We hope you enjoyed our 1st Annual Hedgeye Investing Summit last week. What a week it was. We have almost 10 hours of investing insights from some of the sharpest minds on Wall Street.
We don’t want you to miss any key investing takeaways. That’s why, over the coming days, we’re going to deliver key highlights from the event.
Below is an excerpt from one of our favorite interviews – renowned short seller Andrew Left of Citron Research and Hedgeye CEO Keith McCullough discussing “The Art of Short Selling.” (CLICK HERE to watch the entire 45-minute interview, in which Left and McCullough discuss short selling, pot stocks, Tesla and how to spot “frauds, fads and failures.”)
* * * *
McCullough: We wanted to kick off the 1st Hedgeye Investing Summit with short selling for a reason. We think it’s a great time to be a short seller in America. There are plenty of opportunities out there. We wanted to start with one of the best-known short sellers, Andrew Left from Citron Research, who has not been shy to short companies in what has been a raging bull market.
What I really wanted to discuss with you, Andrew, is how you identify short ideas within your investment research process. And how you look for shorts.
Left: It’s a very difficult process. Every short has its own life. There’s not one specific theme that you would say that’s it. If you were shorting just on valuation, over the past few years you’re out of business.
Now, even though people say don’t short on valuation, what else would you short on? The market is made up of valuations. When people said 20 years ago, this stock is at 10 times and the rest of the market is at 7 times. I get that. Maybe then you don’t short on valuation. But when you have a stock trading at 35 times sales expected in 2022, how do I not short that?
So there are numbers on the screen, and these numbers get you to a valuation. But then there are frauds, fads and failures. Those are the three main themes for any short seller.
McCullough: That’s great. Let’s just get this out of the way. Isn’t it a trivial matter to say something is expensive or cheap? We all know that. What we don’t know is, precisely what you said, what are the fads and failures going to be. Do you agree with that?
Left: Most definitely. And also, what could really grow into their numbers? I’ll give you a good example: The difference between the Internet bubble and what we’re seeing right now in the Cannabis bubble. What you saw in the Internet bubble is that companies were being made that had moats and once they turned the switch, they had scalability.
I think a lot of what you’re seeing right now with the Cannabis bubble is companies that don’t have moats and aren’t scalable. So the valuations aren’t justified like some of the Tech bubble increases that we saw for so long.
McCullough: Since you went there, let’s do Pot stocks first then. You’ve seen these stocks go parabolic. How do you think about it top down?
Left: How does my language have to be on your show Keith?
McCullough: You can say whatever you want.
Left: Okay. Some of it is so f--king stupid I can’t even believe it. Recently, Cowen analysts took their price target on Tilray (TLRY) shares from $62 to $172 a month later.
Cowen, have you completely taken your credibility and thrown it under a bus? Just say nothing. It’s just so beyond ridiculous. These are not companies that have hockey stick-like growth.
Now, for the cannabis stocks, I understand the enthusiasm. I understand we’re a nation of people and, for some reason, marijuana and cannabis has been illegal for all this time. I get it. I get people are excited.
But being excited about something and having an investable idea are two completely different things.
McCullough: Tilray and Cronos (CRON), I think those are two stocks you don’t like. But let’s break it down. There are 300 investable stocks in that universe. We’re about to launch a Cannabis sector at Hedgeye and the conversations my analysts and I are having, at the bare minimum, are entertaining. A lot of the estimates right now are based on TAM (total addressable market). At the end of the day, do people just like pot stocks because the charts look good and they like pot?
Left: I’m pretty sure the tomato market is bigger than the pot market. So should we be bidding up the price of tomatoes? It’s a crop that gets grown and it will be sold. But most of all, unlike tomatoes, it will be highly regulated. There will be some winners. I put out a tweet out on Pyxus International (PYX) the other day and it’s up a lot. There is a legitmate company underpinning that stock.
So how about this, the whole space is frothy. But if you had to make a bet, at least give yourself the best chance that the company can grow into its valuation, versus a Cronos which is like a multibillion dollar company that I don’t even know what their story is right now. They’re just throwing out a bunch of announcements with a slick CEO from Wall Street and getting investors to buy it.
I’m also short a company in Canada right now, called Namaste. I think it’s a $700 million market cap. It’s a complete fraud. You can trade it here NXTTF.
McCullough: How do you risk manage short positions? If a stock goes against you what is the process to avoid getting squeezed?
Left: First of all, every day you re-check your thesis. Am I still a short? Is there still a catalyst involved? I just saw yesterday David Einhorn covered a nine year short. That’s beyond patience. The point is if you believe there’s a catalyst, you can own some out of the money puts, you can short the stock. Again, it’s stock specific. It’s based on the volatility of the specific stock.
McCullough: An investor is asking here in the Q&A, ‘How exactly do you define frauds?’
Left: A fraud is a fraud. When you get a fraud, it’s like ‘Oh my God, look at this. It’s a fraud.’ You get so excited and your mouth starts watering. And then you fight it. The best is when management comes out and says, ‘We’re not a fraud.’
What’s crazy is when you find a fraud and Wall Street doesn’t care. That happens. It just takes longer to prove it. Listen, when I exposed the Valeant situation and the network involved in Philidor, the first reaction by the company was, ‘We’re going to tell the SEC on him and we’re going to sue him.’ I thought, ‘Wow, that’s pretty wild.’
McCullough: So frauds are the best.
Left: Oh, yes. If you can articulate to Wall Street why it’s a fraud and you understand something the other shareholders do not know, then it’s the best.
McCullough: What is the top fraud that you’re looking at on your screen today? You mentioned that pot stock.
Left: How about this, any company that tries to blame short sellers – and you can’t take Tesla here because they do have a demigod-type leader and a product that’s compelling, no doubt. But if you run a company and you’re trying to blame short sellers you’re probably a fraud.
CLICK HERE to watch the entire 45-minute interview.
