Whitney Tilson’s Q3 Investor Letter: Two Short Bets and Three Favorite Long Picks

Whitney Tilson‘s Kase Capital holds a relatively modest equity portfolio and it has recently issued its third quarter letter to investors, revealing a 3.6% loss in September, underperforming the S&P 500 by less than 1.0 percentage point. Overall, the fund is down by 8.5% year-to-date, versus the 5.3% decline for the S&P. In the letter, the fund mentioned several long and short positions that played important roles in its performance and provided its outlook on these companies, and we’ll reveal these thoughts below.

Whitney Tilson is just one of over 730 investors that we have in our database whose stock picks we analyze every quarter through their 13F filings. Through extensive research, we have determined that imitating some of the stocks that these investors are collectively bullish on can generate significant returns over the long-term. However, the key is to focus on their small-cap picks, rather than their large- and mega-cap stock picks, since small-caps are usually less efficiently priced. Our strategy imitates a portfolio of the 15 most popular small-cap stocks among the funds we track and it has returned 102% since August 2012, beating the S&P 500 ETF (SPY) by 53 percentage points (see more details here).

Let’s start by taking a look at the two short positions in Kase’s portfolio, namely Lumber Liquidators Holdings Inc (NYSE:LL) and Herbalife Ltd. (NYSE:HLF). So far, the bet on Lumber Liquidators has played out well, with the stock down by nearly 75% year-to-date. Tilson covered 20% of the position in August, but kept the rest, believing that it might lose even more ground. In fact, the investor considers that there is a “decent chance” that the stock is a zero and an even greater likelihood that it will decline to single digits. Moreover, according to Tilson, Lumber Liquidators Holdings Inc (NYSE:LL) is facing many problems related to its management, aside from lawsuits from regulators. Other investors are also fleeing the company. During the second quarter, the number of funds from our database with long stakes in Lumber Liquidators Holdings Inc (NYSE:LL) declined to 14 from 28, while the aggregate value of their stakes slumped to $69.57 million, though still representing 12% of the company. 

On the other hand, Kase’s short stake in Herbalife Ltd. (NYSE:HLF) was not so successful, with the stock 46% in the green year-to-date. However, Tilson maintains his optimism regarding the bet, considering the company’s decline in almost every market, except China, and believing that the pressure from U.S regulators will catch up with the stock’s price.

“At today’s price, I view Herbalife as an absolute gift and if it weren’t already a substantial short position, I’d be adding to it,” Tilson said.

Tilson’s opinion on Herbalife Ltd. (NYSE:HLF) is shared by another investor, Bill Ackman, who is also shorting Herbalife. However, 38 other investors from our database are bullish on the company and held over 38% of its outstanding stock at the end of June.

On the next page, we are going to discuss three stocks that Tilson is long, namely Berkshire Hathaway Inc. (NYSE:BRK.A), Platform Specialty Products Corp (NYSE:PAH), and Micron Technology, Inc. (NASDAQ:MU).