Andrew Left and Short-Selling a Company Into Bankruptcy

The recent New York Times profile on Andrew Left (@CitronResearch) is fascinating and worthy of a solid read. There are a ton of little nuggets in there even if, in some cases, it begs certain follow-up questions. The comments following the article are equally interesting, many of them decrying the author for pitching Left as this savior of the little man without any regard whatsoever for who might be affected by a stock decline of the sort suffered by Valeant Pharmaceuticals ($VRX)(spoiler alert: lots of Moms and Pops...but also a lot of hedge funds who checked into the "hedge fund hotel").

A few things left us curious:

1. Track Record. The article notes that Left has a positive track record. But unlike Jim Chanos, another reputed short seller, Left needn't disclose his holdings and manages his own money. So how does the author KNOW this? He backs up the statement with this: "On average, the value of companies he writes about drop 10 percent in a year, and some drop as much as 95 percent." Well, on average, how many of Left's investments does he actually write about? Isn't the denominator there important? 

2. Abstract References. Why not more detail behind the referenced jewelry chain masquerading as a subprime lender? Presumably this is Signet Jewelers ($SIG)(which has now sold its financing business)? Wouldn't it make sense to highlight a business that caters to that demographic?

3. Lacking Disclosures. Left's observation that companies don't disclose information for a reason is interesting. With negative free cash flow and increasing heaps of debt AND no transparency behind viewership of original content, Netflix ($NFLX) comes to mind. If the numbers were bananas, they'd presumably justify the high content costs, yeah? We'd think that, as a basic matter, any analyst trying to understand the billions spent on such content would want to know what some of the metrics are there. Similarly, Apple ($AAPL) doesn't line-item Apple Watch sales; instead, it embeds those sales in a catchall line-item of "Services." That, too, should give some cause for concern (though Mary Meeker says 25% of Americans now own wearables). 

Sheesh...the Hedge Fund Business is Rough. $VRX

Maybe the SEC will approve a quadruple levered index fund that effectively shorts hedge funds. $111 billion has been withdrawn from hedge funds as they, collectively, fail to match the S&P Index. The linked article cites Pershing Square Capital ManagementPerry CapitalEton Park Capital Management and Paulson & Co. as examples of fallen stars; it also highlights the ridiculousness of paying these guys 2-and-20 to go long in a hedge fund hotel like Valeant ($VRX). You can just as easily lose your money in a pharma index. As Matt Levine from Bloomberg says, "The giants of the earlier, more romantic age of investing are on their way out -- retired, running family offices, reinventing themselves as quant managers, or just reeling off consecutive down years." Zing. On the flip side, Steve Cohen is whipping it out and flicking off the regulators starting in '18 (firewall). So, there ARE growth prospects in the industry so long as you're already rocking billions of your own seed funding, some celebrity, and a f*ck you attitude that translates, in the minds of the fickle, into "alpha." Yield is yield and ya gotta get it somewhere. Who cares how?

Interesting Restructuring News

  • Financial ServicesOcwen Financial Corp. got pummeled this week with fresh allegations.
  • Pharma/Hedge Fund Hotels. We enjoyed this summary of Bill Ackman's involvement in Valeant. And this piece discussing Marc Cohodes' short-strategy vis-a-vis Concordia International.

  • Fast Forward. With Agent Provocateur (amusing write-up below, if we do say so ourselves) going bankrupt and L Brands (Victoria's Secret) reporting dogsh*t numbers last quarter, we figured we'd look at the lingerie space for a hot second and we found a lot of action. And it ain't good for the incumbents. It'll be interesting to see if Aerie's omnichannel strategy pays off - bold move to double down on physical stores these days - when Amazon looms right around the corner.
  • Rewind I: Groupon. As we foreshadowed might happen, Groupon dropped this bomb on Good Friday while markets were closed - a banal and cynical PR trick to try and avoid a bad news cycle. 
  • Rewind II: Sun Capital Partners. We have been beating up on Sun Capital Partners as its retail portfolio just gets uglier and uglier (see now Marsh Supermarkets, which has apparently hired Hilco to explore strategic options, and Vince, which got itself a recent downgrade). Perhaps CVC Capital Partners and Leonard Green & Partners have gotten the memo; the two PE firms appear to be exploring a sale of BJ's Wholesale Club which, in turn, probably means that any plans of an IPO are on hold. 

News for the Week of 3/12/17

  • Commercial Real Estate Backed Loans. Looks like J.C. Penney store closures could impair $30b of loans.
  • European Elections & CDS. Investors perceive greater redenomination risk in France and Germany.
  • European Retail. It seems the bloody retail phenomenon isn't exclusive to US retailers. Jack Wolfskin, a German producer of outdoor wear and equipment, is in the midst of a restructuring of its $365mm of debt. The Blackstone Group is the company's sponsor and PJT Partners is shopping the company. Meanwhile, Jaeger, a UK-based clothier is also on the block, with an administration within the bounds of possibility. AlixPartners is advising the company.
  • High YieldValeant PharmaceuticalsForesight Energy and Community Health Systems all issued new high yield debt this past week and what screams of a massive yield grab. No, we're not joking: this actually happened. And demand was so strong that upsizing took place. We repeat: "demand was so strong that upsizing took place."
  • Oil & Gas Fallout. Like we said last week, we're crushing Ramen so it's hard to feel sorry for a man pulling in $2mm and a $50k/month consulting fee, but its interesting to see some of the effects of the energy downturn - here, relating to Energy XXI's former CEO. 
  • Power. The Westinghouse saga got juicier with Weil and the Japanese Prime Minister basically saying put up or shut up. Meanwhile, FirstEnergy is involved in shenanigans and Exelon is now getting active
  • Private Equity History LessonA review of J.Crew's take-private transaction and private equity's affinity for dividends, long-term viability be-damned. 
  • Puerto Rico. Sh*t is getting real and people are starting to clamor for bankruptcy.
  • TelevisionNetflix is going after unscripted reality TV. Choice quote: "The competition should be scared out of their minds. These guys are monsters — they're coming in to play and play hard."
  • Uber. Expansion in India seems to be predicated upon a mountain of driver debt.

  • Rewind I: Five weeks ago we reported the following: "The Finish Line Inc. announced its sale of Jack Rabbit Sports this week (66 locations) for undisclosed terms. "Undisclosed terms" = GU gels and a jock-strap." Apparently, we were too generous with our characterization of the financial consideration. Something tells us this won't stop Peter J. Soloman from dutifully and opportunistically noting the tombstone on its pitch materials for the next big retail mandate.  See, also, this.
  • Rewind II: Looks like Avaya Inc. has a potential buyer in publicly-traded Extreme Networks Inc. for its networking business (for $100mm).
  • Rewind III: Store closures. Add Staples to the list (70 locations) and Signet Jewelers (165 stores). And here is one report on the failure of BCBG.
  • Chart of the Week
  • Chart of the Week II