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

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

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

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

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

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

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

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

Berkshire Hathaway Inc. (NYSE:BRK.A) has been one of Tilson’s long-term favorite picks and in the letter, he reiterated his view on the stock, estimating an intrinsic value of close to $270,000, which suggests that the stock is currently trading at a 30% discount. Berkshire Hathaway Inc. (NYSE:BRK.A)’s investment in Heinz and Kraft is also bringing significant profits, which are currently not reflected in its financial results. “To my knowledge, this extra value hasn’t been noticed by any analysts, media or investors,” the investor added. Therefore, these investments could raise Berkshire’s intrinsic value even more. At the end of June, 71 funds from our database held shares of Berkshire Hathaway Inc. (NYSE:BRK.A)’s class B stock.

Platform Specialty Products Corp (NYSE:PAH)‘s stock has lost nearly 50% since the beginning of the year, significantly affecting the returns of Kase Capital. Tilson thinks that the decline of the stock is mainly due to external factors, such as weakness in emerging markets and commodities. However, he believes that the company is still doing well, and that its management is doing a good job of cutting costs and improving the business. The same bullish sentiment toward Platform Specialty Products Corp (NYSE:PAH) can be observed across the hedge fund industry, with 53 funds from our database holding over 53% of Platform Specialty Products Corp (NYSE:PAH)’s shares at the end of June, up from 38 funds with holdings a quarter earlier.

Micron Technology, Inc. (NASDAQ:MU)‘s stock is also 52% in the red year-to-date, amid a declining demand for DRAM chips. The company posted lower-than-expected results for its fourth quarter of fiscal year 2015, but the stock still gained ground because it was trading at a low price.

“The stock is stupidly cheap at ~4x the company’s potential earnings power in a good environment (which I estimate at $4/share), a 40% discount to the replacement value of its manufacturing facilities, and 24% below a lowball $21 bid by a Chinese state-owned chip design company, Tsinghua Unigroup Ltd.,” Tilson said

Therefore, Tilson remains bullish on Micron Technology, Inc. (NASDAQ:MU) because the company continues to carry a strong underlying growth in demand for the long-term and has a “rational industry behavior”.

Another investor who is also disappointed by the performance of Micron Technology, Inc. (NASDAQ:MU)’s stock is David Einhorn of Greenlight Capital. However, Einhorn cut his exposure to the stock, with the thought that it will stay low for a significant amount of time yet (see Einhorn’s take on the company in his latest investor letter).

Disclosure: None