Whitney Tilson
Thu, Sep 17, 2020|Whitney Tilson

NNOX is 'Theranos 2.0'; Short report on Lumber Liquidators; Interviews with Carson Block and Dan David; Snowflake's IPO; Working remotely from Bermuda

1) I'm returning to the topic I've been writing a lot about over the past week: activist short-sellers.

One of the best, Andrew Left of Citron Research, released a scathing report on Tuesday on medical imaging company Nano-X Imaging (NNOX): A Complete Farce on the Market – Theranos 2.0. Excerpt:

Since its recent IPO, Nano-X Imaging has become a market darling based on the claim that they have created a better medical imaging device that is low cost, portable, and will forever change the way diagnostics are done globally as this new innovative technology will soon replace the legacy x-ray market.

Citron puts NNOX under a corporate x-ray and we see right through it as a stock promotion that is actually insulting to anyone who spends 10 minutes to read the prospectus. This stock is heading to $0 as the company's recent fair value opinion on their technology is $0.14 a share.

Having read the report and knowing the kind of work Left does, there's no doubt in my mind that he's correct... and that this stock is worthless.

At least some investors agreed, as NNOX shares tumbled 23% on Tuesday. And yet, the company still has a $1.6 billion market cap. Look out below!

2) Over the years, I've found that the best short ideas tend to come from short-sellers, followed closely by good journalists. It's amazing what you can learn by reading the New York Times, Wall Street Journal, Washington Post, Financial Times, and a few others.

But industry insiders can also be another good source. An excellent example is this five-page report on flooring retailer Lumber Liquidators (LL), which was sent to me by a veteran of the flooring industry who wishes to remain anonymous. Here's the summary:

The stock of Lumber Liquidators (recently rebranded as LL Flooring) has been on a wild ride this year, starting at $9.77, crashing to $3.77 in March, before soaring 685% to a recent high of nearly $30 on the home improvement "COVID bump."

Though the stock has pulled back to $22.36, I still believe it's a great short, as the company is unlikely to meet Wall Street's expectations for the following reasons:

  • Gross margins will be under pressure since the List 3 tariff exemption was recently repealed, which means that the ~43% of products LL sells that are imported from China are now subject to a 25% tariff.
  • Container shipping rates have jumped dramatically in the last 30 days and will likely remain elevated for some time until supply and demand imbalances are remedied.
  • LL imports almost all of its Luxury Vinyl Tile ("LVT") from Asia and its laminate and tile from Europe. The USD is weakening as the pandemic recedes and the "fear trade" unwinds, making LL's inventory purchases more expensive in dollar terms.
  • LL's total inventory at the end of the second quarter was the lowest it has been since the first quarter of 2016, and on a per store basis it is the lowest since 2009. Replenishing this inventory in a world of elevated shipping rates, a weaker dollar, and an additional 25% tariff will put LL at a disadvantage to its larger competitors.
  • The home improvement boom may be fading.
  • The core small box concept may prove disadvantageous in the age of social distancing.
  • Rebranding may be a distraction.

3) Two of the best activist short-sellers are Carson Block of Muddy Waters and Dan David of Wolfpack Research, both of whom were featured in the outstanding documentary, The China Hustle (available on Hulu here). I wanted to share links to the in-depth interviews they did with the Marketing Geeks Podcast, which I really enjoyed.

Here are summaries of each:

  • On the Marketing Geeks Podcast, hosts Justin Womack and Andros Sturgeon are joined by Carson Block, an infamous and world renowned activist short-seller who has been featured on major media outlets like CNBC, Bloomberg, Business Insider, etc., and highlighted in the hit documentary movie The China Hustle. Carson Block is known for documenting and alleging fraudulent accounting practices in publicly traded Chinese companies. In this interview, we explore his journey from international entrepreneur to "FEARED" and respected short-seller.
  • Dan David, the featured protagonist and narrator in the ground-breaking documentary film, The China Hustle, joins the Marketing Geeks, Justin Womack and Andros Sturgeon, for a fascinating sit-down interview about massive levels of fraud and deception that have yet to receive proper mainstream attention. Dan is a freedom of speech advocate, an activist short-seller, and he was the former Republican Congressional Candidate for the 4th district of Pennsylvania. He's also the founder of Wolfpack Research, and CIO of F.G. Alpha Management, a short-biased hedge fund.

4) The shares of data warehousing company Snowflake (SNOW) – which is in part backed by Warren Buffett's Berkshire Hathaway (BRK-B) – skyrocketed 112% yesterday on its initial public offering ("IPO"). This gives the company a market cap of $70 billion, equal to 178 times trailing revenue.

I've heard good things about Snowflake (and am happy to see that one of my favorite companies, Berkshire, is benefitting), but that's one of the most extreme valuations I've ever seen...

P.S. This cracked me up:

5) A friend who lives in New York but is working remotely from Bermuda right now sent me this e-mail last week. It sounds pretty awesome! She writes:

I'm working from Bermuda for most of September and the kids will start school here. It's a great place to live and work – and it's empty right now. Here's a picture I took of Elbow Beach, which would normally be packed with people:

The country is now open and welcomes both short-term tourists as well as professionals and college/graduate students who want to work/study remotely for up to a year.

We pretested within one week of coming, completed an online travel authorization two days beforehand, were tested on arrival, and got results back the same day. Once we tested negative, we were free to go out and about (they tested us again on days four, eight, and fourteen). We wear masks in public places, but can dine al fresco, use the beach and pool, and do other outdoor activities.

Bermuda's not inexpensive but it has a great protocol for COVID – the country has had only 177 cases and nine deaths in total. It feels very safe here.

We have a fractional ownership interest at Newstead Belmont Hills, so we've been coming here every year for at least two to three weeks in the summer. The property reopened a month ago and we are staying longer than we typically would. Newstead also rents units, so you don't have to own to stay here, but it's nice to unpack the bar and kitchen staples when you return.

Here are further details for those who are interested:

Best regards,

Whitney

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