Our in-house contrarian Mike Alkin returns to the podcast. Mike is editor of Moneyflow Trader, where he specializes in discovering mispriced sectors and companies… helping investors profit as stocks move lower.
Mike discusses one of his current favorite short ideas… But he’s not all bear. He also shares one sector he’s bullish on right now [12:41].
I just returned from a business trip and have a wonderful rant about my travels—plus an airline stock you should avoid.
And in my educational segment [52:55] I break down the red flags behind two high-profile stocks.
Wall Street Unplugged | 664
Four “fan favorite” stocks… and why you should short them
Announcer: 00:00:02 Wall Street Unplugged looks beyond the regular headlines heard on mainstream financial media to bring you unscripted interviews and breaking commentary direct from Wall Street right to you on mainstream.
Frank Curzio: 00:00:16 How is it going out there? It’s April 10th. I’m Frank Curzio, host of Wall Street Unplugged podcast where I break down the headlines, and tell you what’s really moving these markets.
Frank Curzio: 00:00:31 I’m not sure how American Airlines is still in business. I mean, I’m all for 10 at least over the last two years flying with them. I know somebody like, “10 times? You flew them 10 times over the past 24 months?” Well, you guys know I’m on the road a lot, at least twice a month, sometimes three times, visiting companies, investors, going to conferences, speaking at conferences. But this week, this was Monday, days ago, I had to fly to Baltimore to tape a shoot for our next promotion, which by the way I think is going to be amazing and really good. And the company I’m talking about, it’s not just a name that you can make money on, which I really believe you will. But I really got attached to this story since I interviewed some of the top people in law enforcement, activists, veteran police officers that aren’t 30, 40 years. The company makes a new product, it’s probably going to be on the belt of every single police officer.
Frank Curzio: 00:01:34 I’m not just talking about the country, but as a chance, I mean even getting interest globally right now, it’s really incredible story that I was talking about. If you are a subscriber to Curzio Venture Opportunities, you know what company I’m talking about, it’s a product that saves lives. So I’m really excited about it. Remember, we’re 100% independent. The company did not pay me a dime to promote them. My job is basically to show new subscribers a great pick. People that don’t know my brand yet, and if I make them money, they become subscribers for years, hopefully decades, and if I don’t, then you know what? Then they’re going to cancel their subscription. And that’s the way this business should be. This industry should be. Unfortunately, it’s not really like that right now. Well, the stock goes up or down.
Frank Curzio: 00:02:16 It really doesn’t matter from the publisher’s point of view. I mean a lot of financial newsletter publishers are going to make money. The editor is going to make a fortune. Most editors outside of our company aren’t allowed to buy their own picks. They could tell it’s got to go up 60 times, 100 times, they can’t purchase it. They’re not allowed to. And then what happens? Everyone is making money except the subscribers. These subscribers to these products, you know the mom-and-pop investors like yourselves, they’re getting crushed in a lot of these picks. And sometimes it doesn’t matter to some publishers out there. Not all of them, just a few. It’s getting a little crazy. But Curzio Research, I like our method better. It’s put up or shut up. I mean that’s the way I always did business.
Frank Curzio: 00:02:55 That’s how I was talking to my father and my mentors, and that’s the reason why I’ve been doing this for over two decades, and you’ll see me cover my losers and my winners and everything, because you learn the most from your losers of course. Anyway, getting back to American Airlines, so when I book my trips I usually do through Expedia because a lot of times I’m booking my trips late, unless I know I’m attending a specific conference like four months from now, consumer electronic shows, one that I go to every year. Sometimes the Value Investing Congress, whatever, and Expedia just gives me the best options when I have to book something right away. So I was supposed to fly home late. This is on Tuesday night, last night, get home around midnight and have the podcast today, Wednesday it’s fine, and they wound up canceling my flight.
Frank Curzio: 00:03:41 I have to tell you cancellations and delays, the last 10 times I used them almost every single time. I don’t know, maybe it’s me. Some people say, “Oh, I hate this airline.” For me it’s just American Airlines. Maybe it’s just me. Maybe it was the only 10 flights they canceled the whole year. I have no idea, but every time I used them, thank God I only use them to fly home, using Expedia I use … You can use different airlines, you don’t have to use the same airlines just whatever’s the best and timely for me. But they canceled the flight, and I was supposed to come home late. So I had to get a hotel mile away from the airport in Baltimore and I just flew Southwest direct here to Jacksonville. But I got in a few hours ago still in time to do this podcast. I didn’t miss the podcast. But it’s just every time I fly with those guys, it just, I mean I don’t get it. I really don’t.
Frank Curzio: 00:04:27 I mean there’s no surprise their stock is off close to 30% over the past 12 months. That’s no surprise to me. But when you use that, when you have your experiences, and I’m not talking about one experience, two experiences, but it happens a lot, you see it reflected because it’s probably not just you. So that’s why I always tell investors … Individual investor have so much more power than they think they have because you’re out there, you’re looking at different things. I mean sometimes hedge fund managers don’t do that. They’ll look at the numbers, whatever. Not all hedge fund managers or not all investment advisors, but you’re out there looking at things in real time. Seeing like, “Hey, are people starting to go to Chipotle?” Well yeah, the lines get a bit of a little longer, and you’ve seen the stock go higher.
Frank Curzio: 00:05:06 Whether they’re going to a different shop or different store, people are buying stuff. I mean, the price of milk is going … whatever it is. I mean, you have that ability to really see what’s going on. I mean, we should get off of flights. All the time I talk to cab drivers, which I’m going to talk to you later in the educational segment. I ask him how businesses, how’s it going, if he’s a Lyft driver or an Uber driver. But they’ll give you real time information. American, it’s no surprise. I started doing the homework fundamentals at the airport. And last night when I had to get back to my hotel saying, “Man, it’s crazy, the airlines are doing great, but American Airlines is not really doing too good.” It’s down close to 30% again over the past 12 months, and they just lowered their guidance again, blaming the government shut down, are you kidding me?
Frank Curzio: 00:05:51 And they also blame Boeing, grounding their Max 737, something I’ll get to later on as well. And all that’s BS. I mean those are BS excuses. Since less than 2% of their entire fleet is the Max 737, you can’t tell me you’re missing earnings because of that. There’s no way, you just don’t get it, you go to your website and book, and they still have these dropdown menus. It’s even hard to book a flight on these things, even when you use the app. I just don’t get it. Then I look at Delta, close to its all-time high and yes, I’m going to pat myself on the back a little bit for that one, because I do talk about my losers lot. But I was recommending that name in the 30s in say about over the past two years, two years ago, 2016 a little bit longer. It’s before Buffet decided to go all in all the airlines, and his company is also paying you north of 3% yield. Now it’s two and a half percent, stocks are going higher.
Frank Curzio: 00:06:47 But if you look at Delta today, it’s trading at eight times forward earnings, meaning it’s cheaper today than when I recommended it back in mid 2016 in the 30s, and how could that be? The price is high. It’s because their earnings have skyrocketed. Most airlines have finally figured out how to make money, they charge for everything, upgrade your seat. All these things are worth it to some people just to get that extra leg room. I mean a company generating 7 billion in operating cashflow, generating over 11 billion in income with a market cap of just 39 billion. And when I look at dividend payout ratio, which is … Dividends relate to how much you generate in earnings, it’s 23%. We talked about AT&T being up there on 60% but if you get closer to 100 that’s when you want to worry.
Frank Curzio: 00:07:35 Most utilities around 60, 65% and a little bit higher. 23%, I have to tell you … Analysts, any analysts listening out there, any junior analysts, if you want a project and they may probably find this app, it’s been a little crazy. But if interested in doing a side project for me, I’d like to know how many companies in S&P 500 are paying more than a two and a half percent yield and their dividend payout ratio is less than 25%. I don’t think you’re going to find a lot of companies. A lot of companies at two and a half percent yield, their dividend ratios is north of 50% and what does that mean? It means Delta has significant room to raise their dividend. I mean, they just told you about their operating cash, the cashflow they bring in. Plenty of cash to buy back loads of this stock, which they should do right now, [inaudible 00:08:19] it’s trading eight times forward earnings.
