Whitney Tilson is short EXACT Sciences Corporation (NASDAQ:EXAS) and unafraid to say it. The market has been agreeing with him, after all, ever since Tilson presented Exact Sciences as his favorite short at the Robin Hood Investors Conference about a year ago. Exact Sciences’ stock was $23 and change then and it’s $7.76 now. There are two sides to every coin, and in this article, we present the short side and specifically, Tilson’s short thesis on the stock.
We pay attention to hedge fund investors such as Tilson because our research has shown that hedge funds are extremely talented at picking stocks on the long side of their portfolios. It is true that hedge fund investors have been underperforming the market in recent years. However, this was mainly because hedge funds’ short stock picks lost a ton of money during the bull market that started in March 2009. Hedge fund investors also paid an arm and a leg for the services that they received. We have been tracking the performance of hedge funds’ 15 most popular small-cap stock picks in real time since the end of August 2012. These stocks have returned 102% since then and outperformed the S&P 500 Index by around 53 percentage points (see more details here). That’s why we believe it is important to pay attention to hedge fund sentiment; we also don’t like paying huge fees.
First, Whitney Tilson acknowledges EXACT Sciences Corporation (NASDAQ:EXAS) doesn’t sell snake oil.
Exact has a real product that addresses a very serious problem, the low screening rate for colorectal cancer, the second-leading U.S. cancer killer.
But, Tilson feels that the company will run into serious challenges as its product is a bit limited.
Nevertheless, I felt (and still feel) that it’s a great short because the test has significant drawbacks that will severely limit its adoption and, in light of this, the valuation is absurd.
EXACT Sciences Corporation (NASDAQ:EXAS)’s sole product is Cologuard, a non-invasive multi-targeted stool DNA test that helps detect the presence of colorectal cancer and pre-cancer. The company received bad news from the U.S. Preventive Services Task Force (USPSTF) on October 6 after the agency didn’t recommend Cologuard as a routine screening test for colorectal cancer in a draft. The agency said Cologuard ‘may be useful in select clinical circumstances’ instead. Although the draft hasn’t been finalized and EXACT Sciences is trying to change it, the price action has been very negative and it seems investors don’t believe the USPSTF will change its mind.
Tilson feels USPSTF’s ruling will cause Cologuard’s demand to fall off a cliff and subsequently cause EXACT Sciences Corporation to miss analyst expectations ‘by a country mile’. Tilson thinks the revenue misses will rapidly burn EXACT Sciences’ net cash of around $350 million (or $4 per share) and cause the bullish analysts currently defending EXACT Sciences Corporation to throw in the towel.
If I’m right about a massive revenue miss, this, by itself, will crush the stock – but in addition, I think it will be difficult for Exact to reduce the enormous cost structure it’s built up in anticipation of Cologuard’s launch… [I]nvestors who think this cash provides much downside protection for the stock are mistaken, in my opinion, because it will be needed to cover the company’s large ongoing losses and thus will never be returned to investors.