1) Two of my favorite stocks, aircraft-leasing company Willis Lease Finance (WLFC) and electric-aircraft maker Joby Aviation (JOBY), reported earnings yesterday...
I've written favorably about WLFC more than a dozen times (archive here). The stock soared 17% to close at an all-time high of $229.09 after the company reported blowout numbers. Revenue rose 23.2%, and earnings per share soared 47.5%.
For further insight, I turned to my friend who runs a highly successful hedge fund (and prefers to remain anonymous). He knows WLFC better than anyone, and it remains his fund's largest position by far. He began:
WLFC's earnings always have a lot of moving parts and accounting nuances, but nearly every aspect of the report came in very strong. If we back out some one-time items, we still see very clear core earnings power in the $5-to-$6 range per share for the first quarter.
However, as he continued, the key will be WLFC's outlook going forward as it implements its new asset management strategy:
The deployment of Liberty Mutual's capital (which WLFC is managing) began near the end of the first quarter, so that will be a nice second-quarter tailwind. And the company disclosed that capital from Blackstone Capital began deployment in April.
It stated that around $200 million of assets from WLFC's own balance sheet will be sold into the Blackstone portfolio, which we estimate will result in $5 to $9 per share of pretax gain on sale. As such, the second-quarter earnings for WLFC could easily approach $10-plus per share, as the combination of the asset management income kicks in and the core legacy business continues to grow earnings.
Lastly, he noted that management's comments on the current environment were a good reminder of two important dynamics:
1) Willis primarily traffics in next-generation engine assets that are more fuel efficient and in greater demand today amid higher energy prices... and 2) Willis' business can be countercyclical because airlines have a greater reliance on leasing assets and using external maintenance during periods of turmoil as capital constraints prevent it from purchasing its own assets.
He concluded:
Therefore, despite elevated fuel costs and pressure on the airline industry, engine leasing demand remains very robust. Willis' business is firing on all cylinders, and the stock remains incredibly cheap on every metric.
Thank you for sharing your insights!
I didn't lose my nerve when the stock dropped below $120 last November. And I agree with my friend that it's still attractive here.
2) I also didn't lose my nerve on Joby Aviation's stock, which was down 34% year to date as of yesterday's close (though it was up 34% over the past year)...
The stock jumped more than 15% this morning after the company released its latest quarterly report after the close yesterday. It's making excellent progress on all fronts...
Joby completed demonstration flights in San Francisco and New York, was selected for the U.S. government's eVTOL Integration Pilot Program designed to accelerate the development of this technology, and made progress toward aircraft certification. It still expects to start commercial operations sometime in 2026.
The company burned $222 million of cash in the first quarter, but it has $2.5 billion of cash and only $735 million in debt and lease obligations. So it's in a strong financial position.
As I've discussed in many prior e-mails (archive here), this company is the clear leader in an exciting new industry – electric vertical takeoff and landing ("eVTOL") aircraft.
I became a believer after I visited the company's headquarters in the Bay Area two and a half years ago. It reminded me of my visits to Netflix (NFLX) in February 2011, when the stock was around $4, and Tesla (TSLA) in May 2013, when the stock was around $3.
Like those two companies, Joby has a brilliant founding CEO who has assembled a team of some of the world's best engineers who are developing radically innovative products in some of the world's largest markets.
That's why I think Joby's stock has the potential to be what I call a "moonshot" – a market-leading company in sexy, exciting sectors that appeal to the media and retail investors, as I described in my January 17, 2024 e-mail.
So why has Joby's stock drifted down from more than $20 last August to around $10 today?
It could be in part because investors were hoping the company would begin flying commercial passengers in the United Arab Emirates in the first quarter. But these plans are obviously on hold in light of the Iran war.
Mainly, I think it's because stocks like JOBY – which don't trade on a multiple of earnings, revenues, or book value – can trade anywhere in the short term.
I'll only invest in stocks like this when I think I can make five to 10 times my money. That's why I wouldn't have sold when it spiked last summer... and why I think it's even more interesting today at half the price.
If you plan on investing in a speculative stock like this, size your position small, buckle your seatbelt, prepare for a wild ride, and focus on the long-term potential.
3) Palantir Technologies (PLTR) reported earnings after the close on Monday. Revenues and net income grew 85% and 53%, respectively, and the company raised guidance.
But the stock dropped 7% yesterday. And it's now down 28% versus a 5% gain in the S&P 500 Index since I included it in my list of "Stinky Six" stocks to avoid in my October 29 e-mail.
It's on the list mainly due to its absurd valuation and my belief that it's little more than an information-technology consulting business.
But I also can't stand CEO Alex Karp's ridiculous hyping of the stock and over-the-top self-glorification. Here are some examples from the latest shareholder letter:
- "Our financial results now demonstrate a level of strength that dwarfs the performance of essentially every software company in history at this scale."
- "The significance of this accomplishment, the magnitude of this feat against not insignificant headwinds, may be lost on some."
- "We stand on the walls, sentinels of the inner sanctum, against the assault of AI slop. The Ontology is based firmly in reality – there is, here, a dialectic between ground truth, tribal knowledge, and enhancements."
- "Palantir is now literally one of the most impactful companies on the planet... We are in a category of our own."
- "These are not incremental or marginal advances. These are signs of a phase shift, even sublimation, to borrow the concept from physics."
- "Our record levels of revenue and profit are the direct results of the revolutionary way we built this business, which is unlike anything we have seen in corporate America... What business in the world, at this scale, has ever accomplished anything of the sort."
What a blowhard. Karp's language smacks of desperation – an attempt to prop up an obviously overvalued stock. I'm reminded of a famous line from William Shakespeare's Hamlet: "The lady doth protest too much, methinks."
Just before Palantir's earnings release, my old friend Michael Burry of The Big Short fame posted on his Substack (for paid subscribers only) that he's shorting the company. He thinks the stock is worth low double digits at best and noted:
When shorting overvaluation, one should bang one's head against a wall until some sense is knocked back into it. Never short overvaluation.
I would argue this is not just overvaluation. I am shorting the business model. I am shorting the entire premise upon which the company rests. I am shorting the CEO.
He compared its market capitalization with those of its peers:
Palantir's market capitalization of over $350 billion fully diluted is greater than the market capitalizations of Lockheed Martin (LMT), General Dynamics (GD), Northrup Grumman (NOC), and it is not close. Palantir's market capitalization exceeds that of those three titans of U.S. military defense by over $50 billion.
These three have 38x more revenue than Palantir, and about 30x owners' earnings.
After the earnings report, Burry posted:
Palantir is not growing as fast as commercial AI adoption, and I believe this is the beginning of frontier models getting an edge in. In the intermediate to long-term I see little role for Palantir in the commercial space except as a legacy player for lazy management teams.
I think Burry is right, which is why Palantir remains firmly on my list of stocks to avoid.
4) Burry also commented on three companies I've written about several times before and will take another look at in the future...
First, in his post on Monday, he wrote that he established a position in apparel maker Lululemon Athletica (LULU), whose stock sits at an eight-year low:
This summer will be a vacuum. The new CEO does not start until after summer. Without any catalysts until later this year at the earliest, the shares are falling hard.
And yesterday, he disclosed that he increased his position in PayPal (PYPL), another stock that has been obliterated. It reported earnings yesterday and tumbled 8% to close at a nearly nine-year low:
PayPal reported decent earnings today, with 7% revenue growth. PayPal is a float business, but lower interest rates created a headwind. Venmo is growing strong double digits and remains a pawn for value realization. Active accounts are flat, and guidance of a flat 2026 could be table-setting by the new CEO.
The buyback is now $6 billion for the trailing twelve months on a now $41 billion market capitalization, and PayPal has essentially no net debt. That $6 billion came roaring out of free cash flow...
Very large buybacks are not a story the market respects in low growth names. Nevertheless, as recently shown with eBay, when the valuation is compressed over a longer period of significant buybacks, the numbers play out in the share price eventually, especially with a little turnaround/refresh under new management.
Burry highlighted the company's cost-cutting strategies and compared it with industry peer Fiserv (FISV):
The new CEO is looking to save $1.5 billion in run-rate expenses the next few years, and news this morning is of 20% layoffs...
PayPal does not need nearly as many people as it has to run its business, and continued deployment of foundation models will accelerate work force reductions...
Both PayPal and Fiserv have new CEOs stressing AI-forward turnaround strategies from fairly strong incumbent positions. Fiserv probably has the stronger moat, while PayPal is being more aggressive with its buyback.
He concluded:
PayPal shares at current levels are in my view a long-term 16-17% [compound annual growth rate] investment given continued capital stewardship and renewed [return on investment]-focused business investment under new management.
Lastly, on Monday, Burry blasted the bid GameStop (GME) CEO Ryan Cohen made for eBay (EBAY) and sold all of his position.
Burry thinks GameStop will need to pay a higher price than the initial offer, which would saddle the company with a dangerous level of debt:
The more likely outcome at the higher price sees leverage rise to 7.7x, a level of debt that borders on distressed and tends to strip competitiveness and innovation from such-stricken companies. Wayfair lived there for years, Carvana nearly died there and still might from such a start. Bath & Body Works too. Those are the survivors. They are few.
He's skeptical that Cohen will be able to grow cash flows enough to support so much debt:
Ryan must see low-hanging fruit, though if huge cash flow could be unlocked as if by a magic wand, one might expect eBay to have found it during its epic search for cash with which to buy back slag heaps of shares. eBay reduced its share count from 1.2 billion shares ten years ago to just 444 million shares today – one of the most prolific buyback programs markets have seen.
Ryan cannot be after fat to cut, if only because no amount of cut fat makes this deal work. Rather, Ryan is pointing to a transformation, to hundreds of billions of dollars of opportunity, and he convinced TD [Bank] to give him the $20 billion committed financing, which is no small feat given the low single digit billion dollar [earnings before interest, taxes, depreciation, and amortization ("EBITDA")] numbers sported by these two companies.
Burry thinks Cohen's plan is "to dominate collectibles and used goods of all ages," but doubts it will succeed:
Amazon tried to do that, failed, and is not coming back...
If GameStop wants to do it with billions of interest expense and all manner of covenants restricting its movements, it will not be breaking new ground. It will be trotting in well-worn ruts on the road to capitalist Hell.
He concluded by quoting the late, great Charlie Munger:
"When a manager with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact..."
Cohen has been on the media circuit attempting to defend his bid for eBay, and it's not going well. His interview with CNBC went so badly that it has gone viral (though subsequent interviews went a little better). No wonder GME dropped 10% on Monday.
I think LULU, PYPL, and EBAY are interesting. But GME, not so much...
Best regards,
Whitney
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