Frank Curzio: 00:08:22 And by the way, those earnings are projected to grow much faster than the overall market. So we’re not buying like a value trap here, we’re buying a company that’s growing tremendously, faster than the overall market at a discount to the … What was it? 16 times earnings, 16.5 times earnings we’re trading at right now? Forward earnings, eight times forwards earnings, are you kidding me? How many times are you buying growth stock that’s under 10 times earnings. Usually it’s a value stock. You’re trying to buy it. Maybe they have growth catalysts coming up. Catalysts are going to able to get into some of these names like cheaper. I mean Microsoft I think was trading at 10 times earnings once, now it’s much higher than that, they went to cloud, and they have new growth model.
Frank Curzio: 00:08:59 IBM’s multiple is going to get higher too as they get more to services, which they’re doing. I think it’s their number one performer in the Dow right now, IBM. When you look at companies like this, and you’re paying attention, for me, someone who flies, I mean Delta’s a no brainer even here as a long-term holding. AT&T hasn’t been that good an idea. I talked about GE, that’s on me. But there has been a couple of winners, lots of winners in large cap. This is one of them, it continues. But man, America Airlines, I don’t know. I don’t know if it’s me, but every single time, every single time, and I had a book them because it’s the only way I could get home last night, and I wound up that I didn’t get home last night. I got home this morning, a few hours ago from I’m taping this podcast but hey, I never ever miss a podcast because I love you guys, and I love doing this.
Frank Curzio: 00:09:43 Anyway, have a great show for you today. My interview is with a pretty okay guy. He’s all right. You may know him, his name is Michael Alkin who writes the Moneyflow Trader newsletter for me, Curzio Research. It’s a newsletter that uses conservative option strategies to basically bet against individual stocks, so he’s not shorting names where you have that unlimited risk, you get crushed if the stock continues to move higher, higher and higher. He’s using options that will increase your returns significantly compared to shorting if the stock moves lower over the next 12 months. That’s important because I’ve seen people be dead right on their thesis, but wrong in their timing when they predict, “Wow, this stock is terrible, it’s going to crash.” And that stock runs away from them and they get crushed, they have to cover their short position, and you’ll see that stock maybe a year later, 18 months later go down significantly.
Frank Curzio: 00:10:39 So we’re using options, again time is a big factor is the factor, but we have 12 months, A, you have your thesis saying, “Hey, these guys are not going to make the numbers. Maybe they make them this quarter, they might not make them next quarter.” If you have a 12 month timeframe and think about it guys, if you really believe the market’s overvalued, which hey, we’re getting there. I’m not finding as many ideas as I used to. I was finding them a lot more over the past like three, four months, especially when the market really got hit in December. It’s not that easy right now. You believe the market is overvalued or someone who believes the market’s going to crash, this is a newsletter you want. Mike’s a 20 year hedge fund veteran hosts his own podcast called Talking Stocks Over Beer. It’s getting tons of traction where he interviews, hedge fund guys. Hedge fund guys are very difficult to get on podcasts, since he’s been in the industry has got a good name.
Frank Curzio: 00:11:27 He’s getting a lot of great names on that podcast. Again, Talk Stocks Over Beer, absolutely for free if you guys want to listen to that. So he’s super smart forensic accountant, and he’s going to share a few ideas with you and talking about popular stocks that are probably sitting in most of your portfolios right now that he believes are going a lot lower. It’s going to be a great interview coming up. In my educational segment, I’m going to break down some of the biggest stories in the market right now, it’s going to be Lyft, I talked about last week. I told you to avoid. It’s down a lot, pushing $60 now. I’m going to break it down even further, so I started to do even more digging and found even more interesting stuff. It’s probably going to scare the crap out of anyone who’s on the stock right now.
Frank Curzio: 00:12:11 Also, I’m going to revisit Boeing, another name I told you to avoid, and it’s been falling. Is it time to finally buy this names? All this stuff factored in, it’s going to be good, this segment, because I actually talked to several pilots who listen to the podcast, who have flown these planes. We may want to give a listen before we take any position in the stocks. It’s going to be a fantastic educational segment, guys. Definitely don’t miss it. Before I get to that, let’s get to my interview, the one and only Michael Alkin.
Frank Curzio: 00:12:40 Michael Alkin, thanks so much for coming back on the podcast.
Mike Alkin: 00:12:44 Hey buddy. How are you? My pleasure Frank.
Frank Curzio: 00:12:47 Well I have to tell you; I have to give you a shout out man. Your podcast is getting a lot of traction now. I mean, you’re actually like a podcast guy. Did you ever see that two years ago that you’d actually be doing a podcast today?
Mike Alkin: 00:12:57 Never. Never. My wife laugh because … I’m an introvert. So she laughs like, “How do you talk for an hour, hour and half?” A, and B, “Who cares what you have to say?” That’s what my kids say. So there you go. No, I never did. Never did. It just happened.
Frank Curzio: 00:13:18 It’s funny because I say the same thing. Like I even say it, I’m like, “Man, I can’t believe you guys listen to this that long.” But we try to make it entertaining, and it’s cool too. It’s almost like therapy, because you can rant and everything, you can get everything off your chest, but you really get a chance to tell your story, not in writing. But when you see things that are BS out there or people are focusing on, it’s just … I don’t know, it’s just different medium that works.
Mike Alkin: 00:13:44 It’s funny, because I listen to some podcasts where I learn a lot. They go right into it. Boom, “Hi, let’s bring our guest on.” And I have no idea who these people are. I don’t get to know them because they interview someone. A, I don’t know who the interviewee is. But I like to know the interviewer too. Yeah, I spend the first 15 or 20 minutes just talking, rambling about what happened over the weekend. And some people like it, some people don’t. And as I tell them, if you don’t like it, lot of other podcasts go listen to it.
Frank Curzio: 00:14:20 It’s nice we’re giving free podcasts, so if you don’t like it, listen [inaudible 00:14:24].
Mike Alkin: 00:14:25 It’s free, there’s no advertisers. We don’t get paid. Hopefully you like it, you can fast forward through my babbling and my hockey talk and my stories. If you don’t like it, that’s cool too. So, yeah. But it’s fun.
Frank Curzio: 00:14:39 No, that’s awesome. That’s awesome. So listen, there’s two big topics I want to talk about here because we want to get through this really quick. The reason why we’re getting through quick, because it’s my fault because I just landed not too long ago and we promised a podcast today and I never missed a podcast, but you did some incredible research on the shale companies, this is an industry I’m familiar with vision shale company, all the major shale areas in the US. I think a visited in like 2011, 2012 people make a lot of money on these companies.
Frank Curzio: 00:15:06 But when you took a fresh look at this industry over the past couple of months, I mean you provided incredible research and I love what you did for subscribers where you have a glossary of the terms and you really broke it down, things you have to understand because people just throw out numbers and EBITDA and this and that, sometimes it’s hard to understand, but some of the findings are pretty interesting. I mean, some of the things that people aren’t really saying out there, and I want you to talk a little bit about that because there’s people out there that do own some of the big shale companies and even some of the smaller ones, but there’s a lot of interesting things going on, isn’t there?
Mike Alkin: 00:15:38 You know, it is Frank. And my [inaudible 00:15:41], you and I’ve talked about this before going back to 2014 when I was popping around the Bakken shale plays and you’re paying 500 bucks a room for a Hampton Inn hotel and the roughnecks coming in off the rigs were buying $300 bottles of wine. So you’ve seen booms and busts and the last several years, obviously I always say the shales are the unintended consequence of fiscal monetary policy of the global financial experiment. So as you go into these shale plays and you’re … You call it tight oil, if you will, and you’re extracting because of technological advances that can extract the oil and gas from the shale and then you could go across horizontally, so you just don’t have to go straight down.
