By Jacob Wolinsky. Originally published at ValueWalk.
Whitney Tilson’s email to investors discussing his talk to IESE Business School students; Berna Barshay on cruise operators and Marriott; he is in the NYT; how he quickly fixed his mistake of taking the coronavirus too lightly.
Q1 2020 hedge fund letters, conferences and more
Tilson’s talk to IESE Business School students
1) My friend Professor Marc Badia of IESE Business School has invited me on a few occasions over the years to speak to his global class of MBA students.
I was happy to do so again yesterday, via webinar, which you can watch here (69 minutes). In it, I introduced myself, discussed the coronavirus crisis, and then took questions covering a variety of topics:
- How you must track not only coronavirus cases, but hospitalizations and deaths
- The importance of antibody testing
- What I’ve done with my own savings in the past six weeks
- Is it time to take some profits after this recent rally?
- The bear case – and why I think it’s unlikely
- The market wasn’t in a bubble prior to this crisis
- I’m not a value investor, but a “make money” investor
- Why stocks could “melt up” starting in the fourth quarter
- How to avoid value traps
- Buy stocks with earnings per share (“EPS”) going from $1 to $5 – and sell short ones doing the reverse
- Valuation matters at the extreme, like with Zoom Video Communications (ZM)
- Why I like Altria (MO) and Amazon (AMZN)
- Bill Ackman’s short of MBIA (MBI) and recent CDS trade
- My short of Lumber Liquidators (LL)
- My work at the field hospital across the street from my building
Berna Barshay on cruise operators
2) My newest colleague, Berna Barshay, shared these comments on cruise operators:
I was in shock two weeks ago when Carnival (CCL) managed to raise almost $6 billion in new debt capital at the height of the COVID-19 panic. Talk about pulling a rabbit out of the hat!
If there’s one business out there that strikes me as being at risk of permanent impairment, cruise ships would be it. Not only will the ship operators have to go months – or even as much as a year – without revenue, the public awareness of the fact that they have always been floating petri dishes has hit all-time highs.
I have historically been favorably inclined to this subsector because consumers love it, and cruises offer unequaled bang for the buck. There’s no cheaper way to travel on a per day basis, when calculating all-in lodging plus food and beverage costs per traveler.
Early this year, I was actually contemplating taking a cruise for the first time in my adult life this summer… something that clearly won’t happen. And I’m not sure it will ever happen now… Between the high-profile deaths on the Diamond Princess and the images of full ships parked for weeks outside the port of Miami, unable to dock, even as COVID-19 ripped through their halls, I’m not sure this previously attractive, “bang for the buck” vacation will ever be for me.
The big question is how many of the legions of loyal cruise goers will have the same reservations I have. Despite the lack of revenues facing the industry in the short to intermediate term and the big existential questions that overhang the industry in the long term, CCL raised those funds, albeit at a steep price, paying 11.5% on $4 billion of senior secured notes (down from initial indicated pricing of 12.5%) and 5.75% on $1.75 billion of convertible notes.
Despite the hefty price, CCL shares are up more than 50% since the deal, which probably gives them runway to survive well into 2021, even if revenues remain at $0.
Berna Barshay on Marriott
3) Berna also commented on Marriott (MAR):
Yesterday, Marriott, which is holding onto its investment-grade rating by a thread (currently BBB-, with its outlook lowered to negative by Moody’s yesterday), sold $1.6 billion in five-year notes priced to yield 5.75%. The company had hoped to raise $1.5 billion at 6%, and initial conversations were supposedly at the 7.25% level, so the deal was upsized at a lower cost to the company. This was an excellent result for Marriott. Rumors were that the deal was 13 times oversubscribed, with a $20 billion order book.
Even among the most bullish investors, you would be hard pressed to find someone who would argue that there will be a “V-shaped” recovery for Marriott. Clearly the Fed’s activity – as unprecedented as it is – is propping up the debt markets considerably, which is spilling over to the equity markets as well, driving performance.
It’s amazing what a difference two weeks makes! Or as a bond hedge fund manager I know said, “What a difference one new buyer to the market makes – when that new buyer is the Fed!”
Speaking of Marriott, I wanted to highlight a remarkable video released a few weeks ago by its longtime CEO, the highly respected Arne Sorenson, who received the “CEO of the Year” distinction in 2019 from Chief Executive magazine. The video – directed at employees, customers, and shareholders – was widely lauded for its candor and its raw emotion, something you don’t see very often from Fortune 500 CEOs.
