I nailed Super Micro Computer; 'Don't Bet Against America'; I was in seven states yesterday
1) The most important thing I aim to do in my daily e-mails is to help my readers make money...
I do so by highlighting good stocks, teaching them the tools to evaluate such stocks, and keeping them invested in stocks despite the ever-present naysayers and their gloom-and-doom predictions. (It reminds me of the old joke that economists have successfully predicted nine out of the last five recessions.)
But almost as important is helping my readers avoid losing money – by warning them about bad stocks, teaching them the tools to evaluate these kinds of stocks, and occasionally (very occasionally, generally no more than once or twice a decade) advising them to get defensive across their entire portfolio because a huge bubble is bursting (such as the Internet and housing bubbles).
It would be hard to find a better example of a prescient warning when, two months ago on August 29, I shouted from the rooftops to beware of server maker Super Micro Computer (SMCI).
At the time, I flagged a damning report by renowned activist short seller Nate Anderson of Hindenburg Research: Super Micro: Fresh Evidence Of Accounting Manipulation, Sibling Self-Dealing And Sanctions Evasion At This AI High Flyer.
I also analyzed SMCI's financial statements and highlighted the inexplicable divergence between the company's income statement, which showed booming sales and profits, and cash-flow statement, which revealed deeply negative operating cash flows.
As I concluded:
Based on this quick analysis and many similar situations I've seen over the years, I think there's a chance that SMCI will be forced to admit that, once again, it was cooking its books and will have to restate its financials.
Of course, we'll have to wait and see what comes of all this. But if Anderson is correct and SMCI comes clean, the stock, which has a roughly $27 billion market cap and trades at about 22 times trailing earnings, would have much further to fall...
Sure enough, yesterday the stock crashed a staggering 33% after the company's auditor, Ernst & Young ("EY"), resigned.
The Wall Street Journal has more details in this article, Super Micro Stock Tanks After Auditor Resigns, and here's an excerpt from SMCI's SEC filing about EY's resignation:
In late July 2024, EY communicated to the Audit Committee concerns about several matters relating to governance, transparency and completeness of communications to EY, and other matters pertaining to the Company's internal control over financial reporting, and that the timely filing of the Company's annual report was at significant risk. In response, the Board appointed an independent special committee of the Board (the "Special Committee") to review the matters and certain of the Company's internal controls and certain governance procedures (the "Review").
And it gets worse – here's more from the SEC filing:
After receiving additional information through the Review process, EY informed the Special Committee that the additional information EY received raised questions, including about whether the Company demonstrates a commitment to integrity and ethical values consistent with Principle 1 of the COSO Framework, about the ability and willingness of the Audit Committee and overall Board to demonstrate and act as an oversight body that is independent of the CEO and other members of management in accordance with Principle 2 of the COSO Framework, and whether EY could rely on representations from certain members of management and from the Audit Committee.
The filing also cited part of EY's resignation letter, in which the firm didn't mince words:
In the Resignation Letter, EY stated, in part: "we are resigning due to information that has recently come to our attention which has led us to no longer be able to rely on management's and the Audit Committee's representations and to be unwilling to be associated with the financial statements prepared by management, and after concluding we can no longer provide the Audit Services in accordance with applicable law or professional obligations."
This really couldn't be more damning.
It's very rare for an auditor to resign like this, so I think it's highly likely that EY discovered accounting fraud that SMCI was trying to cover up.
If so, SMCI will have to admit to this and restate its financials, which will send its stock down further (shares are taking another big beating today)... so continue to avoid it.
2) Picking up where I left off yesterday...
Last Wednesday at our company's annual conference in Las Vegas, I gave a presentation that included an 11-slide section I called "Don't Bet Against America." In it, I showed how well the U.S. is doing relative to peer countries (a hat tip to The Economist, from which most of the charts from my presentation are drawn).
You can see all of those slides here, and I'll share the highlights below...
As I showed in this chart, the U.S. accounts for an all-time high percent of the G7's GDP (in fact, our GDP growth is driving 80% of the World Bank's 2025 forecast for the entire world):
Our rising relative GDP is due to labor productivity that is 20% higher than in Western Europe and 60% higher than in Japan – take a look at this next chart I shared:
Meanwhile, as I shared in this chart, our GDP growth since 2019 dwarfs that of peer countries:
"Ah, but what about China?" you might ask. "The country is always growing faster than the U.S. is and is destined to catch up, right?"
Not so fast... China's nominal GDP as a percent of ours, after decades of increases, has declined in the past two years. Take a look:
When I pulled the data for this chart, I was surprised – it really underscores how rich our country is. For example, residents of Mississippi (our poorest state by personal income per capita) earn more than citizens of any other major country:
Though many families are struggling, overall U.S. household balance sheets are strong. Here's another chart I shared in my presentation:
And as I discussed with this next chart from my presentation, the U.S. energy production is simply booming – our energy production is one-third larger than Saudi Arabia and Russia, and we produce more oil than any other country – and we are increasingly energy independent thanks mostly to fracking:
Lastly, our demographics bode well for the future, as we have the youngest population, and that's expected to remain the case – here's the chart I shared:
In summary, while we have plenty of problems, I wouldn't switch places with any other country.
So I'll say it again... Don't bet against America!
3) I was in seven states yesterday – that might be a record...
In the morning, I took a train from my home in New York City to the headquarters of Stansberry Research in Baltimore – I passed through New Jersey, Pennsylvania, and Delaware.
Then I flew from Baltimore to Boston and took a bus to New Hampshire to spend a day and a half with my parents, who are staying at our extended family's house on Lake Sunapee – a final visit before they return home to Kenya next week.
Here's a picture of us this morning:
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.