Mike Alkin: 00:16:42 You can also go across, quite a bit. So you have the opportunity to find more stuff. And, I’m talking in lay person terms. But that costs money. It costs money and it costs a lot to find it. And what you saw though, because of interest rates that were near zero, starting in 2007, 2008, 2009, after the global financial crisis and the global central banks just lowered rates next to nothing, money was looking for a home that could pay a decent yield. And it was able to … You were able to finance these through high yield debt. A lot of these oil and gas shale plays, right from all over the different shale plays, the Marcellus, the Utica, the Bakken, the Permian, all of the different ones throughout the country, I won’t name all of them.
Mike Alkin: 00:17:35 But one of the things you started to notice was that no matter what price oil went to, they weren’t generating cash flow because it was costing a lot of money. But that gets glossed over when there’s environments where people are dying to put capital to work, and they’re reaching for yield. So, you can go out and finance hundreds of billions of dollars worth of debt on future production growth. And one of the stories that you see is, as I said, as the more and more money is thrown at it, the more and more reduction you saw, even when prices went higher, that you saw a free cash flow just evaporating, it wasn’t there. I think it’s six to seven or 10 companies don’t generate free cash flow in the shale plays.
Mike Alkin: 00:18:27 What peaked my interest about it is my interest in nuclear power. Not any part of my thesis whatsoever at all but, it’s interesting to know other sources of generation and natural gas has really taken a big role, a leadership role here in the US, natural gas generation, and it’s hurt some of the nuclear power plants in competitive markets where they have to compete on an auction basis. And that has hurt them because the price of natural gas has gone down to sub $3, when it was calm, and you would see $10 and $12. So that made me curious, really, let’s dig a little deeper here and understand what’s going on, because what’s assumed forever is natural gas is always going to be sub $3. And it matters because if natural gas went from three to five, that changes dramatically the economics of a US based nuclear power plant.
Mike Alkin: 00:19:25 So as they started doing, and I started looking at saying, “My God, no matter where price of oil is, most of these guys don’t make money, and they got a couple hundred billion dollars’ worth of debt and that debt is coming due.” And you started to notice in the late fall of last year that the high yield issuance for these shale plays, the appetite was really starting to wane. And as that appetite was waning, and you say, “Well wait a second, if you don’t have people willing to finance these so easily, when this debt comes due, these guys are going to have to pay a lot more in interest rate.” It’s supply-demand, just like in anything, just like this stuff they’re pulling out of the ground it’s based on supply and demand, same thing with capital. If a lot of people are willing to finance it, you could issue debt at a lower rate because not a lot of people are … You got an issue that at a higher rate. Now that matters when you’re not generating the returns that you think you were going to generate on that debt that you’ve borrowed.
Mike Alkin: 00:20:20 So you have to re-up the debt at higher rate. But what you’ve seen though is you have seen some investors come in to the space where they are talking about … I wouldn’t necessarily call them active activists, but they’re starting to hold companies feet to the fire and saying, “Listen, this isn’t the world of profitless prosperity here. You can’t just keep saying we’ve got a great technology.” And one of the themes has been us energy independence, where produced so much oil, tight oil, shale oil and natural gas that, we are for the first time supposedly energy independent. And that gets people excited. Well yeah, sure. But again, capital markets, finance these companies, and at some point you got to pay the piper. And so I’m not so sure how energy independent we are. Well, these activist investors or these soft activists have come in and said, “Listen, we are demanding production cuts, because what’s the point in keep producing, producing, producing, if you’re going to not make money on it? That doesn’t matter.”
Mike Alkin: 00:21:33 And so you’ve started to see talk of production cuts, and in the shale plays, what you see is when somebody says … Normally frank, what do people like when they’re looking at oil and gas? They like big land plays, and they like big production growth. Well now what you’re starting to see is companies get rewarded for cutting back production. Because that means they might loss less or maybe there’s a point where they can make some money or generate some more free cash flow. So the capital markets have a strange way of working these things out. And when investors are in there and demanding a certain thing, companies will eventually have to respond because they’re going to need their capital. And so I don’t know how energy independent the US remains if you see these production cuts, and we don’t have time, we’ll not get into it now, but the way these companies account for reserves too are very aggressive and so you can make a strong argument as to the way they were estimating what the future of what reserves are and what future production that might not come to fruition.
Mike Alkin: 00:22:32 Yeah, I think if you are a shale play, I’m not going to list which ones they are, but you need to at least start to think about, take a look at your company’s income statement, their cashflow statements, and say, “Okay, great. They’re selling all this production growth, but are they generating cashflow? When is their debt coming due? What are they paying now for their debt? What’s the environment like for the debt that they’re going to have to roll it over?” Those are important things that you have to ask. So if you do own it, you might’ve had a nice run, and Frank, with all these cyclical industries, people get lulled into the narrative and it’s the recency bias, yeah sure, look at what they’re doing now, but let’s think about the future. And I think that there’s enough of an argument to be made that you need to be cautious and at least know what you want.
Frank Curzio: 00:23:28 Yeah. You bring up good points there, because these guys really pushed out their debt when oil prices fell from whatever it was three, four years ago. It was 90 to 100 steady for years and then all of a sudden it just went down, or was sold … I think it went below $30 for a little bit, 20.29 but now it bounced up, it’s up tremendously this year. But they’re even saying that oil prices need to be well above 90 for a long period for these guys to actually be able to pay off a lot of their debt. It’s pretty crazy. It’s amazing how much debt that they have.
Frank Curzio: 00:23:58 And it’s also interesting, the numbers are going down. You’ve seen the production numbers coming down, but even though oil prices are going higher, it seems more that if these things are participating it might be a good time to short some of these names because, as oil prices go higher, you’re going to see more increase in production probably from … Even though they cut recently where OPEC and Russia and things like that, but, it is interesting and it’s just … Yeah.
Mike Alkin: 00:24:20 Yeah, Frankie. When you look at the debt I mean you’re talking … I could see a couple of hundred billion dollars in debt coming due in the next few years. It’s a lot of money. And when you’ve been [inaudible 00:24:31] cashflow, I mean, you go back to 2010 minus 15 billion, minus 20 billion. I’m talking industry-wide minus 30 billion, minus 15 billion, minus 30 billion, minus 25. Those numbers are staggering. I mean, there’s negative free cash flow numbers from the industry. That’s massive. Depending on what companies you include in a list of companies I include, it’s almost $170 billion in negative free cash flow. I mean that’s a staggering amount of money and a staggering amount of debt has been accumulated. But again, it’s funny, why’d this happen? Because capital needed to go find returns and these are high yielding, meaning a lot of them, not all, but a lot of junk bonds, they offer higher yields and capital. When it’s in search of money debt, it’ll go find a higher yielding stuff.
Mike Alkin: 00:25:26 And when you dress them up and you make it look good and you tell a good story around it and there’s a real narrative, and meanwhile, you know what’s been ignored during all this, the offshore stuff. 30% of the world’s oil comes from offshore oil and gas exploration. But with all of the focus here on the shale plays, what you see is those … the offshore, I mean has been left pretty much for dead. And whether it’s companies that build these rigs, whether it’s companies that service them, they send people out there, the service companies, the drillers literally left for dead. So, it’s funny how things happen in these cyclical businesses. When you’re left for dead, the valuation start to become kind of silly, good silly, and it doesn’t take much to swing the pendulum back if nothing more than the mean reversion. But all of a sudden what you’ve seen also is these massive, amounts, hundreds of billions of dollars in offshore projects that are going to be needed to bring on that million barrels a day of oil, of growth that the world’s going to need.
