We think there is a subsegment that is high momentum stocks that have gotten completely out of control in terms of their valuation and we think that those stocks did reach a bubble proportion.
They have gotten out of control why?
There is a difference between the right price for a good business and where the stocks have gotten.
This is what happens with bubbles and what happens with momentum.
Good news, if it is better than he thought it was, the stock has a gap that is 15% higher in response.
You do that 4, 5, six quarters in a row, before you know at the stock has doubled or tripled.
But the stocks might only be four percent better than you thought they were and valuation is out of control.
He wrote in your letter to investors for the first quarter that you see some of these stocks dropping by 90%. so, good businesses that are overvalued by that much?
Let me clarify.
I was saying that in the previous bubble, 1999, 2000, even the best stocks fell.
Those with the best.
The worst ones fell more, they practically went out of business.
I am saying that when stocks become disconnected, they are difficult to short because when they are at a price that is a silly price, they can just keep going.
Twice the silly price is not twice as silly.
But the float is tiny, right?
That, too, but it doesn't matter.
It could be a big company or small company.
But twice silly is just silly.
Once they disconnect and decide to come back the other way and people say they are growth investors, what would i be willing to pay for this?
I am now looking at multiples.
When you look at multiples, those are a long way for these stocks to fall.
When a value investor gets interested?
When do multiples matter the most?
Call it pe for now.
Some of these businesses not only have earnings, they don't have serious plans to make earnings.
I know you do this kind of thing, my attempt at it is far less sophisticated and comprehensive than yours, but i look at a stock that was $50 billion in market cap, trading at 10 times sales here in the united states.
There are 89 of them.
The first nine that came up don't have any hits at all and are not expected to have earnings in the next 12 months.
We are talking about stocks trading at as much as 2900 times sales.
That is a lot.
Now, 89. that does not even include the one that i know you shorted, athena health.
Look, i don't think we have a generalized stockmarket bubble, but i do think we have a certain number of stocks that caught everyone's fancy.
There are good stories behind a lot of these stocks and companies tom a but i think the valuation has gotten out of control.
You have taken a different approach than, perhaps, the convention, which might be pinpointing or identifying overvalued, single name stocks and you have instead gone for the basket approach.
What is in the basket?
A number of stocks.
Probably many of the ones on your list.
We identified many.
I don't want to get into all the different ones in the basket, but i think that people can more or less peace things out.
We are certainly not calling apple or micron of short, we are long and those things.
Twitter, for example.
A company that people, as you know, have raised many valuation concerns about.
It showed up on my list.
Here's the thing, half the people were upset that we thought we were talking book.
The other half of the people were upset that we were not telling them all the names.
We could not please anybody.
But why do you have to please anyone?
You are a hedge fund investor, the only people you need to satisfy are your investors.
You don't owe anyone anything.
Be clear, the letter is to our investors.
It gets out there.
We have a lot of investors, we have to send it to a lot of people and as a result, it gets out there.
Isn't that what everyone does every day?
I think that adding information to the markets so that people can sort these things out is constructive and why we tend to sometimes share.
You started to come to these ideas not just in the first quarter, but several quarters ago.
In the third-quarter you wrote to your investors that the market in general was getting increasingly creative in its behavior.
What did you mean by that?
Is it more creative now?
If so, how?
The best that we can do as value investors -- we will never belong on these.
We are not going to be long on athena health.
We are disciplined value guys.
The best that we can do is hope to not be short into much of them wrong time.
We did a good job in hindsight last year not being short on much of these.
This year it seemed like the environment was beginning to turn and things were headed towards a peek.
We shortened a whole bunch of them.
Want to talk about athena?
Walk us through the idea behind it.
Look, athena is a very good example of this.
A good business with a good strategy, a good product and good management doing good things for the world, but the stock is just at the wrong price.
It is as simple as that.
What happened was a few weeks ago morgan stanley came out with conventional valuation where they projected out the results to 2030 and we just look at that and said -- wow, how are you going to get from a 10% margin to a 30% margin?
We thought about the business.
We just don't think that the assumptions they are using are plausible.
You said in your presentation that there were not any cloud companies.
What would constitute a cloud company, then?
The way i look at it, there are two types of these internet companies.
One that has sort of a network effect.
There are others that don't have network effects.
To me that means having more users on the network makes the site more valuable to each user.
You may is a great example of that.
Everyone likes auctions.
If you want to auction something off, you go to ebay.
The buyers know where the sellers are going to be.
It is hard for a new entrant to penetrate that.
Ebay is able to extract value from that network by charging fees and commissions and so forth.
