ā, MEGL 0.00%ā, OLPX 0.00%ā, PACK 0.00%ā, SCHL 0.00%ā, SIX 0.00%ā, TDCX 0.00%ā, TSLA 0.00%ā
As of this writing, Vince Martin is long AGS, HLN, and SIX, and short KLIC and TSLA.
Disclaimer: The information in this newsletter is not and should not be construed as investment advice. Overlooked Alpha is for information, entertainment purposes only. Contributors are not registered financial advisors and do not purport to tell or recommend which securities customers should buy or sell for themselves. We strive to provide accurate analysis but mistakes and errors do occur. No warranty is made to the accuracy, completeness or correctness of the information provided. The information in the publication may become outdated and there is no obligation to update any such information. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Contributors may hold or acquire securities covered in this publication, and may purchase or sell such securities at any time, including security positions that are inconsistent or contrary to positions mentioned in this publication, all without prior notice to any of the subscribers to this publication. Investors should make their own decisions regarding the prospects of any company discussed herein based on such investorsā own review of publicly available information and should not rely on the information contained herein.
We are well aware of the claims otherwise after earnings, notably those pointing to the gap between growth in SG&A and revenue and deliveries. Weād point to the fact that a) Tesla has brought in outside CFOs b) thereās no evidence CEO Elon Musk has the financial wherewithal to direct significant accounting fraud and c) SG&A expense shouldnāt necessarily ramp with sales (see p. 40 of the 10-K).
Thank you! Awesome breakdown