Mike Alkin: 00:26:36 You need these offshore projects and those projects have been put on the shelf. And so all of a sudden what tends to happen when all of a sudden you wake up one day to say, “Look at that, it’s hard to finance these companies or where they’re struggling a little bit.” All of a sudden the market will gravitate back towards the offshore type of plays. And then you’re sitting there looking at securities that are incredibly cheap. But again, these things take time. It doesn’t take … What I noticed with a lot of investors is they want immediate gratification. These things can take a few years to play out. But the way I always look at these things is, What am I buying? If I’m buying offshore stuff, it doesn’t have to work today, but can I buy a security that might have two, three, four X upside? Okay, yeah possibly. What’s my downside? Could that be in 20%-30%? Yeah. Well I can’t find that in a regular market, if you will. That doesn’t exist. They’re not going up two, three, four X.
Mike Alkin: 00:27:35 If I could find that and that asymmetry in risk reward, I’m willing to wait a few years. I’m willing for it to go down. I’ll put a little position on, I’ll buy more on the dip down because I’m just looking for those things that are just asymmetrical and asymmetry doesn’t exist in a lot of places. I think it exists in the offshore space.
Frank Curzio: 00:27:53 Yeah, it’s a great stuff to have. I mean, just washes onshore oil production, oil producers where you’ve seen the mass amount of debt that restructured years ago coming back. There’s a lot of credit agencies that warning about this. And again, all prices are going up, so you might not see too much now, but it’s definitely in trouble. I love the offshore angle as well, which is fantastic.
Frank Curzio: 00:28:15 Now I want to move on because there’s a stock we’re going to talk about, which you’ve been talking about for a while and a lot of the points that you made to me even on this podcast, even through your newsletter on this company, people are finally starting to make those same points today, that you started coming a while ago. And I’m talking about Tesla where you first … I think when I first started talking to you about this stock, maybe over a year ago, you’re like, “I don’t know if it’s a fraud or not, but this stock is going to go a lot lower. They just attach credits because it’s peer.” You didn’t believe Elon Musk. We don’t know if he’s crazy. And then it seems like to me that you’re like, it actually could be that, I mean I don’t want throw out that word and put words in your mouth, but it seems like you’re getting much more bearish on the name along with a lot of other people. Where do you stand with Tesla at this price right now?
Mike Alkin: 00:29:03 I don’t get [inaudible 00:29:04] Twitter debates on it, A, it’s not fair to people that subscribe to our work, but B, people are crazy. I’m out there with my real name, and you’ve got these lunatics out there hiding behind, whatever fake name they have on Twitter if you say anything bad about the guy, but actually at this point I don’t give a shit. I think Musk is a genius at one thing and that’s knowing how to raise capital, has been here to fore, and separating people from their money, and I’m getting them to invest in whatever he’s working on and dreaming a dream. That’s his genius. I think the rest is just noise. For me, Frank, anytime I see people lauding someone has been next whatever, as if he’s a god, and you turn things into a cult to me that raises my suspicion.
Mike Alkin: 00:30:01 I mean, what’s this guy down that’s been profitable over for 15 years? He ultimately sells businesses but … On paper is worth what, 20 billion? Let’s see where Tesla’s settles out. But at the end of the day, this is always come down to really a few things for me. Number one, I’ve made a living for 25 years, history often, if it doesn’t repeat it often rhymes. And things just happen, cycles come and go. And one of the immutable laws building automobiles is it’s a really tough business. There’s only so much profits to go around, and to do that, you got to kick scream, claw for market share. And when you do that, it’s a tough business. My view has been that model X and model S are really fine cars.
Mike Alkin: 00:31:02 But they’ve been out for a long time now. And if you got in a model X or model S, these are the higher end vehicles, and you really had nothing to benchmark it against, so you got in the car, and the acceleration is like nothing. It’s like making a rocket ship, like, “Holy Shit, this is cool.” And you paid over $100,000 or $80,000, $90,000 for the car. And that’s great. That’s where I think they should have stayed as a niche car maker, because what you’re really doing now is I think at the end of the day that you … Holman Jenkins wrote a fantastic opinion piece in the journal today. And he basically, talking about, people comparing this to Apple and if you look at the iPhone is around the world.
Mike Alkin: 00:31:49 Well that’s great. But the reality is, and he goes on to point out which somewhere along the way I think I’ve talked about is an EV isn’t an iPhone. Everyone has a car. The car already fulfills the basic function of a car. And there’s only limited profits from selling cars. Think about the iPhone, think how many people didn’t have one. They had to go out and buy one. So it was a smart phone is new. In this particular case, tax credits really matter. McKinsey did a piece about a month or so ago, it was a very good piece. And you can talk about the importance of subsidies, in the US, you’ve got the $7,500 tax credit that ended December 31st, it got cut in half, and then July 1st I think it gets cut in half again. And then every six months it gets cut in half, when you sold over 200,000 vehicles.
Mike Alkin: 00:32:40 So here’s Tesla, had a first mover advantage got to the 200,000-vehicle mark and now the tax credit goes. And if you’ll recall that Musk was out a couple of years ago with the $35,000 model three mainstream vehicle and that was going to drive everyone to this vehicle, and they took a half a million reservations for it. Well, they’re just now saying they could come out with that vehicle now, but there are still not. That’s where you need to be, but now take away that tax credit that’s got cut in half another half, and now you’re going to be a car maker selling … They did this is push for the year end, for the first quarter I should say. The third and fourth quarter they had this huge push because they focused everyone on deliveries and how much production they were going to make, and they exhausted that reservation list. Towards the end of the year, if you wanted a model three, you could have gotten it, but not the 35,000, the ones in the high 40s.
Mike Alkin: 00:33:39 If you wanted a model three, you could have got one in a few days. How is that possible when you have a waiting list at one point believed that it was 500,000 and then it got moved down to 400,000. And if you supposedly make, which I don’t think they do 5,000 a week, and you had a waiting list of 400,000 people that’s what, 80 weeks? How are you able to get one in a few days? Well, I know because I have sent videos to a friend of mine who puts them up on Twitter as others who go around the country and see vehicles in the thousands. Mine is well over 100, where I live, but there’s thousands of vehicles in inventory of this model three, that supposedly in tremendous demand. Not at that price point, and they’re going to struggle with the $35,000 price and the credits are getting cut and there’s a spate of new cars coming out.
Mike Alkin: 00:34:33 So what’s happened is the model S in the model X are the real high margin vehicle. That’s where they get most of their margins, $35,000 model three, it [inaudible 00:34:45] barely if at all, probably nonprofitable, but even the higher price model three were still less than the model S and model x. So what did the first quarter it look like? The numbers were an unmitigated disaster. They delivered 63,000 [inaudible 00:35:02], which was done on 31% sequentially. People say, “Well, it was up over 100% year over year.” Stop, stop. If you financially and politically and understand investing, it’s meaningless. The year over year growth on a rapid supposed growth company like Tesla, when you’re in the beginning of a production ramp of the thing that’s taking you to a promise land, it’s sequentially quarter over quarter growth because last year’s base was nothing.
Mike Alkin: 00:35:32 So people sit there and say, “Oh, it was over 100%.” Who cares what they do quarter to quarter because you’re ramping. And take out seasonality, when you go look at the seasonality numbers, that’s noise, people say, “It was seasonally tough.” It’s nonsense. So sales were down, overall, 31%. 16% below the consensus of 76,000 vehicles. That’s a big number. It started the year at 88,000 vehicle … It started January, 88,000 and they delivered 63. On the model three, they delivered 51,000. That’s down 20% sequentially. That was below what was a consensus. I mean it was an unmitigated disaster, but the bigger number that I think gets lost in the message is the company delivered 12,000 model S and Xes in the quarter, that was down 56% sequentially and almost 40% below the consensus of 19,800 vehicles.
Mike Alkin: 00:36:32 And that’s despite cutting prices on this thing from 10-40% during the quarter. So most of the attention is being given to the sales of the model three and the production. What Musk is genius at is focusing people on the message he wants, “We could produce this number of cars.” Two years ago was they were going to produce 10,000 a week model for east. Now it’s down to 5,000 model threes, but it’s focusing people on production because he’s got people, these Teslimings, I call them thinking demand is insatiable and unlimited. It’s nonsense. It’s not. The demand has fallen off a cliff for model three, same thing in Europe. But the model S and model X, now you’ve got the real car companies coming out with vehicles in droves. The German makers coming out, Jaguar has got them, Porsche has got them, they’re all coming out.
