Hedge Funder Whitney Tilson’s Three Short and One Long Picks

Whitney Tilson the founder of the New York based hedge fund Kase Capital Management recently shared the slide deck of his “Robin Hood” Investor’s Conference presentation. The slide deck not only gave a peek into Tilson’s view on the economy and markets, but also revealed his top long/short ideas and the reasoning behind them. Whitney Tilson is cautiously positioned with very low long exposure because he thinks that the markets are in the overvalued zone. He also thinks that investors are complacent with the CBOE Volatility Index trading at decade lows. He thinks that the markets are in for volatile times given the high degree of uncertainty due the Trump’s win, Brexit as well as rising populism across the world. Tilson also summarizes by saying that while Trump may be good for stocks in the short term, he may not be favourable over the long term. In the article below, we take a detailed look at three short and one long idea.

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Whitney Tilson has Exact Sciences Corporation (NASDAQ:EXAS) as his biggest short position and recently added to his position after the biggest insider sales of $25 million. He had in fact recommended this stock as a short two years ago when the price was $23.86, but had not covered his position despite the stock falling to as low as $5. The stock declined after the USA Preventive Services Task Force had not included the company’s only product “Cologuard” as a recommended test for Colorectal Cancer Screening. The stock recovered in July after the same task force gave an A grade to Cologuard and six other screening methods.

Whitney Tilson thinks that the stock is still a great short and that the target price of the stock is $3 a share (cash on its balance sheet). The main reason behind his bearishness on the stock is that he does not think that the company’s test is better than the mainstream “FIT” test, which is much cheaper (23 times cheaper) and covered by most insurers. Competition is increasing for Exact Sciences’ Corporation (NASDAQ:EXAS) product and the commercial payor adoption for Cologuard will be much slower than what is priced into the stock. The financials of this company are pretty bad with losses accelerating as the company spends heavily on marketing, only to generate a modest amount of revenues. The quarterly burn of Exact Sciences Corporation (NASDAQ:EXAS) was $154 million in 2015.

Berkshire Hathaway Inc. (NYSE:BRK.A) is a stock that Whitney Tilson has become bullish due to the acquisitions of Precision Castparts Corp (NYSE:PCP) and Duracell which have increased the conglomerates earnings by 12%. He is bullish on Warren Buffett’s holding company because it provides more certainty in a world that is turning more turbulent. Berkshire Hathaway Inc. (NYSE:BRK.A) is Whitney Tilson’s second largest position with a portfolio weightage of 5.2%. He estimates that the intrinsic value is $292.5 which is almost 20% higher than the current market price of the stock.

Another short idea presented during the conference was Direxion Daily 20+ Year Treasury Bull 3x ETF (NYSEARCA:TMF). This is an ideal short for someone who believes that the interest rates on USA government bonds are going to increase. This is Tilson’s 3^rd largest short position at 2.6%. There are 2 reasons for shorting this security. The biggest reason is that this positioning will make money when interest rates increase resulting in a decline in bond prices. 20 year Treasuries have fallen by 40% over the last few months. The second reason is the benefit from the decay associated with levered ETFs. The only risk is that borrowing costs are quite high at 12% per year.

Whitney Tilson is bearish on Wingstop Inc (NASDAQ:WING) which is a chicken restaurant franchise business. Wingstop Inc (NASDAQ:WING) has a high margins and low capex business model which is typical to a franchise business. It has 949 Wingstop Inc (NASDAQ:WING) restaurants in 40 states (93% of units) and 6 countries, of which 98% are franchised. Though the company has shown strong revenue growth (15% CAGR) over the past 5 years, the stock price has essentially remained flat since its IPO in July 2015. Whitney Tilson is short on this stock because he thinks that it is highly overvalued at 62x trailing EPS and 12x trailing revenues. He thinks that the company’s business has low entry barriers and it faces strong competition from other chicken wing restaurants and fast food chains.

He seriously doubts whether the management can achieve its goal of developing 2500 restaurants given that the market is becoming saturated. He also red flags the fact that its prior owner Roark Capital dumped its entire stake extremely quickly (in 6 years) despite having a reputation of holding franchise businesses for an average period of at least 10 years. Whitney Tilson also highlights the fact that the company’s same store sales growth has been declining and its business is primarily centred on just two USA states. It is the second largest short position in his portfolio given that the stock is priced to perfection.

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