Brand-new presentation from two of my colleagues; The Office of the Comptroller of the Currency terminated a consent order at Wells Fargo; The curious case of Children's Place; Tesla is back in the news; The bull case for Tesla; Spending the weekend with my parents
1) Right now, two of my colleagues have teamed up for the first time ever to sound the alarm on something they see brewing in the markets...
Longtime readers will recognize both of them: Stansberry Research's own Dr. David Eifrig (he goes by "Doc"), who's a senior partner at our company... and forensic accountant Joel Litman, the founder and chief investment strategist at our corporate affiliate Altimetry.
They just went on camera to explain how 1 in 3 U.S. stocks currently face what they're calling a "Wall of Debt."
As they say, a massive $679 billion is at stake amid this developing situation... and it also means a huge opportunity for investors.
When smart folks like Joel and Doc step forward together like this – and provide a game plan for what to do – it's worth paying attention to. Get the details for yourself right here.
2) In my e-mail 10 days ago, my friend who's an expert in the financial sector made the case for why he's long Wells Fargo (WFC), despite being bearish on banks in general. As I said then:
My friend thinks this makes Wells Fargo a good value compared with the rest of the large banks, with a catalyst being an eventual exit from the regulatory doghouse and potential return to a more normal historical valuation and increased capital return to investors.
Sure enough, as CNBC reports, this news came out yesterday... triggering a 7.2% jump in the stock: Wells Fargo says regulator has lifted a key penalty tied to its 2016 fake accounts scandal. Excerpt:
Wells Fargo said Thursday one of its primary regulators has lifted a key penalty tied to its 2016 fake accounts scandal.
The bank said in a release that the [Office of the Comptroller of the Currency ("OCC")] terminated a consent order that forced it to revamp how it sells its retail products and services...
Wells Fargo, one of the country's largest retail banks, has retired six consent orders since 2019, the year CEO Charlie Scharf took over. Eight more remain, most notably one from the Federal Reserve that caps the bank's asset size, according to a person with knowledge of the matter.
I asked my friend to comment, and he replied:
The OCC consent order that was lifted was related to the new account scandal and sales practices. While it is positive news, Wells Fargo still has eight consent orders in place (this was the sixth to be removed since 2019), including the one with the Federal Reserve that limits the bank's assets to $1.95 trillion.
The fact that the stock is up so much on this news is somewhat surprising given that Wells Fargo isn't out of the regulator doghouse yet, but shows how the favorable regulatory developments are a strong tailwind for the stock, with the biggest one (asset cap) still to come.
3) Andrew Walker had an insightful post on his Yet Another Value Blog about the strange goings-on at retailer Children's Place (PLCE)...
I'm not sure I've ever seen anything so extreme, in which a sophisticated investor, in a matter of days, bought more than half the shares outstanding in a distressed company. Here's Walker's post: The curious case of $PLCE and the $GME 2.0 possibilities. Excerpt:
Things changed last Friday (Feb. 9). The company put out a press release on their Q4 results. The Q4 results were, to put it lightly, an abject disaster. Sales came in below the company's expectations, but the real killer is operating margins were coming in at negative 8-9% versus the company's prior expectations of positive 2-3%.
The combination sent PLCE into a liquidity crunch...
Again, these results were an abject disaster. One of the few analysts who covered the company instantly took their rating from neutral to sell and their [price target] from $19 to $4 while noting a real chance the company couldn't make it through the current liquidity crunch.
That's a huge ratings change... and it's made even larger when you consider the analyst had a buy rating with a $45 price target on PLCE as recently as November!
As Walker noted, the stock of Children's Place responded how you would have expected:
It had closed the prior day at just under $20/share, and it opened up the next day at <$10/share. Surprisingly, the stock inched up to close that day at ~$12.50/share... still down a lot on the day, but in my experience retailers facing liquidity crunches see much more dramatic stock drops, so I was kind of surprised by how well the stock held up!
Here's where things get spicy: Mithaq [Capital] used the swoon in PLCE to snap up shares. On Feb. 13, they filed their first form 4, which showed they'd bought ~1.8m shares of PLCE during the dip on Feb. 9. Remember, PLCE has just 12.5m shares out, so this was a huge amount of PLCE's float (~15%). The purchases bought Mithaq up to >20% ownership of PLCE.
But Mithaq was just getting started. Mithaq wanted to show PLCE just how much they loved them by sending a Valentine's Day form 4 that showed continued, aggressive buying.
Walker goes on to say that the "aggressive buying" did two things:
First, it's created a little bit of a meme squeeze in PLCE today (I'm writing this mid-day Feb. 15; the stock has ~doubled as I write this and it's been paused multiple times for volatility halts).
But, perhaps more interestingly, it's created some really weird dynamics. Today (or perhaps last night), Mithaq delivered PLCE notice that they own ~54% of PLCE and plan on nominating and replacing the full board; in addition, Mithaq wants to talk to PLCE about providing financing.
I'm just fascinated / impressed by Mithaq's strategy here.
Mithaq aggressively bought >50% in PLCE in the open market inside of a week. Perhaps I have a short memory or am forgetting something, but I've never seen an investor blitz their way to this much ownership this quickly before. Mithaq was able to do that because other shareholders were absolutely panicking (perhaps rightly so!) about the liquidity issues; Mithaq saw value there and was able to pounce in a big way.