Mike Alkin: 00:37:25 They will have subsidies and here’s the thing, Frank, Tesla needs to make a profit. These other guys don’t, they fill gas engines. No matter how much you … The ice and the combustible engine that people hate, it’s bad, because Elon is saving the world. Shit man, I like EVs, you like EVs, you want clean air. I like nuclear power, I run a nuclear power hedge fund. Holy smokes, do I want EVs to work? Because wind and solar ain’t going to do it greenies, that ain’t going to power anything. If you want it, you need a lot of base load power. So if you think about that, I love EVs, and I love that all these choices coming out and just think these guys who’ve been making cars for decades upon decades, upon decades, they want to get into the mix too.
Mike Alkin: 00:38:14 And guess what, rather than doing product cycles in such a short timeframe, that Musk does, they wait, they watch the market, they’re fine waiting half a decade, maybe longer. They let somebody else go out there and now they’ll come in with fresh tax credits, with kick ass vehicles and oh, by the way, they also have other vehicles that could help subsidize while they’re growing this. He doesn’t have that. So I look at it and I listened to the … I love to hear the bulls. The autopilot full self-driving the message they come out with nonsense. It’s not, it’s not. And they say, yes it is. And what you see with Musk, and this is where if I’m a Tesla bull, I’m really concerned because when there’s bad news coming, he’s got something else, he’s got something to promote. He’s the ultimate promoter. He should have been a mining executive, because he could promote like there’s no tomorrow. You know what I’m talking about, right buddy?
Mike Alkin: 00:39:14 And not all mining executives, some. But what he’s really good at is focusing people where he wants their attention to ignore the really important stuff. So he’s coming out the model Y, the Tesla semi, the Chinese factory, he’s got all this stuff. This guy never delivers in a remote timeframe. And here’s the problem. He’s got a balance sheet that’s so loaded with debt. He’s got massive amounts of debt. He jammed the third and fourth quarters, pulled forward all this demand, and now, now what does he have? He’s got two really nice cars. The model S and model X. The model three. You could say, all you want, I mean some people say it’s really good, some people say the quality’s not good, but trying to come out with this $35,000 version. It’s going to be really difficult to make any money on it. But let’s say he was, the model S, the model X are imploding the sales and that was your profit engine, that was going to help get you through till you got the scale required for the model three. I don’t think that happens.
Mike Alkin: 00:40:25 Next week he’s putting on a show to talk about full self-driving and the autopilot and all this stuff. More smoke in mirrors more, get people excited to try and get the stock price going. What I don’t understand, and maybe he’ll do it when we get off the phone, who knows? But what I don’t understand is if I had the working capital commitments he has, this year alone to Panasonic over almost $4 billion in purchase commitments for their batteries, 18 billion in overall purchase commitments to them for batteries, a couple of billion dollars of working capital commitments in 2019. I mean, he’s got a lot of cash flow needs this year. What I don’t understand, at least for over a year plus now is, at any point in time he could have gone out and did a capital race when he had to pay this $925 million in this convertible note that was due recently, which paid. Go out, you can dilute it. It appears to me the raging bulls don’t really care about numbers.
Mike Alkin: 00:41:29 So if that’s the case, they shouldn’t have cared about dilution. So if you need several, several billion dollars to get some cushion at that point with a $50, $60 billion market cap, raise $10 billion-
Frank Curzio: 00:41:43 You know what? Hold up right there because we have two minutes left but I wanted to get into that too, because this is an important point guys, and this is what I learned from [inaudible 00:41:52] listen to you about this. Where you say you’re bring up the capital, so for me, if I’m a short this stock, I want to try to look at every place I could be wrong. And I think I even had this conversation with you and said, well you know what? Tesla right now has enough bulls in there, and they have a lot of big funds who are 5% plus holders where the stock’s trading at 275. Maybe they could do a capital raise at 225, raise five, six billion, whatever it is. So their mark cap should be enough for two years. And when I said that to you, you said something very interesting about that because that was the thing. Well, maybe they could raise capital at a much lower price, but you brought up a good point where you don’t think they’re going to be able to raise capital.
Mike Alkin: 00:42:31 Something is amiss. I don’t understand if I have 25 million Twitter followers, if bad news is good news in the stock price. Now let’s not forget though, the stock is down. What? I don’t have my Bloomberg up right now, but the stock is down 15%, 20% on the year. It’s down from 380 to 270 something. So people are starting to get the chest here. And that was after by the way, he put up a really big third and fourth quarter by pulling forward all this demand, to do what he could to get the stock price going. And the stock still a lot lower than where it was. So there’s something fundamentally broken, but we just haven’t seen a collapse yet. But yes, Frank. So with his powers of persuasion, he could go out when he’s under the gun … I don’t see how it’s deniable that cashflow is a challenge.
Mike Alkin: 00:43:28 And they lowered the numbers for first quarter. They came out and they did. And they’ve got these commitments. You could make that all go away by just going, if you’re him and going to the public markets and initialing equity. You could get some … I don’t know what rate he’d pay on the debt, but do a capital raise. Do a capital raise. I don’t know, what do you need? If you need five, six, $8 billion. Normally people don’t like capital raise, investors who are going to participate in it might, but existing shareholders say, “Oh, dilution,” and the stock goes down. In this case nobody cares because valuation doesn’t matter. If valuation doesn’t matter the stock would be 50 bucks right now. So you have such fervent bulls, do a capital raise, take care of your cash needs and then just go about your business.
Mike Alkin: 00:44:22 Why isn’t he doing it? I don’t know the answer to that. Is there something, is there scrutiny that they don’t want to be exposed to because if you’re the bank and you’re doing your due diligence, you’re taking on some responsibility there. I don’t know the answer. I know the fact they are not doing it. Like I said, who knows, we can get a phone right now and they can do it. But it’s been a long time and they’ve come down to the wire. He was interviewed what a few months ago and he said, in the third or fourth quarter they were down to weeks before it was [inaudible 00:44:55], really? Call up, your banker and say, “Listen, I want to raise this.” You could do it theoretically pretty easily. Why didn’t you do it? Do you like living on the edge that much? Or is there something we don’t know about that’s going on behind the scenes that’s preventing that or that they don’t want to have people looking too deep? I don’t know the answer.
Frank Curzio: 00:45:18 Hey, Mike that makes a lot of sense.
Mike Alkin: 00:45:22 It’s red Flag that I can’t get past. I just don’t know the answer to it. Look, as far as … Frank you can go so many different ways, how come there’s all these cars that don’t get registered right away? I mean, it’s a big meaningful number. If you go in Tesla Motor Club, you’ll see stories all over the place saying, “How come my car’s not getting registered? I bought it. I have all the paperwork I’m paying for. Why don’t I get my plates?” Who knows, they want to keep it in inventory for their asset back line. I don’t know. But these are questions that you have to ask, but what I do know, in almost a quarter of a century of looking at companies and promotion and things that don’t make sense to me, this is at the, if not the, it’s close to the top of the list.
Mike Alkin: 00:46:19 It’s not an indictment of Musk as an entrepreneur. He’s a brilliant entrepreneur. I’m not saying he’s not right. He’s found a way to get people excited about the products he’s selling. And he plays it as though he’s saving the earth. It’s David versus Goliath. The stuttering genius. I’m an engineer and all this stuff, look at us, it’s us against the world and all these bad people who drive gas cars. They’re terrible. Let’s go save the world, and great he’s got guys like Ross Garber on Twitter out there all excited about the financial advice from California. He gets people out there who have big followers, and they fervently support him. Look, everyone’s entitled to their view. I get it. But at some point in time, you’ve been doing this a long time. How many times are you going to disappoint investors with numbers, real numbers that don’t make sense, meaning you’re constantly pushing out timelines. That doesn’t make sense to me.
