Short Selling Pitfalls and Ideas from Whitney Tilson
by Travis Johnson, Stock Gumshoe | September 9, 2014 12:45 pm
Notes from the Value Investing Congress
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Source URL: https://www.stockgumshoe.com/2014/09/short-selling-pitfalls-and-ideas-from-whitney-tilson/
Hi Gumshoe. New to the game of options. Any chance you can walk me through what you did?
Didn’t end up getting a fill on the order, but what I offered to do was buy put options.
Put options are the right to sell a stock at a specific price (“strike price”) before a specific date (“expiration date”). If you buy them, that means you are being bearish on the stock or want to buy some insurance against the stock declining.
If you buy a put on EXAS with a $15 strike price and a January 2015 expiration, for example, that means you’re betting the stock will fall below $15 between now and mid January. That put contract right now goes for about $1 per share (options contracts are almost always for 100 shares, so it’s actually $100 per contract), so you’d need the stock to fall below $14 for it to return a profit for you. If it goes to $10, your put option in January would be worth $5, which would be a 400% return for your option contract. If EXAS is still above $15 at the expiration date (it’s around $22 now), the option contract would expire worthless and you lose the full $100. Most people do not exercise options, they just buy or sell to close the contract (in this case, you’d sell the contract you had bought) for something like the exercise value.
Options are often illiquid and often trade at a very big premium, particularly for smaller stocks like this — the contract I looked at had a wide spread and my bid wasn’t taken so I didn’t end up doing anything.
The Exact (EXAS) short was a terrible idea by Tilson. Fundamentally he simply didn’t understand the company, the problem or the solution.
I’ve been long the company since 2008 and written about it on MarketWatch more than once: http://www.marketwatch.com/story/a-very-exact-opportunity-in-biotech-2014-04-04
A few things. The “ick” factor is just funny. Compared to an FIT, it’s far less “icky.” I think compared to a pipe in the back end it’s less “icky” too.
Let’s look at numbers, Reimbursement came in at $498/test by CMS. The retail price will drag CMS price slowly HIGHER over time as that’s how the process works after initial pricing,
FIT largely took over the FOBT market in just a few years. Cologuard includes an FIT and will take over the FIT market about as fast. With an uptick in compliance that is being pushed by ACA, this test will be doing about 4m annually by decade end. That means about $6 EPS.
That doesn’t include international sales or pipeline development which is going to be robust with a test for pancreatic cancer and stomach cancer destined for Asia (stomach cancer is more pervasive there).
The company is cash rich, has great management and connections, a huge market it will likely dominate and a pipeline that is impressive.
The short thesis for EXAS is a bad one. You might choose not to invest in EXAS, which I think gets into the $60 – $100 range by decade end, but at least stick to betting against bad companies with deteriorating fundamentals, not good ones that might or might not be great.
FYI, EXAS has quietly doubled in the past couple months (though it’s still well below where it was in the Fall of 2014, when it was such a “hot ticket” stock and Tilson talked about his short thesis). Here’s a summary of a note from one of the analysts that follows the stock:
“EXACT Sciences (EXAS 12.46) target raised to $15 from $10 at Mizuho. Firm notes EXAS posted a strong, well executed quarter as test volumes exceeded guidance and estimates. While that helps lower the 2H ramp needed to hit full year test guidance, the ramp remains significant and remains an area of concern for us. They also think valuation has now returned to frothy levels, leaving little room for error. They raise their PT on the solid results, but they remain on the sidelines, and prefer CPHD as a molecular diagnostic play” (from Briefing.com)