The few short sellers who remain after Nate Anderson's retirement; Muddy Waters' bearish report on FTAI Aviation; My banking-expert friend still thinks Willis Lease Finance is a great stock idea; Bearish reports on AppLovin
1) In my January 21 e-mail lamenting the retirement of Nate Anderson of Hindenburg Research, I wrote:
Some investors (and all management teams of targeted companies!) demonize activist short sellers. But as I've written many times, investors should celebrate them.
I referenced my July 3 e-mail, where I discussed this in greater depth:
As I've argued in hundreds of my e-mails over the years, the stock market is filled with hype, fads, frauds, and plain old overvaluation. This leads to many wildly overvalued stocks – and huge losses for average investors duped into investing in them.
There are huge forces at work pushing stocks higher than they should be, led by company executives, who stand to make millions (if not billions) of dollars if their stocks go up a lot, even briefly and unsustainably.
They, in turn, are almost always cheered on by Wall Street "analysts" (I use that term loosely, as most simply parrot what companies tell them) and the media.
As I continued, there isn't much protecting investors:
Regulators can't do anything about hype and overvaluation, just fraud – and are so outmanned and outgunned that they can only address a fraction of it (and even when they do, it's usually long after the stock has crashed).
So short sellers – especially those courageous enough to go public with their work – are a critical factor that can protect investors, as hundreds of examples and lots of academic research show.
With me, Jim Chanos (Kynikos), Andrew Left (Citron Research), David Einhorn (Greenlight Capital), Bill Ackman (Pershing Square), and now Nate Anderson out of the business of activist short selling, there aren't many left. This Financial Times article profiles the best known of those who remain: Last men standing: the short sellers who remain after Hindenburg's exit. You can see their recent track records in this chart:
2) Activist short seller Carson Block of Muddy Waters recently published a bearish report on FTAI Aviation (FTAI), which you can read here. Here's a summary:
Muddy Waters is short FTAI Aviation because its financial reporting is highly misleading. We believe revenue from true maintenance and individual off-the-rack module sales are materially lower than reported. FTAI, in our view, is misleading investors by reporting one-time engine sales as Maintenance Repair & Overhaul revenue in its Aerospace Products segment. It appears that FTAI's [Aerospace Products] revenue growth story is due to trading whole engines (i.e., asset sales). We estimate ~80% of FTAI's Aerospace Products adjusted [earnings before interest, taxes, depreciation, and amortization] is gains on sale, which we believe is largely from selling whole engines. The goal of these misrepresentations appears to be to generate a valuation materially greater than that of a leasing business. Fortress sold significant stock in a May 2024 secondary offering on the back of FTAI's misleading narrative.
3) FTAI is in the same business as Willis Lease Finance (WLFC), which remains one of my banking-expert friend's favorite stocks – despite its nearly 300% run-up since he first shared it with my readers on February 8, 2024. He shared why in my January 14 e-mail, writing:
WLFC has been the biggest winner and continues to be our primary stock of interest. Of the three stocks we mentioned, WLFC is the crown jewel worthy of the most in-depth discussion.
We recall you giving your readers the advice about letting your winners run, and WLFC is a textbook example.
WLFC is the highest conviction investment we have made in our entire investing careers, and despite the stock's move higher it remains our highest conviction investment. Every aspect of the aircraft engine leasing and maintenance industry is booming due to supply chain disruptions, engine recalls, and industry capacity constraints. Even if travel slows it will likely be 3-5 years before the industry returns to a reasonable equilibrium. Willis has spent the past ten years building the business for exactly this environment and we believe the earnings growth in 2025 will confirm this.
For 2024 we expect WLFC to earn close to $20/share once Q4 is reported, and in 2025 we believe they could earn $35-$45 per share as lease rates re-price higher and maintenance revenue grows. Even a 12x multiple on the low end of this range doubles the stock from the current price.
Does Muddy Waters' bearish report on FTAI change his view on WLFC? Not at all, as he explained in a recent e-mail to me:
The issues at FTAI are purely focused on their accounting and reporting – it has absolutely nothing to do with the industry as a whole, which continues to be firing on all cylinders.
For someone who really understands both companies, the report is actually a positive for WLFC given WLFC is on the completely opposite end of the spectrum from an accounting perspective. The Muddy Waters report even has a couple of references to WLFC and how they treat depreciation versus how FTAI does. Beyond the depreciation topic, WLFC's maintenance income related to long-term leases is currently meaningfully under-reported due to how they account for it.
He gives a simple analogy:
The easiest way to explain it would be to compare it to a rental car. Say your bike is stolen and you decide to rent a car, but there are virtually no rental cars available due to strong demand and all the rentals have a weekly fee plus they also make you pay per mile. You rent the car for a week, but after that week you still want the car and you realized if you turn it in you likely won't get another car so you extend the rental for another few weeks. Your credit card is charged for the weekly fee, but all the per mile fees aren't charged until you return it.
This is how WLFC accounts for the maintenance component of their engine leases, and in this environment where there is a massive engine shortage nobody wants to return an engine, so many of the leases get extended and that maintenance income recognition gets deferred.
Currently there is a very large build up of income to be recognized in the coming quarters.
And he concludes:
Lastly, FTAI has virtually no tangible book value whereas WLFC has a stated book value of over $75/share.
However, given they depreciate the engines and carry them at the lower [end] of depreciated value or market value, we estimate that there is somewhere in the range of $700-$800 million of hidden value if the engines are marked to market (compared to only $1.2 billion of market cap today versus $8 billion at FTAI).
The company disclosed $400 million of hidden value using 12/31/23 appraisals but based [on] the increases in engine values in 2024 that number will grow meaningfully when the company discloses it in the coming months.
We would say any weakness in WLFC is a great opportunity given FTAI's issues are completely unrelated.
Thank you, my friend!
4) Though she's not mentioned in the FT article and I don't know her personally, I think activist short seller Lauren Balik is likely right that AppLovin (APP) is a stock to avoid, even before reading her two reports published last month: AppLovin is a Round Tripping Hellhole and How AppLovin Gooses Revenue.
There are three reasons why my "spidey sense" leads me to this snap judgement...
First, the totally stupid name: AppLovin?! Please... (For another example, see the U.K. online retailer in the FT chart above targeted by ShadowFall: Boohoo.) Just about every company I've ever seen with a goofy name has been a failure – the only exception I can think of is Lululemon Athletica (LULU).
Second, the stock chart: Two years ago, this stock was around $10. It closed last Friday at $369.59... That just screams "bubble!"
Lastly, the valuation: After its more than 3,500% gain in two years, AppLovin trades at 30 times trailing revenues, 64 times enterprise value to EBITDA, and 112 times earnings per share. As of last Friday, its $124 billion market cap is higher than that of Starbucks (SBUX), Nike (NKE), Lockheed Martin (LMT), and United Parcel Service (UPS)...
I would bet a lot of money that those four blue-chip stocks end up outperforming AppLovin.
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.