Liquidity and cash burn remain key near-term risks

April 14, 2017 11:00 AM

“Liquidity and cash burn remain key near-term risks, and investors may grow weary of continued raises as this is the second capital raise in a year.”

—Colin Langan, UBS

Tesla Inc. (TLSA) announced plans to raise another $1.15 billion in capital to fund its expansion of the Model 3. Once again, investors seemed eager to line up and give Elon Musk money. 

Business Insider talked with UBS’s Colin Langan about a deal that combined $250 million in equity and $750 million in convertible debt. Oh, and don’t forget  to tack on $15 million for the offering’s underwriters (where is blockchain when you need it?). When Musk isn’t fantasizing about life on Mars, his other favorite hobby is spending other people’s money. 

Langan has a price target of $160 per share, a figure we published in September 2016. His biggest concern – and Wall Street’s – is that Tesla fails to meet its delivery goals on the Model 3.

 

“IEX is simply providing our members their own information back to them at no charge.”

—Brad Katsuyama, IEX Founder & Chairman

IEX, the Investors Exchange, has launched a free, web-based application program interface (API) supplying customers with IEX quotes and trading data for mobile, desktop and trading applications. Data includes the best bid and offer for all stocks quoted on IEX, industry wide trading volume and aggregate metrics on notional volume, routed volume and market share.

 

“Valeant is a very early-stage Berkshire.”

—Pershing Square Capital founder Bill Ackman, 2015

Bill Ackman was on top of the world in 2015. His hedge fund surged 40% the year prior. People cheered for him in his standoff over Herbalife against Carl Icahn. The money poured into his fund. 

Then he met Valeant Pharmaceuticals (VRX), a flawed pharmaceutical company that loaded up on debt to try to sell the idea that female Viagra was the cure to societal and portfolio ills. It is two years this month since Ackman told a Sohn conference audience that the company was undervalued over time just like Warren Buffett’s Berkshire Hathaway. Oops…

From its peak north of $250 per share, Valeant has collapsed. Ackman finally threw in the towel in March and registered a staggering $3 billion loss after tripling down on the stock.

In the Fall, Modern Trader spoke with Credit Strategist Michael Lewitt who told readers that the stock was worth nothing. Valeant could achieve that feat by 2018 without some form of unexpected bailout.

 

“Management confirmed the concerns we have been voicing for several months now, specifically that consumer demand in firearms is deteriorating given pull forward into 2016…”

—Rommel Dionisio, Wunderlich Securities

Wunderlich analyst Rommel Dionisio said in March that it didn’t matter that Smith & Wesson (OABC) had changed its name. The gun maker still faced monumental challenges in 2017. The biggest challenge? The world’s greatest gun salesman, former President Barack Obama, left the White House. With Republicans firmly in charge, the threat of anti-gun legislation sits at virtually zero. 

Gun background checks, a proxy for sales, surged a stunning 55% in Obama’s final year as markets expected Hillary Clinton to win and for sales to rise even higher. The tables turned with Trump’s victory, and guns stocks have been among the worst performers since the election.

As we reported in our “Issue with Guns” (see Modern Trader, March 2016) the problems for gun stocks are reminiscent of the sharp 2014 downturn in the sector: Retailer inventory is high. Margin-crushing promotions are necessary to clear that inventory. And competition is high in this environment. But nothing will hurt gun stocks like AOBC and Ruger (RGR) more than Trump’s victory. The question now is which Democrat will be appointed the next great American gun salesman?

 

“A company controlled by just two men should be labeled as ‘junk equity.’”

—Anne Simpson, Investment Director, CALPERS

CALPERs’ (California Public Employees Retirement System) director Anne Simpson again criticized Snap Inc.’s precedent of issuing only non-voting shares to public investors as institutional investors pushed regulators to consider banning the practice before it becomes the standard in limiting the power of certain shareholders.

In a conversation last month, Simpson told Modern Trader she opposed to Snap’s liberal use of the public markets. Snap Inc. – the owner of Snapchat – watched its stock erode to under $20 in mid-March, leaving retail investors who piled in on the first day of trading underwater. As we concluded last month, investors should wait for the market to price the stock accordingly after the lock-up period and for the company to show progress in its advertising revenue before considering a purchase of Snap stock.

 

“The CIA reports show the USG developing vulnerabilities in U.S. products, then intentionally keeping the holes open. Reckless beyond words.”

—Edward Snowden, Parts Unknown

At a time that Russian hackers are still a buzz on Capitol Hill, the friendly fire comes from the United States’ own security apparatus. Wikileaks has exposed that the U.S. government was spying on its own citizens through a number of standard household products, including Smart TVs. Snowden’s criticism has less to do with the government’s clandestine efforts and more on the vulnerabilities that hackers can exploit. 

“Why is this dangerous?” he continued. “Because until closed, any hacker can use the security hole the CIA left open to break into any iPhone in the world.”

John Reed Stark said that it was time to move on from the Russian hacking battle in our March forecasting issue. We’ll check back with Stark for comment on the issue in the weeks ahead.

About the Author

Garrett Baldwin is the Managing Editor of the Alpha Pages and the Features Editor of Modern Trader. An author and Baltimore native, he earned a BS in journalism from the Medill School at Northwestern University, an MA in Economic Policy (Security Studies) from The Johns Hopkins University, an MS in Agricultural Economics from Purdue University.