The closest analogy I can think of is when Bill Ackman of Pershing Square Capital Management bought 25% of General Growth Properties when it filed for bankruptcy in early 2009, hired lawyers, and, along with the family that controlled the business, fought for recovery for the equity.
It was a grand slam, as the stock recovered from pennies a share to more than $11 by the end of 2009 – making my fund 17 times its money in less than a year, my highest return, even – and the company was later sold to Brookfield Property Partners in 2018 for $9.25 billion.
I'm a little more skeptical that Mithaq's investment will work out. General Growth Properties' malls were performing well – the company filed for bankruptcy not because its business was doing poorly, but because lenders panicked and wouldn't roll its debt during the global financial crisis.
In contrast, Children's Place appears to be a lousy, dying business (though certainly not as bad as Bed Bath & Beyond). Ask yourself: Would anyone care if Children's Place went out of business tomorrow?
4) Tesla (TSLA) is once again in the news, with this article on the front page of the business section of today's New York Times: Tesla's Chair Under Scrutiny for Oversight of Elon Musk. Excerpt:
For more than five years, Tesla's board has been led by Robyn M. Denholm, a technology executive who rarely speaks in public outside her native Australia and posts barely anything on X.
To some analysts and investors, Ms. Denholm is the "adult in the room" who has helped Mr. Musk turn Tesla into the world's most valuable automaker. But to her critics, she has failed at her most important job: serving as a check on Mr. Musk.
Late last month, a Delaware judge sharply criticized Ms. Denholm's leadership while striking down Mr. Musk's 2018 compensation package, which is worth more than $50 billion. Ms. Denholm took a "lackadaisical approach to her oversight obligations" at Tesla, said Chancellor Kathaleen St. J. McCormick of the Delaware Court of Chancery.
The judge also questioned whether Ms. Denholm could be independent from Mr. Musk, because her job on Tesla's board had earned her more than $280 million. In court last year, Ms. Denholm described that pay as "life changing." Her compensation greatly exceeds what other large U.S. companies like Apple and Alphabet, Google's parent, pay the independent chairs on their boards.
I think it's true that neither Denholm nor any other board member (nor anyone else!) acts as a check on Musk.
This is part of the reason Musk has run amok over the past couple of years – along with other factors I've discussed previously:
I fear he has gone off the rails in the past couple of years due to some combination of borderline autism, extreme narcissism, overwork, sleep deprivation, a severe X (formerly Twitter) addiction, the lack of any guardrails, and – apparently – drug addiction.
That said, I don't think shareholders of Musk's various companies care – he has overwhelming support. And I don't think Apple's (AAPL) board chair acted as much of a check on Steve Jobs, nor Berkshire Hathaway's (BRK-B) on Warren Buffett...
5) In response to the Wall Street Journal article I included in yesterday's e-mail, The Six Months That Short-Circuited the Electric-Vehicle Revolution, a friend who is bullish on TSLA e-mailed me:
A lot of the narrative in this article is nonsense.
The Model Y is the best-seller globally despite being more expensive than the cars it displaced (the Camry and Corolla). Many potential Tesla customers don't have a clue about [electric vehicles ("EVs")] or the benefits of a Tesla (I know this personally) because the company doesn't advertise.
So there is a knowledge barrier and a price barrier because there are only so many buyers at Model Y prices.
I expect the Model 2 (as I call the next-generation platform, which will be way more affordable) to sell very well and be even more of a mass-market product.
Meanwhile, [General Motors] and Ford are stepping back on their EV efforts because every car they sell generates tens of thousands of dollars in losses for them.
In contrast, Tesla's median net profit per car over the last eight quarters was around $7,700 per car.
The charging infrastructure in this country still sucks, with the notable exception of Tesla's Supercharger network, which is excellent.
Tesla is accelerating forward while incumbents are going backwards. In a couple of years I expect Tesla will have a larger share of EVs than it has now.
6) As you read this, I'm about to take off from JFK for a 14-hour flight to Nairobi, Kenya to spend the weekend with my parents...
As I just learned yesterday, my 82-year-old father is in the hospital with various ailments related to having his third bout of COVID-19 two weeks ago.
While he's now testing negative, my mom said he was weak, lightheaded, and had an irregular heartbeat.
So, against his usual protestations, she took him to the hospital yesterday... where doctors discovered that his atrial fibrillation ("AFib") has returned (longtime readers may recall the saga of his two ablations in 2022).
He also has a lung infection, plus his clotting level is up. And to cap it all off, he's prediabetic (likely from his notorious sweet tooth – my mom says he eats six chocolate chip cookies a day and sometimes gets up in the middle of the night to snack on one of the mouth-watering sugar buns she bakes).
Here's a picture of us from the last time he was hospitalized in November 2022:
It all sounds very serious, but it's not quite as bad as it appears.
My dad is healthy as a horse and the test results this morning were promising, so they're sending him home tomorrow, right after I arrive. We'll spend a day and half together before I fly home, departing just before midnight on Sunday.
As I thought yesterday about whether I wanted to fly 14 hours each way and blow $2,440 on the last-minute ticket to spend 36 hours with my parents, I asked myself: "If they lived in Florida, would I fly down for the weekend to see them?"
Of course I would!
So why would an extra 20 hours of flying and $2,000 change my decision?
It didn't.
At the end of the day, it was an easy decision.
Best regards,
Whitney
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P.P.S. Our offices are closed on Monday in observance of Presidents Day. Look for my next daily e-mail in your inbox on Tuesday, February 20. Enjoy the holiday!