Short reports on EQIX, TBBK, and SOUN; Leadership shakeup at Boeing; Washington Post op-ed on scams

1) In yesterday's e-mail, I warned about investing in Trump Media & Technology Group (DJT) and concluded:

DJT looks like a meme stock and reminds me of GameStop (GME) in its heyday in 2021. And like with GameStop, the ending seems certain: huge losses for retail investors sucked in by the hype and action.

Don't be one of them.

While I'm on the topic of stocks to avoid, today I want to flag three more...

Up first, Hindenburg Research is out with a new short report on data center real estate investment trust ("REIT") Equinix (EQIX).

This is notable, both because of the author of the report (Hindenburg has an extraordinary track report of uncovering fraud) and the size of its target (Equinix is a large REIT that owns and operates more than 260 data centers worldwide and has a roughly $75 billion market cap).

Here's Hindenburg's full report, Equinix Exposed: Major Accounting Manipulation, Core Business Decay And Selling An AI Pipe Dream As Insiders Cashed Out Hundreds of Millions, and below is an excerpt with five bullet points:

• Our investigation, which included a review of financial and litigation records and interviews with 37 former Equinix employees, industry experts and competitors, revealed that Equinix manipulates its accounting for [adjusted funds from operations ("AFFO")], the key profitability metric for REITs. We estimate this metric was overstated by at least 22% in 2023 alone.
• A key accounting trick to boost AFFO is to misclassify 'maintenance CapEx' as 'growth CapEx', giving the appearance that the company's cost to maintain its revenue base is lower than it actually is, making the company appear more profitable.
• When Equinix transitioned to become a REIT in 2015, it began using AFFO as a key metric in determining executive bonuses. That same year, Equinix reported a sudden 47% drop in maintenance CapEx, leading to an estimated 19% boost to reported AFFO.
• The company also reported a sudden spike in growth CapEx on its balance sheet, a dynamic that has continued for almost 10 years. This shift has fueled Equinix's stellar non-GAAP reported AFFO metrics and enriched its top executives.
• During our investigation, former employees and executives provided an array of examples of obvious maintenance CapEx being classified as growth CapEx in order to boost reported AFFO metrics.

As I've written many times before, while I think 99% of investors should avoid short selling entirely, I think every smart investor should listen to short sellers.

There are probably a few dozen who publish their work publicly.

Of course, most aren't as well-known as Hindenburg... and the quality of their work varies.

But whenever I'm considering buying a stock, I always check to see if anyone has published a bearish report – whether it's a Wall Street analyst with a "sell" rating on the stock or an activist short seller. Up next are two examples of the latter...

Here's a report from Culper Research on a small (roughly $1.7 billion market cap) regional bank The Bancorp (TBBK): Bridge to Nowhere. Excerpt:

[We] believe the Company has misrepresented the quality of its real estate bridge loan ("REBL") portfolio. Over the past 10 quarters, TBBK's REBL book has ballooned from zero to $2 billion, or 2.5x the value of the Company's common equity and only provisioned $4.7 million...

Utilizing UCCs, liens, deeds, and local property records, we uncovered loans totaling $141.6 million, or 50% of the Company's $283 million in loans coming due just this year, that we believe harbor meaningful risks...

Our views are not only informed by our loan-by-loan analysis, but by our visits to 21 different TBBK-funded properties in the past 2 weeks, our conversations with former TBBK employees including a former REBL underwriter, and conversations with several of TBBK's borrowers/syndicators.

Lastly, Capybara Research is skeptical of roughly $1.7 billion SoundHound AI (SOUN), whose stock has more than tripled since February due to all the hype around artificial intelligence ("AI"): SoundHound: Lies, Damned Lies, and Cheeseburger "AI".

The report opens with this statement:

SoundHound is a failing company peddling lies and deception. It reminds us of the old saying "lies, damned lies, and statistics", except in SoundHound's case, they don't provide statistics, because no amount of massaging could make the numbers look good.

