Weekly Short Ideas Series (4/19/2020)

by 35nakedshorts

This is a curated list of the best short ideas published across the web. I boil them down into easily digestible blurbs, summarized below. I plan to do this as a weekly series. Unfortunately automod is quite strict about external links, so I don’t always link directly to the original report, but a quick Google search should turn these up.

Company: SCWorx Corp (WORX)

Short call by: Hindenburg Research on 4/17/2020

Thesis: SCWorx recently made news by announcing a massive deal ($35M/week) to purchase and resell COVID-19 tests, causing a rapid 434% explosion in share price. Hindenburg points out that the company is headquartered in a Regus rental office in NYC, its CEO previously pleaded guilty to felony tax evasion, and to cap it off, SCWorx’s supplier, Promedical, has a CEO who is a convicted rapist. That’s just on the supplier front. On the buyer front, SCWorx’s supposed $840M purchaser of test kits is a virtual healthcare company with just 3 employees listed online.

Company: Middleby Corp. (MIDD)

Short call by: Prescience Point on 4/15/2020

Thesis: Middleby Corp manufactures and distributes equipment predominately used in restaurants: ovens, ranges, fryers, rethermalizers, refrigerators, blast chillers, etc. This is a COVID-19 play based on forensic analysis of the company’s financials by Prescience Point. In interviewing Middleby’s customers and competitors, Prescience Point estimates that demand for foodservice equipment is down 85%. Furthermore, as up to 15% of all restaurants nationwide shut down permanently, the used equipment market will be flooded with supply. Even before the global pandemic, Middleby’s prospects were stagnant at best with declining organic growth, but Wall Street consensus bewilderingly expects Middleby to post record numbers for 2021.

Company: GSX Techedu Inc (GSX)

Short call by: Citron Research on 4/14/2020

Thesis: GSX provides online K-12 after-school tutoring services for Chinese students in various subjects such as English, Chinese, physics, chemistry, biology, history. Citron is jumping on the “China hustle” bandwagon with other activist funds, claiming that up to 70% of revenues are fabricated. Citron went to the great length of paying programmers to discreetly attend 20% of online classes offered and write scripts to capture web traffic, including the number of unique users online. Using this sampling methodology, they found gross discrepancies between the actual and claimed number of active users. They also find that GSX is rarely mentioned in local media, despite allegedly being one of the fastest growing companies in the online education sector.

Company: Rubicon Project Inc (RUBI)

Short call by: unbiasedobserver on 2/24/2020 (but became public on 4/9/2020)

Thesis: Rubicon is an adtech company that automates the buying and selling of digital ads. User unbiasedobserver points out three main catalysts that could spell trouble for the company. First, he notes that Rubicon currently earns a sell-side commission of 13%, which is more than double that of other industries: investment banking, real estate, etc., and he expects this to collapse in line with other industries. Second, Chrome browser is phasing out third-party cookies in two years, which devastates Rubicon’s intelligence and ad analytics capabilities. Finally, California’s Consumer Privacy Act goes into effect July 1st and places strict requirements on companies who sell consumer data. An analogous scenario might be Europe’s GDPR, which caused half of third party data vendors to go out of business.

Company: eHealth Inc. (EHTH)

Short call by: Muddy Waters on 4/8/2020

Thesis: eHealth bills itself as the “Expedia for health insurance”, allowing consumers to analyze, compare, and buy health insurance plans through its web applications. Muddy Waters alleges that eHealth is going with the good old tech darling strategy of losing money per customer, but making up for it in volume. eHealth began aggressive TV marketing spend in 2018 and 2019, decreasing the loyalty of their customer base and increasing the churn rate. Suspiciously, eHealth’s LTV (lifetime value) formula was adjusted to heavily weight the year 2017, the year before the churn rate increased. Substituting their own more conservative formula to calculate LTV, Muddy Waters estimates that eHealth loses $402 per MA (Medicare advantage) member.

 

Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence.