Continue to avoid Super Micro Computer; Lessons from Spirit Airlines' bankruptcy; 13-F analysis highlights Pinterest; Last day in New Zealand
1) Shares of Super Micro Computer (SMCI) just made another dramatic move...
The company has been riding the AI boom by making servers that contain chips made by Nvidia (NVDA). And its stock surged 31% yesterday after the company announced that it had hired BDO USA as its independent auditor. This came in the wake of the noisy resignation three weeks ago by Ernst & Young ("EY").
I've been warning my readers about SMCI since August 29 (even with yesterday's rally, it's still down 37% since then) and again on October 31 and November 7 because I think it's likely that the company has been committing accounting fraud, which EY discovered.
I think BDO will now find it and force SMCI to restate its financials... so to be on the safe side, continue to avoid the stock.
2) Meanwhile, ultra-low-cost carrier Spirit Airlines filed for bankruptcy earlier this week – wiping out shareholders...
As I wrote in my October 4 e-mail, I owned the stock last year "because I thought there was a greater than 50% chance that a judge would allow JetBlue Airways (JBLU) to acquire Spirit at $33.50 per share, so the expected value was significantly higher than the $15.89 I paid."
But then the judge – wrongfully, in my opinion – blocked the merger, and Spirit's fate was sealed. The Justice Department argued – and the judge agreed – that consumers would be hurt if JetBlue acquired Spirit because there would be less competition... but now look at what has happened.
While Spirit says it plans to keep flying, it's likely crippled – and consumers will be worse off than if the merger had gone through.
The reason I bring this up is to repeat a critical investing lesson that I, fortunately, applied here: When my investment thesis – my reason for owning the stock – proved to be incorrect, I sold.
While this might sound simple and obvious, I assure you it's not. As I wrote on October 4:
The natural human inclination when you suffer a big loss is to feel sorry for yourself, lick your wounds, and hunker down – waiting/hoping/praying for the stock to recover to your purchase price so you can exit with your investment (and dignity) intact.
This is exactly the wrong thing to do.
The market doesn't know what your purchase price was, doesn't care about your dignity, and isn't listening to your prayers.
Instead, you need to put your emotions aside and ask yourself a simple question:
If I didn't already own the stock, would I buy it today at this price?
And as I continued, it's important to avoid inventing new reasons to own such a stock:
In my case, my investment thesis was based on a single pillar: that a judge would rule in favor of Spirit and I would quickly double my money.
Once that pillar was blown out, it would have been easy to try to replace it with another one, rooted in how cheap Spirit's stock appeared. Emotionally, that's what I wanted to do because then I wouldn't have to recognize the loss – as long as I held on, the stock could always recover.
But I was able to put those feelings aside and realize that I didn't want to make a completely different bet on the turnaround of a money-losing, undersized company in a terrible industry... so I exited my position not long after the ruling.
The legendary Warren Buffett put it well: "You don't have to make it back the way you lost it."
Here's a Wall Street Journal article from earlier this week with more lessons from Spirit's demise: How Spirit Airlines Went From Industry Maverick to Chapter 11 Bankruptcy. Excerpt:
In testimony last year defending the JetBlue merger, [Ted] Christie, Spirit's CEO, acknowledged larger airlines had a winning formula with their international networks, premium seating, and lucrative credit-card offerings. Big airlines were also able to win over cost-conscious fliers with their own discount tickets.
Other problems piled up. Labor costs soared and Spirit's operations grew less efficient as the industry grappled with a shortage of pilots and air-traffic control issues.
Spirit faced an outsize impact from a problem discovered in some Pratt & Whitney engines. The required inspections have kept a chunk of its fleet on the ground for months.
"Everything kind of happened at the wrong time," Melius Research analyst Conor Cunningham said.
3) In Friday's and Monday's e-mails, I shared 96 13-F filings from some of the largest, best-known money managers.
As a reminder, institutional investment managers with at least $100 million in assets under management have to file a 13-F every quarter that discloses their equity holdings. By comparing it with the previous quarter's 13-F, we can see which stocks they bought and sold during the quarter.
One of my friends, Paul S., sent me this response with an interesting analysis he did:
I've been following your 13-F updates and thought it would be interesting to go through them and see which stocks were purchased by more than one asset manager during the quarter because it could be an indicator of an especially good idea.
I found the following 22 names (in alphabetical order): RELY, LRCX, ESTC, SPT, GOOG, GLBE, LBTYA, APO, VMC, NSA, ADC, WMG, RHI, DAVA, DIS, MSFT, ROIV, SHOP, DYN, TECK/B, DASH, and PINS.
Of them, I think Pinterest (PINS) [is] the most interesting because of its improving financials. The main question I'm investigating is whether the company has a defensible "moat."
Thanks for sharing your analysis, Paul!
Pinterest is a visual search engine/online scrapbook application that helps consumers find ideas, get inspired, and develop, curate, and hone their tastes.
I took a quick look at the stock and can see that, after getting caught up in the meme-stock bubble, it's now back to where it was when it went public four and a half years ago:
Paul is correct that Pinterest's financials are improving, and the company just turned profitable... so I'm going to add it to my list of stocks to take a deeper look at. Stay tuned!
4) My wife Susan and I spent our last full day in New Zealand at the magnificent Cape Kidnappers on Hawke's Bay in Napier, doing a bit of hiking and mostly relaxing.
The property is on 6,000 acres and was built by the investing legend, the late Julian Robertson, whom I had the honor of meeting a few times. Here are some pictures:
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.