«This is a Frankenstein Experiment That’s Gone Bad»

Marc Cohodes is one of the most feared short sellers on the planet. He explains why his artful profession is becoming increasingly tough, which stocks he is currently betting against and where he spots opportunities on the long side. He also has a clear opinion on the Wirecard accounting fiasco.

Christoph Gisiger

Deutsche Version

If Marc Cohodes takes aim at a company, trouble is brewing. Most of the time, the instinct of the hard-nosed short seller turns out to be correct, and he’s not afraid of toxic disputes with the management.

In his colorful career, the experienced investor from California has uncovered various cases of fraud. Legendary are his battle against the Belgian software developer Lernout & Hauspie and his campaign against the US mortgage lender NovaStar, which was later documented as a case study by Harvard Business School.

The former boss of the hedge fund Copper River Partners, who today only invests his own money, thinks that the pandemic opens up opportunities on both sides of the market. «This is a perfect environment to be long stocks because there are clear winners, and to be short stocks because there will be clear losers,» says Cohodes.

In this in-depth interview with The Market/NZZ which has been edited and condensed for clarity, the straightforward American explains why he sees upside in the stocks of Camping World and Overstock. On the short side, he bets against Align and Trex. He also cautions that things at the German financial services provider Wirecard are going to get even uglier.

Mr. Cohodes, stocks have staged a strong comeback. But now, the rally seems to be running out of steam. What’s going on?

The world is crazy. Because of the pandemic, governments and central banks around the world throw money at banks, whether it’s QE4, low or negative interest rates or other multi trillion-dollar interventions. The Fed is even buying junk bonds. This is nothing short of insanity. It’s a Frankenstein experiment that’s gone bad. It has the worst markings of everything: In the US, you have bailouts for the rich and you have people who are unemployed through no fault of their own standing in food lines and looking for a job. At the same time, you have the government - or let’s just say Trump - dying to get re-elected, encouraging citizens to drink bleach and inject disinfectants.

What are the risks investors should be aware of in this market?

The common theme right now is that people are so used to and enjoying the volatility and cheap or free trading commissions. But what’s really dangerous and needs to be pointed out is these leveraged and over-leveraged ETFs. You don’t need to be playing a three to four-time leveraged ETF to make money. You should just buy a normal ETF. And, if you want to use leverage, you leverage it up yourself. These overleveraged entities cause enormous damage when they run amok. They get caught in computer programs and just go ballistic. I think that’s part of what happened in this recent meltdown.

We’re also reading about rising defaults. Neiman Marcus and J.Crew, two private equity backed retailers recently filed for Chapter 11 bankruptcy protection. Is that a reason for concern?

Private Equity as an asset class is very dangerous and their portfolios are drastically mismarked. The concept of leveraging up basic businesses to the tune of three, four, five or six times is going to prove to be very dangerous. For example, Apollo bought out Chuck E. Cheese and put all sorts of leverage on them. This is a slippery slope. If I were the pension funds or the endowments who are invested in these things, I would be very leery and hesitant of paying these guys the ridiculous fees they charge. So I’m quite negative on private equity.

You started your career in the investment business in the late seventies. How has the art of short selling changed over the years?

Today, it’s about as impossible as impossible can be. So for me, it’s important to not be diversified and to not have a view on the market because you will be very disappointed. Instead, you pick companies no one would miss if they went out of business. That’s why I would never be short Netflix, Amazon, McDonald’s or names like that. Because if they were out of business, people would actually miss them. Neither am I involved in things like Tesla, Zoom Video and all these crazy tech stocks because these things can get out of control - and in an out of control environment where money is cheap and the President is humping the stock market rather than the economy, it’s dangerous to bet against stocks like that.

As in every crisis, there was a growing choir of voices in March, calling for restrictions and bans on short-selling. What are your thoughts on the regulatory environment from a short seller’s perspective?

People attack shorts rather than look at fundamentals. As a regulator, it takes work to get to the bottom of things. But by and large, regulators are lazy, and many of them are captured. Also, trying to simplify things does the investing public a huge disservice. In a crisis, the shorts are the ultimate buyer since they cover their positions in due time. We take risks every day. If you’re wrong about a stock you will get your ass kicked. And, if the shorts lose money, no one is bailing them out the way they bail out these overleveraged financial players. During this recent meltdown, a lot of people said we should close the market. But that would have been the stupidest thing known to man: You never want free markets closed unless you think the markets aren’t free.

What does the daily business of short selling look like today?

There are about four, maybe five people doing this who are any good. But most of the people doing this aren’t very good. They talk about an idea, take a position on a Monday, cover it on Tuesday, and then they’re onto the next thing. So the regulators need to focus on these «get rich quick» schemers and stuff like that. Just look at Wirecard in Germany which talks a big game but can’t file financials and whose numbers are all messed up.

Wirecard is a popular target for short sellers. Are you active in the stock as well?

I’m short Wirecard, but it’s not my main focus. This is an absolute mess. Since I’ve been doing this, I have never seen a company unable to report Q4 numbers but then comes and tries to report Q1 earnings. I find that highly irregular and very troublesome. I would take whatever they say with a grain of salt because I literally think they’re making it up. KPMG’s special audit report spelled out that Wirecard can’t verify nor can the special auditor verify where one billion dollars are. They are literally missing money, and that’s a major problem. It’s just a black eye to the Germans. BaFin, Germany’s financial regulator, looks foolish. It wouldn’t surprise me if Ernst & Young, Wirecard’s main auditor, leaves. Also, it doesn’t matter who they put in at the management.