This should be required viewing by companies preparing to face their stakeholders during the upcoming first quarter reporting season.
Note when Sorenson says that COVID-19 will be worse for Marriott than the Global Financial Crisis and 9/11 combined. With roughly 80% of hotel rooms in America currently vacant, that is statistically true, though still a remarkable statement to hear.
The New York Times Mentions Tilson
4) This nice article in today’s New York Times about the field hospital at which I’ve been volunteering the past couple of weeks, Treating Coronavirus in a Central Park ‘Hot Zone’, mentions me, though not by name.
I posted my video about my experience at the hospital, which has nearly 10,000 views, here.
Taking The Coronavirus Too Lightly
5) Alas, not all press is good press…
An article in The New Yorker this week is about hedge-fund guys who have profited from the coronavirus pandemic. Since I haven’t run money in years and certainly didn’t profit as the market crashed – I took my lumps like everyone else, though I did put a lot of cash to work – I was surprised to see myself in the article.
The author’s main criticism is that I not only took the coronavirus too lightly, but advertised this in my personal e-mails to friends and family.
My response: mostly guilty as charged.
I tend to be a risk-taker – for example, I ride my bike in New York City every day and have done some pretty hairy climbing on mountains like the Matterhorn and Eigen, and am training to climb The Nose of El Capitan later this year. I’ve been lucky so far – I’ve never broken a bone or spent even one night in a hospital – so perhaps this gives me a sense of invulnerability… which led me to dismiss the terrible danger posed by the coronavirus – if not to me, then certainly to millions of others.
So shame on me for telling anyone to not worry and continue skiing, taking flights, etc.
But I want to be clear: I wasn’t saying these things publicly to the nearly 40,000 readers of my Empire Financial Daily or my many thousands of paid subscribers.
In my report to Empire Investment Report paid subscribers on March 9, entitled “The Coronavirus Panic Is Overblown, So It’s Time to Buy” (you can read a summary in my daily e-mail here), I wrote:
[Investors] are only focused on the rapid rise in coronavirus cases in a handful of countries – and the fact that nobody knows with certainty how bad things will get. But is a full-blown panic – like what we’re seeing today – warranted?
We think not…
However, we want to make two things clear. First, we are giving investment, not medical, advice. To be successful as an investor, you must be willing to accept uncertainty and take risks, because if you wait to buy until the skies are clear, stocks will have already rallied. But when it comes to the health and safety of you and your loved ones, we’d tell you the opposite: don’t take unnecessary risks (however you define that)…
Note that I didn’t minimize the dangers of the virus. I was simply doing my job: giving the best investment advice I could, amidst the chaos and uncertainty of that time. (And, you might be surprised to hear, the market is up slightly since then.)
But there’s no doubt that I initially didn’t take the virus seriously enough. However, I recognized my error quickly, which underscores an important investing lesson…
While it’s ideal to be correct about something – a stock, pandemic, person, etc. – right off the bat, all of us sometimes make mistakes in our initial judgements. That’s OK – as long as you have the humility, willingness to do more work, open-mindedness, and wisdom to fix your mistake.
That’s what I did with Netflix (NFLX) nearly a decade ago. I had foolishly shorted the stock and taken a beating… but (to make a long story short) I met with CEO Reed Hastings, realized my mistake, and covered my short. Then, after the stock collapsed by nearly 80%, I bought it – and it turned into one of the greatest stocks of all time.
Similarly, I quickly realized my mistake regarding the coronavirus and increased my warnings about it within days. For example, in my March 12 e-mail, I wrote:
I remain cautiously optimistic that we will avoid a worst-case scenario without the draconian measures being taken in those two countries. But quick, decisive, and smart action is necessary…
To be clear, I am not saying we should be complacent.
While I think the stock market sell-off has gone too far (as I discuss below), I think that we should take very strong measures at the governmental and institutional levels – such as those Kristof recommends – and also take some reasonable personal steps toward social distancing…
There are a lot of unknowns and the range of outcomes is very wide, so we need to take strong measures immediately, monitor the situation closely to see if these are sufficient, and, if not and a worst-case scenario starts to unfold, implement ever-stronger steps.
I echoed similar warnings to take the virus seriously – but expressed optimism as an investor – again and again at every opportunity since then.
Best regards,
Whitney
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