But there are other types of internet companies where your relationship is with the provider.
Having lots of customers might help the provider be more efficient and run their business better, but it does not really present them with a competitive position that allows them to earn huge profits over a long.
I think that athena falls into that latter category.
If i understand it correctly, you have raised the concern that athena may not be able to compete with other large members.
The case really requires them to make a huge entrant.
I can understand how investors might have duped themselves into thinking that athena health can do that.
But what about customers?
Essential health has become a client of athena.
You know, that is a pretty big company.
Are they sue -- are they similarly duping themselves?
No, no, athena has a good product with real customers.
I would not tell anyone not to use their product, i think it is a fine product.
I think the market opportunity is smaller than people think.
They are already up to 3700 doctors, which is a lot, and they concentrate in the ambulatory business.
As hospitals by a doctor practices, available tools shrink, plus there has been a huge move towards electronic health records.
The stimulus provided reasons for doctors to take this on.
Athena has captured part of that, but there has been the huge penetration of electronic health records.
I think they will run into a saturation and their growth will slow down.
I know you said you wanted to make it clear, this is not the case -- the way you are looking at it, you say it is a good company.
These are much different scenarios?
For here, this is about price?
When does the market wake up and revalue these overvalued stocks?
Aba arty have.
It's possible the top was in a few weeks ago and we won't now and in the year it will be very clear what was at the top.
Did they rally backwards?
Certainly, there will be sharp rallies if they continue to go down and in hindsight we will know if this was the top or a correction, and so forth.
Our strategy is to have relatively small positions in a large number of these things with time on our side.
Talk to us about the warning signs.
We remember what they were back in 1999, 2000. every night in new york city and other party for another tech company where you didn't know what they did.
Eyeballs with ratios at over 1000 or more.
What are they today?
I don't know about the multiples, but we have seen a lot from the addressable markets.
Like blue sky and.
You mentioned it, price to sale with no earnings.
There is no forecast for earnings over the intermediate.
Just a hope that you will achieve critical mass.
Amazon generates profit with an incredibly skinny margin and it seems focused on building a customer base with revenue, more than anything else.
The stock has done terrific.
It has done terrifically, absolutely.
They can continue to do terrific window they don't, but the truth of the matter is that with something like this, you are still looking at a rather fancy piece.
Back to the warning signs.
There are things that happened.
I went through this in 1999 and 2000. some of the things that happened were that shorts could not stay involved.
The daily pain was simply too much.
You saw these parabolic or whatever kind of moves.
You saw that in a lot of those stocks.
Athena certainly did that up to 200. it was very hard, you could see short-sellers being carried out of these things, even if they thought they were right.
Then you also see the short interest going way down.
A lot of these stocks, there is much lower short interest now than before.
Another thing that you saw became digital ipo.
People were buying these ipos without thinking too much about them because they were going up 40%, 30% the next day.
Like candy crushed.
Not that one, but the other ones that came out in the previous few weeks.
When there are huge pops in the ipos, everyone calls their underwriters and they do not think about it.
They just want the money on the first day of trading.
The stocks hold those prices and bring out the next ipo.
With king you saw that they priced it not so well and the price traded down.
At the same time the secondary offer, the ticker that they did, they priced that on the whole and it did not do well, which told me to be were beginning to get towards maybe the end of the cycle.
What about another one?
I am not mentioning any more names.
Bigger than a bread box?
Small -- smaller than a volkswagen beetle?
Does it make it hard to know how to be a value investor right now?
Fundamentally no one will disagree with you, but when we look at the ipo market, hedge funds, every day they need to return and these deals look great when they know that they can get a big allocation, it is attractive to buy.
How do you keep that discipline at a time when momentum seems to be on your side?
Sometimes it is a struggle.
We like to time arbitrage.
We like to get our analysis right and sometimes wait longer than other people.
That is one of the other things.
Our horizon for investments is not usually one day or even one month.
It could be one to four years, ancient on wall street these days.
Is it unfair that activists are getting this brand right now?
That they are goodtime charlie's in it for a short.
When bill ackman just said yesterday that he is on a six to seven year time horizon?
Do activists have the wrong brand right now?
I cannot sort out the differences between me and bill.
I think they are considerable.
I think that for us, we are doing the same thing we have always done.
We are not suddenly more activist.
In fact we are not very activists.
We did a thing with apple year ago.
Before that it was four or five years prior to our prior activism thing.
That does not mean it could not turn around tomorrow.
These things are very infrequent, but i will not argue with people who want to characterize us.
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