Mike Alkin: 00:47:18 No matter what any CEO will tell you, they worry. What do they worry about? Meeting consensus, beating consensus, because the consequences of not is your stock gets punished. Here, it doesn’t matter. It doesn’t matter what consensus is for now. But right now, I think we’re seeing death by 1,000 cuts. Like I said, the stock was at 370, 380. Now it’s at 270 something, and he’s been promoting semi, promoting the Y full self-driving. There’s promos coming. The model three for 35,000, all the fanfare, it hasn’t worked. So I don’t know what that base is here. The retail guys are coming in and supporting the stock. Good news is bad news in Elon we trust. You know what, Frank, at the end of the day, simple math matters. And the simple math here says that margins are going to get squeezed. At least in my view. Margins get squeezed.
Mike Alkin: 00:48:14 He’s got big capital commitments. And that typically in a really tough industry doesn’t end well. I know the silicon valley types and all the millennials say, “Yeah, well it’s different this time and this isn’t a car company.” Bullshit. It’s a car company. They make cars, they compete against car companies. They have huge capital expenditures, which besides maintenance you don’t see a big, spend. It’s just, none of it makes sense to me. It’s tricky because, you look at this and say, “How come on all this bad news comes out, and it doesn’t implode.” Some things just take longer than they think they will.
Frank Curzio: 00:48:55 Yeah, now I hear you. I mean, you’ve been on this for Moneyflow Trader subscribers, and it’s interesting, really quick. I remember when Baker Hughes, I think it was about to take over Weatherford, because I thought they were going to take over GE capital or GE oil and gas division and they came out and said that, “Hey, we’re not going to do it for some reason.” And about six months later, Weatherford announced that they have accounting irregularities and stuff like that.
Frank Curzio: 00:49:23 So when you’re raise money guys, when you have to open up your books and open up everything, and you’re right, it just doesn’t make sense why the company could do it at 225, because the biggest concern here is what? Cash burn and debt and that you could alleviate those concerns, at least from the bears and the fact they’re not raising money, and now you’re lowing production, you’re seeing the top executives leave. I think you’re on this thing. I think you’re right. It’s just a matter of time. But, yeah, definitely.
Mike Alkin: 00:49:46 And Frank, somebody asked me the other day, they said, “I feel bad because a lot because a lot of these investors, these retail investors, they’re going to get bagged.” And there’s this guy on Twitter called Bag Holder Quotes. And I do too, and I don’t know what the answer is, but there’s this thing called FUD, which is fear, uncertainty, and doubt and all of the bulls, the real firm believers say that the bears spread FUD, fear, uncertainty, and doubt. On Twitter there’s … And I’m not active in it because I have subscribers, so I don’t want to share with the Twitter platform but there’s the community called Tesla Q and he was the name you put after a company files for bankruptcy. That’s a symbol they get, whatever it is Q. And there are people from all walks of life that contribute to Tesla Q, and the bulls will say it’s all FUD, it’s all fear, uncertainty, and doubt they’re trying to make.
Mike Alkin: 00:50:46 I got to tell you, I’ve been doing this, like I said, a quarter century and it is without a doubt some of the very best work I have ever seen, far none on the short side. And I have been involved in some forensic accounting shorts and deep dive shorts that the work has been phenomenal. I’ve done good work, peers of mine have done good work. This community here, does work that is just absolutely stupendous. And I think one of the things, when you have 25 million followers, and you are a self-proclaimed genius in the world, thinks you’re a genius, crowdsourcing like this, there’s a lot of really smart people out there who are crazy smart, just like self-proclaimed geniuses are and people don’t have to be financial analysts, but they can be curious and have an interest in doing work, so people should look at that. And if they think its fear, uncertainty, and doubt, then that’s shame on them because ultimately, I think they’re going to have to pay for that in losses, but really solid work out there.
Frank Curzio: 00:51:52 Now that’s great stuff. Mike, I know you’ve been doing a great service [inaudible 00:51:57] Moneyflow Trader. We talked an industry itself and also the stock, which … Every time I talk to you, you’re telling us things that we’re not hearing for months later, which is really cool. So you definitely ahead of the curve and the stock is getting hit, and I think you’re right, it’s just a matter of time. I mean, everything’s going bad for this company. And with that, I just want to say thanks so much for coming on. I did have you as a late guest since my flight just landed, and you did me a big favor and even the guys producing this are doing me a big favor right now to get this out, because this is going out a little bit later than expected. But I really appreciate you coming on as always.
Mike Alkin: 00:52:28 Did Jacksonville forget to pay their internet bill?
Frank Curzio: 00:52:32 I know, we had internet problems and everything man, so I’m just glad everything worked out. So, which is cool, and we’ll get the podcast out but …
Mike Alkin: 00:52:39 That’s all right, my internet goes out three times a day, so I get it.
Frank Curzio: 00:52:44 Oh, I hear you. I hear you. So Mike, [inaudible 00:52:45] get a chance listen to Mike’s podcast Talking Stocks Over Beer, it’s really good, getting a lot of traction now. Have great guests on there and thanks so much for coming on Mike. I really appreciate it.
Mike Alkin: 00:52:53 You bet brother. My pleasure. Thanks pal.
Frank Curzio: 00:52:56 Hey guys, great stuff from Alkin, love having on podcasts, any questions, comments, let me know what you thought. This podcast is about you, not about me. Yeah, let me know you thought Frank@curzioresearch.com. That’s Frank@curzioresearch.com. And if you are interested in his Moneyflow Trader newsletter just got to curzioresearch.com, a lot of happy subscribers. He’s been doing well. [inaudible 00:53:16] lately. And yeah, I mean you can see the work that goes in, the education that goes in and also, his podcast is gaining a lot of traction, which I’m happy about. I’m always happy when people of podcast do well, especially in our industry. It’s not competitive. It’s not a zero sum game where people could listen to numerous podcasts.
Frank Curzio: 00:53:34 Not like you have to listen to a certain time and a certain day, and that’s it. So, the more people that do good podcasts and I have to be honest with you, there’s not a lot of great financial podcasts out there. I try to listen to them. There’s a few that I listened to that are great, but most of them that I give a try, it’s just like, uh, it’s either dry, or they’re constantly selling things, or they have advertisements everywhere, which are pretty crazy. But his is one of the good ones. So guys, definitely if you’re interested, again, it’s absolutely for free if you don’t want, you don’t have to, but Talking Stocks Over Beer. And once again, any couple questions or comments on that interview Frank@curzioresearch.com.
Frank Curzio: 00:54:09 Now let’s get to some of the headlines here. We broke down Lyft last week, Lyft, it fell … It came out at 80, then everyone was like, “Wow, this stock is amazing,” and the stock fell. And I really dug into the numbers, and I didn’t like what I saw. I mean you look at a company where I just felt like the numbers were really petted going into the IPO, and what do I mean by that? They raised their prices close to 25% from last year and 10% from last quarter to make their average revenue per user, basically per driver, whatever, a lot higher than it was last quarter or six months ago, even last year. When I look at their market share stats, there’s a company that’s providing that for them. That’s actually an investor in the company and saying that they have a 39% market share and there’s an independent consultant that that tracks the stats, who’s not an investor, it says market shares more like 29%. Guys, that’s a massive, massive, massive difference, huge.
Frank Curzio: 00:55:15 I mean if that’s true, then Lyft has not really grown as fast as everyone thinks, which is important because it came out at a crazy, crazy inflated valuation. I mean, I don’t even know how to value this company because they said, “Hey, we’re not making money for like forever.” They said, “We’re not making money for … There’s no projection out there. It’s not like, “Hey after year three, after year … There’s nothing out there. No projection to make money. They raised a lot of money, about $5 billion in cash, maybe a little more than the balance sheet from the capital raise, the IPO. So it’s not like it’s going to go out of business or anything, but we had Citron come out at 70 and say, “Hey, you know what?” I think it was like 70, 72. “[inaudible 00:55:54] this company and …” I don’t know.