And here are six of the bullet points in the report:

• SoundHound is misleading investors about their AI capabilities.
• To answer many user queries, SoundHound's "AI" product searches Wikipedia and returns scraped content.
• SoundHound pitches their product as world-class "AI", on par with ChatGPT, but this is not the case. The Houndify product uses commodity speech recognition to search a manually programmed knowledge graph. And it only works for a small set of domains, such as weather, sports scores, etc.
• SoundHound's products often return incorrect information because the company's software is manually programmed and labor-intensive to maintain. This results in outdated information being returned to users.
• SoundHound's speech recognition tech is a commodity service that competes with comparable products from Amazon, Google, Microsoft, Apple, Cerence, and many others. SoundHound has admitted as much by removing claims about the superiority of their product from their recent 10-K.
• SoundHound is hiding the fact that it has lost some of its biggest customers, including Mercedes-Benz, Deutsche Telekom, and Netflix.

Unlike DJT, about which I have a strong opinion, I'm not familiar with EQIX, TBBK, or SOUN.

But if I owned or was considering buying any of these stocks, I would read these short reports carefully...

2) Continuing the theme of stocks to avoid...

In my March 12 e-mail, I shared two reports my old friend – and Stansberry Research founder – Porter Stansberry wrote early last year and in January with his bearish analysis of aircraft giant Boeing (BA).

As Porter concluded in his January report:

Boeing's planes keep killing passengers and falling apart in mid-air. These outcomes are the result of years of bad ideas – starting with the intentional destruction of Boeing's engineering culture, followed by GE-style financial engineering...

As evidence of this, here's a chart my friend and former colleague Herb Greenberg included earlier this week in this essay, In Light of Everything That Has Happened at Boeing...:

Therefore, I wasn't surprised to see that Boeing is changing up its leadership.

Here's Reuters with the story: Boeing CEO Dave Calhoun to step down in shakeup amid safety crisis. Excerpt:

Boeing CEO Dave Calhoun will step down by year-end in a broad management shakeup brought on by the planemaker's sprawling safety crisis exacerbated by a January mid-air panel blowout on a 737 MAX plane.

In addition, board chair Larry Kellner and Stan Deal, head of the company's commercial planes business, are also leaving as Boeing's board tries to get control of the myriad issues that have shaken confidence in the iconic planemaker over several weeks...

Immediately after the Jan. 5 panel blowout, airline executives expressed support for Calhoun, but those good feelings ebbed after additional production delays and as regulators detailed quality problems at its key manufacturing hub outside Seattle.

To repeat what I wrote two weeks ago:

Until I see clear evidence of a massive change in Boeing's corporate culture, I wouldn't put new money to work in this stock.

What I'd really like to see is Boeing move its headquarters back to Seattle.

That would be a great sign that it's abandoning the financial engineering that has brought it to near-ruin and is returning to its roots.

3) Continuing my warnings about the endless frauds and scams out there (which I last wrote about on March 22)...

Here's a great Washington Post op-ed co-authored by William Webster, the former director of the FBI and the CIA: Scams are on the rise, and they're ruining lives. We can stop it. Excerpt:

Ten years ago, we became targets of a scam involving a Jamaican crime ring that tried to defraud us of $50,000 over the phone. It was a harrowing experience, but it drove home a sobering reality – if it could happen to a former director of the FBI and CIA, it could happen to anyone.

Since that 2014 episode, we have given numerous public interviews about the need for scam awareness, especially to protect older Americans like us. But we have watched with alarm as scam attacks have nevertheless continued to grow in sophistication and consumer losses have skyrocketed.

According to a poll conducted by Gallup and the nonprofit Stop Scams Alliance, 8 percent of U.S. adults – roughly 21 million Americans – were scammed in the past year. In other words, more than 57,000 people are being scammed each day. Scams are Americans' second-highest crime concern (after the related crime of identity theft), with 57 percent saying they frequently or occasionally worry about it.

And this is an excellent point:

We need a national strategy and whole-of-government approach, including clear authorities, broader information collection and sharing, and sufficient resources. A presidential executive order should make combating consumer fraud a national priority and require relevant agencies to budget for it. Congress should authorize a federal advisory commission to help build the strategy.

I've said it time and again: You must be vigilant to avoid scams!

Best regards,

Whitney

P.S. I welcome your feedback – send me an e-mail by clicking here.