Hedge fund manager Whitney Tilson, managing partner at T2 Partners, took a break from the Darden Value Investing Conference at University of Virginia today to do a quick interview at CNBC.
In general, says Tilson, when considering shorts the firm looks for broken business models, terrible balance sheets and terrible management teams. Tilson says one recent short, OpenTable (OPEN), is an exception.
“Generally we don’t short good businesses with good managements, market leading positions. But when the valuations get truly extreme, yes, we will short them. And OpenTable is trading at 164 times trailing earnings, 70 times next year’s estimates. It’s trading at 18 times sales. There’s just no possible way that this company can grow into this valuation in our opinion, and fair value is well south of 50-60% decline from here.
“We peg intrinsic value right about where the stock was about a year ago. Shortly after its IPO, it was trading in the mid twenties. And that seems a fair value for a good company. That’s already a pretty high multiple right there. The stock’s over $60 today. It’s just gotten caught up in all the momentum.”
Tilson said the QE2 announcement brought back the “animal spirits” to the market.
“Popular hot momentum stocks are just ripping and they are getting way ahead of themselves valuation-wise. We are finding a lot of great short”, he added.
Another short taken by Tilson is Netflix (NFLX).
“If you’re gonna be in the short selling business- first of all, you have to size things small in a very diversified way. We’ll take 10% positions on the long side, and 1 or 2% position is big on the short side. If something starts to run away from us, maybe we trim it to manage risk, maybe we switch a short position into a put position. So, we currently own shorts and puts on Netflix. Again, it’s like OpenTable, a very good business. But the valuation is very extreme, and we think the transition to a streaming video business model is gonna put a lot of pressure on their margins. And in fact, last quarter the stock ripped upward on the quarter. But we saw declining margins and sequentially earnings last quarter to the most recent quarter went from $0.80 down to $0.70. So, sequentially declining earnings for something trading at 67 times earnings just doesn’t make any sense to us.
“A good business like Netflix,” he added, “well managed, nice subscriber growth, but we think they’re just gonna have to really pay up for streaming content. Particularly for the Stars deal, which is gonna be renewed. Currently they’re paying an ultra low price for most of their streaming content. Their best streaming content is being provided by Stars. We think they’re gonna have to pay 8-10 times as much money as they’re currently paying when that contract gets renewed. You know, given all of those warnings flags, it should probably trade at 20 times earnings, and it’s trading at 67 times earnings.”
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