One of the best ways to maintain a well-balanced stock portfolio is to diversify. Many consider themselves diversified by deploying capital in multiple sectors (Healthcare, Retail, Tech, Energy, etc…). Spreading investment dollars across various sectors will likely minimize variance, but at the end of the day, it is not real diversification in that all your positions are “Long.” To be truly diversified, a stock portfolio requires some “Short” positions to balance the “Long” positions properly. With that in mind, Bag thought he would make a case for 5 of his favorite stock “Shorts” in today’s blog. In the interest of full disclosure, Bag does have his money where his mouth is, as he is short all of these names - believing they are all headed much lower. He also recommends buying some out-of-the-money calls as insurance on Short positions to avoid getting GameStopped squeezed. Last but not least, please, do not trade off Bag’s recommendations. As always - DO YOUR OWN RESEARCH!
Tesla (TSLA - $183) … The pick of the litter. For the third time in 15 months, Tesla has announced more price cuts on all models. On average, their cars are priced 14% lower than in Jan 2022. While price cuts are likely to increase the number of units sold, they will also crush the already thin margins - meaning lower earnings ahead. Bag would be OK with the 14% drop in prices; provided there was a significant jump in volume to offset the lower margins. Unfortunately for Tesla, this is not the case, as they are guiding 2023 production to just under 1.8 million units, up about 2% from the annualized Q4 2022 production of 1.75 million units. The bottom line is 14% less money on 2% more cars.
For those who insist Tesla has proprietary technology in EV Batteries, they don’t. Their batteries are such crap, they no longer put them in their cars. If you buy a new Tesla today, you will likely get a battery made by Panasonic (or LG). While it could be argued Tesla has the best self-driving cars on the market, they are not even close to the “Fully autonomous” self-driving Elon has been promising (and charging for) for the last six years. Bag guarantees lawyers are sharpening their teeth right now in preparation for the upcoming class-action lawsuit over the meaning of “fully autonomous” self-driving. If Tesla is forced to refund what they have charged the last six years for their self-driving package, we are talking 11 figures in liability - yeah, 10’s of billions…..Last but not least, Tesla is a car company, and as such, their stock should be priced like every other car company on the planet…at about 8x earnings. Let’s assume they manage to maintain the $2.80/share they earned last year - although Bag has no idea how that is possible - and a fair price for Tesla stock would be $23.
2. Harley (HOG - $38)…. This one is a long term play. Harley has a stellar brand with quality products, and they make money - so why Short? Well … One of Bag’s primary sources of income for the last four decades has been liquidating estates, where we occasionally run across high-end collectible firearms. In the 1980s & 90’s, Among the most sought-after firearms were Lever action Winchester Rifles made famous in the late 1950s by Chuck Conner’s character in the “Rifleman.” We had a list of people who would rush over to pay us 3-4-5 Grand for every near-mint early manufacture lever action we could find. Unfortunately, most of the finer specimens were already sitting in private collections, so we didn’t see very many of them. But when we did, they sold quickly. Fast forward to 2020, where Bag was contracted to liquidate an estate that contained HUNDREDS of high-end Winchesters. The first thing that went through Bag’s mind was that these things were 3-4-5 grand 25 years ago; they must be worth more now. Shockingly those same Winchesters were now bringing in a paltry $1200-$1800 on average.
What Bag discovered was nearly all the buyers today are retirees in their 70s. They grew up in an Era where lever actions were highly coveted, but expensive, so most went without. But, now that they have retired with a few shekels put away, they are treating themselves. As these same 70-year-old collectors die off - there will be fewer buyers (think falling demand) …and to make matters worse, their heirs will be putting those Winchester collections on the market (think increasing supply). Falling demand and rising supply explain why prices have been dropping. All of which brings us full circle back to Harley. Most people buying Harleys today were raised in the 1970s, coveting the Harleys of Nicholson & Fonda from “Easy Rider.” With that generation now in their peak earning years - or newly retired with a few shekels put away - it’s no surprise Harley has done well the last couple of decades. But going forward - you just don’t see 20-somethings riding Harleys. Harley is about 15 years behind Winchester (Rifleman late 50s, Easy Rider early 70s), but in like manner, as the older generation dies off, Bag wonders from where the demand will come.
