Whitney Tilson Likes Home Group But Hears The Bear Case

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Whitney Tilson’s email to investors discussing his comments on At Home Group Inc (NYSE:HOME); Networking at charity events; Who’s earned 98% of the money in the hedge-fund industry.

charity events
rawpixel / Pixabay

1) Last Wednesday’s e-mail put a lift under the stock of home-decor-superstore chain At Home , even though I didn’t recommend it. I just noted that it had crashed from above $40 to nearly $5 over the past year and that there was a solid writeup on ValueInvestorsClub.com, so I was taking a closer look.

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Q2 hedge fund letters, conference, scoops etc

It’s not a slam-dunk, that’s for sure. Friends of mine posted two particularly smart comments/questions on the Value Investors Club message board. The first one highlights the competitive challenges many companies, not just At Home, face from money-losing Internet businesses:

I am not putting in more time to investigate the stock because I’m guessing it would be very hard for me to overcome this conceptual hurdle.

Wayfair (W) is still selling dollars for 90 cents and as a result is still growing its U.S. business by 38% YoY. Almost all the growth comes from taking market share from incumbents like HOME. I think Wayfair is a bad business with a bad strategy, but the stock market is rewarding such strategies more than it ever has before, so Wayfair’s market share grab is set to continue as far as the eye can see.

Fun fact: here is the progression of consensus 2020 EPS estimates for Wayfair, as the revenue projections and stock price go higher and higher:

Sept’17: $1.75

Dec’17: $0.71

Mar’18: -$0.23

June’18: -$1.09

Sept’18: -$1.95

Dec’18: -$2.97

Mar’19: -$4.19

June’19: -$4.62

With each $2 billion of new U.S. revenue (current annual growth pace), Wayfair has another $200m of annual advertising spend to play with while maintaining the same margins. Although Wayfair’s percentage growth rate is slowing modestly, the absolute dollars of U.S. home goods spend that it is poaching are going up, not down (e.g. U.S. revenue growth was $1.0B in 2017, $1.7B in 2018, probably $2.2B in 2019…).

You can find this general fact pattern all over the place, in many different niches: The new competitors are willing to lose money for many, many years to take market share, and if the incumbents do nothing or merely try to preserve margins, they are dead or close to it. In few niches are they deader than brick-and-mortar retail. The other online sellers of home goods and furniture are not stupid, they are to some extent playing Wayfair’s game. Which means HOME is getting hit by 5-10 attackers and quasi-attackers, not one.

So what is HOME doing about it, other than bleeding market share and margins? Can they do anything?

Potential acquirors know all this also.

Another friend posted this:

Trying to get to what is a normal EBIT or EBITDA margin here. Their GM of 32% is extremely low for furniture, where you would expect to see 40-50%, as the other costs are high (need large space/rent, salespeople, advertising and promotions for demand creation, etc.). It seems like they operate in a very competitive space – the low end – where they could be competing with W, TGT, WMT, HD and LOW, TJX, and many others with more sourcing power/scale, depending on which product type.

It’s not easy to make 7.5% EBIT at these price points – not sure how they did 10-12% before. If you [give] them credit for CY20 achieving sell side sales estimates of 1600, at a 7.5% EBITDA margin (TTM = 5.9%, this year estimate = 7.3%), that’s 120 in EBITDA. [At] 8x, that gets you to $6.25 (current quote). Say they get back to old margins and can do 10.5% EBITDA by slowing growth, maybe you get to 140 in EBITDA, but lower topline gets lower EBITDA multiple. At 6.5x, that’s about $5.50. What am I missing that justifies $15? I don’t see PE paying >10x for any retailer in the retail environment.

Am kind of curious how they made so much money previously on such a low GM. How do they explain that?

2) The Take ‘Em To School charity poker tournament last Wednesday night that I co-chaired was a smashing success. This article captures it well: ‘Billions’ Writer Outguns Hedge Fund Titans at Charity Poker. Excerpt:

[Marc] Lasry, an owner of the Milwaukee Bucks, was next to former Knicks players Charles Smith and John Starks. David Einhorn was also on that end of the table, telling Starks when they sat down, “I’ve seen you play basketball.” Einhorn also tried to get Sabat to keep playing instead of schmoozing. “John! Come back, you have a decision to make,” Einhorn said.

[Brian] Koppelman was on the other end with Ben Mezrich, who is one month into his first television gig in the writer’s room for season five of “Billions,” and Kevin Pollak, the actor and comedian who plays Taylor’s dad on the show.

Here’s a tip for anyone in the hedge-fund business (or looking to break into it): You should take advantage of every opportunity to go to charity or political events where there’s great networking. Where else might you have the chance to meet titans of the industry like Lasry and Einhorn?

Often the entry price is fairly reasonable. For example, you could have come to Wednesday’s event, which stretched from 6 p.m. to 1 a.m., with unlimited food, drink, and schmoozing, for a $250 donation to a great charity. You would have had great fun – and might have advanced your career.

You see, this isn’t an industry where you get a job by submitting your resume to the human resources department (most funds don’t have HR departments!). Instead, you need to find a way to connect directly to the person who’s doing the hiring – generally the founder/portfolio manager.

Consider the difference between these two openings:

Dear [name of fund manager],

Like 100 other people just like me, I’m writing you out of the blue. You don’t know me, but nevertheless I hope you’ll interview me for a job…

Good luck with that…

Now consider this:

Dear [name],

It was a genuine pleasure meeting you at the charity poker tournament on Wednesday night. [If you can, throw in something like: “Congratulations on making it to the final table!”]

I enjoyed our conversation about [a stock of mutual interest or whatever you talked about].

As I mentioned, I’m looking to make the jump from my current position [as a banker or whatever] to the buy side. Might you have an opening for a smart, hard-working analyst with a nose for undervalued stocks?…

Which of these two applicants do you think has a better shot at getting a job?

3) Incidentally, I’m not saying that hiring via personal networks and advancement via personal relationships is the way things should be. It results in an extreme lack of diversity. When senior management mostly hires folks just like them, the result is very few women, African-Americans, or Latinos in senior hedge-fund positions.

(For more on this, see these two articles I published on the New York Times web site: Evaluating the Dearth of Female Hedge Fund Managers and A Deeper Conversation on Women in Hedge Funds.)

Let me put it this way: since I entered the business 20 years ago, hedge funds, collectively, have easily earned hundreds of billions of dollars in profits. I suspect that this is the largest, fastest accumulation of wealth in human history, perhaps rivaled only by the tech sector where, interestingly (and not coincidentally), many similar dynamics are at work.

Of this enormous pool of money, I’d estimate that 98% was earned by white or Asian men, maybe a third of whom went to a half dozen top schools. I’m not exaggerating – trust me, I’m one of them.

Like it or not, this is how things are. So if you want to break into and/or advance in this industry, it helps a lot to be a savvy networker. And there are few better places to network, I’ve found, than certain charity events.

Best regards,

Whitney

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