Frank Curzio: 00:55:58 They just believe that the stocks will go a lot higher and saying that, growth is never a reason to short a stock, and this stock is going to grow a lot more and whatever. A lot of based on growth and I actually tweeted out and said, “Hey …” I like the guys at Citron, they’re pretty good. I don’t know, those guys are using forensic accountants. From what I saw with this I mean there was a lot of red flags in here. Just a lot. I mean look at dilution, I talked about last week. I mean disclosing 46 million restricted stock units represented about 20% of the shares outstanding, another 13.5 million of employee stock options, and it might be a little bit more than that. That’s another 5% dilution. So you look at it, $5 billion that’s 25% dilution. That’s when the stock was trading at 70, and now it’s trading at 61 today. So it went down tremendously.
Frank Curzio: 00:56:52 And you look at a company, that’s a bad sign. When you IPO, I mean, they could snap, you have all the people. So you have everyone who invested early, this is a liquidity event for a lot of them, some are going to be locked up a little bit, for the next four or six months. Man, I hate when that period it comes out, those guys are praying that the stock stays over 40. I’m sure a lot of these guys were in at 10, 15, 20, but I think most of them are going to make money. I think Google invested at a valuation of more about $15 billion, and this came out at $25 billion. They might have invested at 12, 13 billion just a year ago. Put that in perspective, even they might lose money if this thing goes down to 40, 45 around there. But when I’m looking more into these numbers, it really scares me because I don’t know if the growth is real, and more important is when you look at their underwriters. They had that JP Morgan Chase cool, Credit Suisse, cool, Jeffrey’s, cool, who’s not there?
Frank Curzio: 00:57:57 It’s the biggest IPO, the most popular one of the year. What two names are missing from that list, which should be on that list? Goldman Sachs and Morgan Stanley. I don’t care if you hate those guys. Those guys are pretty smart. There’s a reason why Lyft came out and said, Morgan Stanley’s creating these short products that shorting it, they denied it. There’s a lot of people shorting the stock right now, and it doesn’t have a big flow. So I look at this name, I think you’re going to continue to see those short positions build. And going over the next couple quarters. I don’t think Lyft could do anything to really say, “Hey, look how fast we’re growing on what we did.” I mean I talked to three different Uber drivers over the past few days, when I was away, and I asked them. And they were Uber, I have Uber, and I said, “Do you drive for Lyft?”
Frank Curzio: 00:58:38 They said, “Yeah, I used to drive for Lyft, I don’t drive for Lyft anymore.” I noticed what Lyft said in their filing. They said that, “We’re going to have to spend more money for drivers because we have to pay them more money to give them incentive to drive during peak hours.” And all three of these drivers told me the same thing. They said that they love Uber, fortunately for me, unfortunately that every time I took an Uber driver it happened to be in rush hour both ways. And when I talked to them, they said that Uber provides much better incentives and that’s why they’re using Uber. Again, very small sample size. But that was something that was in their perspectives when they launched, “Hey, we’re going to have to spend a lot more money to get these guys to drive during peak hours, because you’re not going to get as much business, it’s going to take you longer to get to places, and they want to make as much money as possible.
Frank Curzio: 00:59:27 And one of the guys told me that, they’ll give him like a $10 incentive on top of the fare. And by the way, when I first got there, I took a cab that cost 40 bucks, it only costs me 25 to take an Uber. I mean there’s a reason why there’s 50 cabs and nobody on the cab line, but I just didn’t feel like walking extra quarter of a mile, half a mile or whatever and wait since I got to Baltimore late on Monday anyway. But when I’m looking at all this stuff, and the fact that they don’t have Goldman Sachs, Morgan Stanley, man, those guys are really smart. I think the stock are going to come down a lot more. And when you look at that market share, I mean guys, that’s a 10% difference in market share. I mean who has this, right? Who has these numbers, right? We should have it right? They should be more consultants on this. I just know two of them and there’s a 10% discrepancy, and the one that’s higher is the company that’s invested in them, which they have an incentive to make sure that, that’s high. I mean that’s how I’m looking at it.
Frank Curzio: 01:00:23 Maybe it’s not, maybe it is, I don’t know. But the person who has nothing at stake is saying that their market shares 10% less, if that’s true, then this company is not growing as fast as everybody thinks they do, but they’re trading at a valuation like this company’s going to grow like crazy over the next five years. So I’d be very, very careful of Lyft here and the dilution is going to be incredible. You’re going to have the selling coming out, you’ve got a while four, six months and most of these guys are locked up for six months. But as this thing comes down, they got to die to get out, lock in their profits. I don’t think these guys are going to hold this long term unless you see, the next two quarters being pretty positive, but companies usually who have a history, unless you’re Levi, which is amazing. Their first quarter is usually like, uh, there’s a lot of things that are brand new to the company, the reporting system.
Frank Curzio: 01:01:05 And the next two quarters are going to be interesting and even if they beat the numbers, man, I’m going to go through those things because they really hyped this thing up into this IPO. If you look at when they first came out and let me see if I can really grab a date on this guys. I’m just going to do this really quick hold on. I like doing this stuff for you. I don’t know if could find it. But the Wall Street Journal was reporting. I’m trying to find out when they reported this because it was so interesting. I don’t know if I’m going to be able to find that date. Give me one second here. [inaudible 01:01:34], Lyft. I love doing this stuff real time, because you guys are like, “Wow, is he really doing it in real time?” Yes, I’m really typing. Okay, hold on. And this is from October, right? So we’re looking at six months ago in October. That’s when they pick their underwriters, and the valuation even said, Lyft’s valuation expected to the top $15 billion, in contrast Uber is being valued $120 billion. That was just like in October.
Frank Curzio: 01:02:05 This thing came out at the high end. I mean they raised it. It had a $25 billion valuation, what? A week and a half ago? When it was at 80 now it’s at 60. That’s massive. So when you’re looking at all the numbers and the raising of the prices and all this … It just seemed like a lot of fluff to me. Man, I have to see the next quarter. I have to see next couple of quarters, maybe Lyft blow out the numbers. Maybe they are gaining more market share. I don’t know. But right now man, it’s hey one red flag two … There’s like three, four, five red flags I’m seeing here that, I don’t know. I think this thing could really go a lot lower from here. So be very, very careful. Wait to see the numbers. I could be wrong on this thing shoots a lot higher. You get Buffet covenant and buy. I don’t know, but based on the numbers and what they’re saying, it just doesn’t add up to me.
Frank Curzio: 01:02:54 One plus one doesn’t equal two right now, there’s something going on with this company when I’m looking at the numbers, get $15 billion valuation, what? In October, now it’s at $25 billion valuation. These guys, that dilution is going to be incredible, and a lot of these guys are in the money on these things. So they’re going to be selling them again, and locked up it’s … Man, I mean this thing is priced that everybody who’s invested in early is going to make a lot of money, but everyone who’s buying this thing in the IPO is going to get crushed. And unfortunately it’s a lot of mom and pop investors, and you know what? That’s what I give a shit about. So when I look at Lyft, that’s what I see. Again I could be wrong, but you should be very, very careful because what I’m saying, a lot of people aren’t talking about. They just say, “Lyft in the growth,” and this and that. And a couple people said, “Nah, I don’t know if I like it.” And they come out with hold ratings. But just be careful. There’s a lot of things.