3. Doordash (DASH - $62). One of the Hazards of keeping interest rates near zero for years is money gets misallocated, funding unprofitable enterprises. The reason for this is there is virtually no cost for speculation. Imagine a bank borrowing a million dollars from the Fed at 1%, and loaning it to a tech company promising the moon. The interest payments on that million are a paltry $833/month. The tech company is happy because they have a million dollars in their checking account. The bank is happy because it has a million-dollar asset on its balance sheet. By the time the world figures out this company will not be delivering the moon, you would expect the bank to eat the loss - except - we now live in a world where a litany of poor decisions by banks leads to the Fed bailing them out with taxpayer dollars. This vicious cycle of zero-interest money …. thrown at speculative businesses which never make a dime … by greedy banks labeled as “too big to fail” … only to be bailed out by the Fed - has been going on for decades! It’s how we got PETS.com, ETOYS.com, and WEBVAN.com - just to name a few. This generation’s version of PETS.com is Doordash. They lost 700 million in 2019, 2 billion in 2020, 500 million in 2021, and 1.3 billion in 2022. They are burning through cash faster than a Kardashian planning a wedding.
If there is a path to profitability, Bag can’t find it. And even if there is one, consider one of the more interesting business stories of the last couple of decades: Blackberry. They were the first to demonstrate a viable market for pocket-sized mobile phones that could text, email, etc.…. Once they showed the world there was a market for what they offered, the big boys (Apple, Samsung, etc..) piled in and took the market away from Blackberry, sending them to bankruptcy court. In like manner, DASH is attempting to show the world there is a market for “to-your-door” food delivery. Bag is skeptical that the market is viable. However, In the unlikely event it is proven to be a viable market, it is probably only a matter of time until big-boy companies that specialize in to-your-door delivery (think Amazon, UPS, or FedEx) decide they want to take it over, sending DASH to bankruptcy court in the process.
4. RCI hospitality holdings (Rick - $75) ….. This one is not for the faint of heart and could take a while to come to fruition. RICK owns & operates high-end Nightclubs. They are currently trading near an all-time high. They make money and lots of it. One of Bag’s poker buddies (Tom) is a bartender at one of their clubs. Tom says it is business as usual to have a line of people under age 30 wrapped around the block, waiting to pay cover charges in the $hundreds just to get inside. Once inside, $50 well drinks and Thousand dollar bottles of wine/champagne are the norm.
To understand why Bag thinks RICK is a short, it is necessary to connect some dots. The first dot is Elon Musk firing 80% of Twitter employees immediately after taking it over. EIGHTY PERCENT! As a regular Twitter user, Bag can attest Twitter functions just fine with 80% fewer employees. The second dot is rising interest rates eliminating cheap speculative money for many tech companies. Going forward, Tech companies will have to stop burning cash and start showing profits. Every Tech CEO worth his salt has to be looking at what Elon did and wondering if they too, could fire 80% of their employees as a path to profitability. The third dot is taking note of what the lion’s share of employees (and the highest-paid ones at that) do at the average tech company. Answer: They write code. The fourth dot is Bag asking Tom, the bartender, “Where do these kids get the money for $50 drinks and $1000 bottles of wine?”. Tom responded, “Most of the regulars were from either the Crypto or Tech space, lately though, it’s just Tech.” The fifth dot is ChatGPT. While ChatGPT may or may not be the official birth of Artificial intelligence (AI), one thing is for sure. ChatGPT’s greatest strength is the ability to write code. Hmmm
When you connect all those dots, a world where tech companies start laying coders off by the thousands seems inevitable. When those layoffs start coming in mass, Bag suspects the under-30 tech-heads currently enjoying $50 well drinks and $1000 bottles of wine will find Clubbing, a tad unaffordable. They will be left to join their friends from the recently popped crypto bubble, who now spend their free time updating resumes on Linked-In. This will leave Nightclub owners like RICK without much of a clientele.