Frank Curzio: 01:03:37 When I analyze companies like this, you might see one or two little things and I’m like, “I want to … There’s a lot here that I just don’t get.” Just be very, very careful End. Another story, [inaudible 01:03:49] news is Boeing. This is a company I told you to avoid because of common sense. Look, they’re going to figure this problem out. It’s software problem. I talked to pilots and it’s more about when this problem happens, it’s more about shutting down the system, and they have to fly plane themselves. Unfortunately when it comes to internationally, a lot of these guys don’t have a lot of training flying a plane without any of this stuff on, what I’m hearing. I mean I’m laughing because it sounds weird to me, but it resulted in a couple of crashes. So pilots are trained here to, “Hey, we got to shut this thing off completely. And then yeah, we’ll be okay, we’ll manually fly the plane.”
Frank Curzio: 01:04:36 But what I’m hearing is a lot of these guys are used to the autopilot and the functions and the computers and stuff like that where they don’t have that much experience. And again, when that happens, it’s not like an easy flight, like you’re just flying. So this is me talking to three different pilots. Well yeah, it’s a software problem and they’ll fix it. But more important is what happens if another one of these things crash, God forbid. And that’s why when you’re seeing a company with that much 80% of their orders, their backlog of for the Max 737s, what are you going to do? And by the way, if you order one of those planes today, if you’re an airline and say, “Hey, I want these plants today.” They’re like, “Great, come back in five years.” That’s when they would be ready. So a lot of these orders are extended over five years.
Frank Curzio: 01:05:17 And what’s going to happen is these guys are going to be like, “You know what, let’s hedge ourselves a little bit. Even if it’s 5%, 10% let’s go with a different plane, the Airbus, the neo 320, provides 15% fuel efficiency per seat. This one, the Max provides 20% fuel efficiency per seat.” That’s what I would do, especially if I’m like a Southwest where … This is their plane. They have the most exposure to this plane that any other airline. So when I’m looking at Boeing right here, and you look at the recent news where China Eastern Airlines, they’re suing Boeing over grounding the plane. American Airlines is blaming them even though you know it’s 2% of their fleet, they’re just … Hey improve operations. It’s not the shutdown. It’s not the Max. It’s because your operations are terrible. I mean, just stop canceling flights. Again, customers have a lot of choices these days.
Frank Curzio: 01:06:10 For me, I’ll never fly them. I can’t fly them. Again, maybe it’s me or whatever. But you’re looking at the company just talking about first quarter where they have … Their backlog is still 80% of that 737 Max. But they said that first quarter deliveries were just 149 total commercial airplanes, verse 184 that was Q1 2018, so year over year. The company says it’s going to cut production from 52 planes per month to 42 planes as they fix the software problem. That’s pretty big because you’re looking at Boeing which is trading at a growth multiple, and you have a lot of these problems here, which is pretty scary. Now when I look at it, and the reason why I would tell you that I think Boeing’s going lower is because expectations are still sky high for this company. And that’s important. Sentiment is important. When sentiment is negative on a stock and everybody has sell ratings and nobody likes it. That stock just has to report an inline quarter and that thing could pop 20%, because everyone’s expecting it to crash and go terrible.
Frank Curzio: 01:07:19 I mean the numbers have been lowered, but not to the extreme that they should be lowered here. I mean, they’re like, “It’s going to get better right away.” And it might get a lot worse. It looks like it’s going to get worse. Their clients are canceling orders right now, and Boeing’s going to its suppliers and explaining that to them and saying, “Hey, you know what? You guys slow down right now.” But look at the average target price for the analyst is 434 bucks, it’s still 20% higher than the current price. It’s a lot considering its stock is trading at 16 times forward earnings, and you say, “Well, that’s a market multiple. I mean, analysts are expecting this company to generate close to or even more than $18 a share. I don’t see that. I see more like 16, 16.50, basically these [inaudible 01:08:03], there’re still very, very high.
Frank Curzio: 01:08:09 I think it could be even less than $16, so the company is trading a lot higher than 16 times forward earnings if you don’t believe those earnings and I don’t. I definitely don’t. Not to mention, even at that pace, you’re trading at a pretty high multiple of 60 times forward earnings when your only growing earning is 3% from last quarter. And the cherry on top is, when I look at the sell side firms here, there’s 27 sell side firms. Sell side guys are in the Goldman Sachs, Morgan Stanley, JP Morgan, the big guys who cover the stock that provide models and target prices, that’s what you see on TV. When they’re like, “They beat earnings, or they missed earnings.” That earnings number is basically the average meeting of all the analyst numbers. And they just say, “This is the average number. Here you go.” And whether you beat the bus.
Frank Curzio: 01:08:59 So it’s important to understand that number, because if you think like I do that they’re earnings estimates are way too high, they’re probably going to miss next quarter. And you know what happens in this market, especially with the past two or three quarters, when you miss bye, bye, your stock doesn’t go down two three, 4% no, it gets crushed 10% plus. I can’t see the mean … I mean they’re just too inflated, [inaudible 01:09:20] 17 of them still have a buy rating on the stock. So sediment is still very, very high for a company that was trading at a growth multiple, that kind of still is. They’re just basically growing earnings 3% from last quarter and yet they’re cutting growth a lot and significantly for their top product that provides 80% of their backlog. And now they’re getting companies that are starting to sue them and also cut orders and that’s going to continue.
Frank Curzio: 01:09:52 And again, God forbid you see another problem. Hopefully that doesn’t happen. But if there’s another problem with this plane, man, their clients are going to be like, “All right, we have to have ourselves a lot more than just 10%, 20%.” And that’s what I’m worried about with Boeing. So right now it’s scary. I know the stock’s down, you see a good name and say, “Hey, you know what, they’ll figure this out.” They haven’t figured it out yet and you know what? Their clients and their customers are cutting production. You’re looking at a company with a growth multiple that’s cutting their growth, and usually you know what happens when … Look at Nvidia, you can look at so many different stocks over the years. Look at Under Armour. When that growth disappears, man those things get crushed. So you have to see the next quarter, and the quarter after to see what Boeing is going to do.
Frank Curzio: 01:10:37 I wouldn’t touch this stock now. I think it goes lower, at least in the short term, but I see them definitely missing estimates next quarter, unless these analysts drastically low with them into their next quarter. But I don’t see that happening. There’s too much optimism on the stock right now and it’s very, very scary. I think it could come down a lot, lot more. But again, let’s look at next quarter, look at the following quarter. But been getting a lot of questions on Lyft and getting a lot of questions on Boeing and that’s how I feel about those two names.
Frank Curzio: 01:11:05 So guys, any questions or comments? Feel free to email me. Frank@curzioresearch.com, it’s Frank@curzioresearch.com. My apologies about Texas Tech. I know it was a sleeper, I had money on it to win I also … Well, I won one money for them to win their bracket. But I also would have won 17.01 … I think it’s 17.5 to one if they won the tournament, and they should have won the game. I mean it’s sad. No idea why that coach didn’t foul when he’s up three with under 20 seconds left. I mean, [inaudible 01:11:30] basketball for 30 years, I don’t think I’ve ever seen a company … A company say that’s how I’m talking right now. I’ve never seen a team when they were up three and fouled the opponent, with less than 20, 25 seconds left and lose that game. I’ve never seen it and it probably happened, but I bet you it’s more than 90% that you’re going to win that game.
Frank Curzio: 01:11:49 You look at what Virginia did the last two games, and three pointers they hit, and they were on fire until the end of that game. Why would you let them shoot a three pointer? Foul them, put the on a line. It’s one on one, they miss, they lose the game. If they make both of them, you get the ball, you get you two foul shots, you’re up three, do it again. Increase your odds of winning that game dramatically. And that’s something that coach is going to think about for a very long time. It’s Texas Tech, they blew that because of their coach. You’re up three less than 20 seconds left. You foul. You don’t let those guys shoot a three pointer, they’re a great three point shooting team. With that said, congrats to Virginia, what a fantastic story. After losing the first round, good for them. Good for them, they won the game, they played great, unbelievable wins. Last three wins. And hey, you know what? They deserve it.
Frank Curzio: 01:12:31 So guys, thanks so much for listening. Again, I really always, always say this. I really appreciate your support. I’ll see you guys in seven days. Take care.
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