5. Homebuilders (XHB - $69) … You could pick any homebuilder; it does not matter - they are all in the same boat. The cost of Labor to build homes is rising faster than inflation. The price for materials to build those homes is also rising sharply. Building code obligations, regulatory oversight, and capital requirements have never been more extreme. Meanwhile, the pool of qualified mom & pop buyers is shrinking daily as mortgage rates are closing in on 7% - almost triple what they were just two years ago. Also affected by the recent rise in interest rates are a couple of the biggest buyers of residential real estate in the last few years, namely Blackrock & private equity. They can no longer buy up residential real estate supply and expect a return on their money above borrowing costs - (You can read in detail why this is fact by clicking here). Bag expects both Blackrock & Private Equity to become net sellers of homes in the next few years as savvy investors start to demand their cash back from these entities in order to park it in something safer & with a more significant yield - like US Treasuries. With supply likely increasing, demand falling, and costs soaring - the headwinds facing Homebuilders in the future is brutal. Bag is of the opinion the best way to play it, is to short the whole sector.
Honorable mentions, not quite cracking the top 5, were Starbucks (SBUX), Delta (DAL), and the S&P index. We will check back in on the picks from today’s blog down the road to see what Bag got right, and what Bag got wrong….
Hum, I think you make some very interesting points (and I enjoy your writing style).
My judgment, however, is completely useless : I have protected 10 of the last one recessions. I am temperamental a bear.
Harley, Doordash and Tesla … can’t say anything about the other but for these three here are my 5cent.
Harley is in a tight spot. As you described it’s customer base (wealthy older men) is dying out or figuring out they look ridiculous after 1-2decades enjoying their harley. Harley is extremely fearful of loosing its identity and thus can’t really innovate. A solution would be to go back to the roots and build lighter smaller more nimble bikes like they did post WW2 but I doubt they are able to pull off the balancing act. To do this huge investments would be needed and the risk would be still there. Harley biggest danger is the sentence - it’s not a real harley.
Doordash is interesting because here in SEA all specialized food delivery services have been incorporated into ride sharing businesses … either by M&A or from the start. But transportation is also still mostly on 2 wheels and transportation costs very low. There is extremely fierce fighting between the different competitors. With enough funding it was allways possible to join the market and not go bankrupt. As a consumer imwould say the winner takes it all is not applying to this market. Maybe it’s a decade long evolution but it seems that single market dominance is not achievable and not required either. Drone delivery will soon become a reality in the us so I totally agree that Amazon is just airing for the right moment.
Tesla - not sure with this one bag. VW ist currently discussing to stop all its IT development and just give up and handing the keys to the kingdom to apple/Google. Reality is they burn funds and still can’t even get anything done. Maybe Elon is overrated but then everybody else needs to be downgraded. Tesla has a realistic chance of being a real dominant power in automotive in the future. Sure the sharks will take the first opportunity to take Tesla down - think political enemies/all other car makers - but I don’t see them achieving it. The future is electric (if we like it or not) and Tesla DNA is electric. Soon luxury car brands will be nothing else than tech versions of Gucci bags or Calvin Klein glasses. Not even produced in-house, all coming out of the same factory with huge profit margins. I have no doubt these brands will still survive 100years longer but not as real tech companies. They will just be brands on a standardized technology plattform (something all carmakers are allready doing) but way more extreme. That’s the reason you won’t see a Google or apple car. Google and Apple is allready in every car and soon the brands and their shells will just be Gadgets and accessories to apples/googles ecosystem. Tesla is the only company with a clear vision to not let that happen to their cars and that what makes them a different beasts. Maybe your prognosis is becoming reality but I would not underestimate them - and be it for the incompetence of the others - many would argue they just can’t change and become a tech company (I mean all car manufacturers) but in reality it’s just money and a will. Herber Dies for example to last CEO of VW was fired. He basically was a 10% Elon musk (and I don’t even mean that negative) he understood where things are going and believed VW could take the fight. Well they threw him under the bus. Hope that makes sense what I wrote