So how do you pick your bets in this challenging market environment?

Never ever have I seen a time where there’s such a varied degree of opinion on what can happen next. There’s people that are very bullish. They think we’re going to have a V-shaped recovery, and we’re going to be off to the races. On the other hand, there are also many people who think we’re at the cusp of a depression. So what I try to do is not really have a point of view. I try to think and not get emotional. This is a perfect environment to be long stocks because there are clear winners, and to be short stocks because there will be clear losers. But you have to think for yourself rather than listening to B.S. on CNBC or BNN because that stuff is designed to make you miss and make you fail.

What are your highest-conviction positions right now?

One thing I feel very strongly about and an area that I own long is camping. This summer, people are not going to want to be on an airplane or on a cruise. They don’t want to be staying at high-rise hotels with elevators. There will be no concerts, state fairs or baseball. People are nervous about public gatherings. They are worried about getting this virus and dying. So what are they going to do? They are going to go back to basics and camp. They are going to rent or buy an RV, rent or buy tents, and they are going to be together as a small group, whether it’s your family or friends.

How do you play that as an investor?

I own Camping World. The company has 150 stores, and the next closest competitor has 20. It’s run by a guy named Marcus Lemonis. He owns a great percentage of the stock and runs a TV show called «The Profit». I don’t really watch TV, but what I do know is that this guy has a lot on the line, and he’s as focused as focused can be. So if he pulls this off and I’m right about camping this stock will go absolutely crazy.

Since we talked earlier for this interview at the end of April, and you recommended the stock, the shares are up more than 60%. How much appreciation potential is left today? Especially, since the company also carries a lot of debt on its balance sheet.

The company had a really good first quarter. As the CEO said on the call, the first weekend in May was the best weekend in Camping World’s history despite the pandemic and everything that’s out there. What’s more, a big-time venture capital investor recently said that he views camping at the start of a super cycle. Mr. Lemonis is the first to admit that he has too much leverage. But to me, too much leverage at the turn of a camping cycle is a plus rather than a minus for a huge market share winner like Camping World. The company has plenty of liquidity, and does not have its debt coming due until 2024. So I’m a huge believer and I even added to my position.

Where else do you spot opportunities?

I also like Overstock a lot. The site is well run, the company has about a $750 million market cap, $160 million in cash, and they are going to surprise people this year. They were supposed to do $1.3 or $1.4 billion revenue this year, but they are going to do a lot more. I’ve been in this stock for quite some time, but the nature of how people buy things is going to change. The days of going to a mattress firm or even any furniture store are over. You’re not going to go to a place and lay on a bed. It’s not safe and it’s not sanitary. So people are going to shop more and more online, and this is a huge plus for Overstock.

But first and foremost, you’re known as a short seller. What are the stocks you’re betting against?

In an environment where people are very careful where they spend money, I have a hard time seeing them buying plastic braces to make their smile look better. That’s why I’m short Align. It’s about a $200 stock that trades on a ridiculous multiple. The last time the economy tanked in 2008/09 we were short all the discretionary dental companies - and we made a lot of money.

Are you also shorting stocks of Swiss companies?

No, I have no problems with the Swiss. They run a tight ship. Back in that last economic slowdown we were short the Swiss dental stocks Straumann and Nobel Biocare, and they both collapsed. So again: The first thing that people stop doing is elective dentistry. They don’t like a dentist fiddling with them, and they’re sure not going to like it in the Covid-19 world when people are putting hands in their mouth. So you stick with what you have, unless you need a root canal or fix a cracked tooth. You’re not going to spend money on costly stuff that you don’t necessarily need done.

What are other names you’re focusing on the short side?

I’m short Trex, a company which makes synthetic decking. In this environment, when you need a new deck, you will replace boards, repaint your deck or waterproof it rather than buy a new one. People will fix what they have rather than pay $35,000 to $40,000 and borrow money to get a brand new deck. What’s more their management just retired, and they have huge execution issues and an awful lot of competition. So I think they’re margins are going to crumble.

Over your decade-long career as a short seller you’ve been in many heated battles. The most recent one was your campaign against MiMedx, a formerly highflying maker of tissue grafts and biologic implants whose stock has crashed and was delisted in late 2018. What’s the next chapter in the MiMedx saga?

Parker Petit, the company's former CEO and my archenemy, is indicted. Allegedly his trial is in July and I would love to see him in jail. MiMedx is on death's doorstep. They’ve taken PPP money, and now they have to give it back. They’re functionally bankrupt. So it would be a perfect final chapter for this thing to just simply go away. Since everyone says I’m biased, I have covered most of my stock, so I don’t have a profit motive with MiMedx. I just want to see justice served. I want them to get what they deserve.

During your fight against MiMedx, you were also paid a visit by the FBI. How did that go?

Petit bribed a US Senator which got the FBI to come visit me, and they told me to quit tweeting about MiMedx.That’s why I want to find out who was ordered to come and see me, and how that transpired. So far, I’m not comfortable with what we’ve gotten back from the FBI on this. Therefore, I’m suing the FBI and the DOJ to get all the records. Depending on what I turn up, I will take further action. I’m not done, and I take my civil rights very seriously. The same applies to family’s safety.

What’s your motivation to go after fraudulent companies like MiMedx?

Anyone who’s a short seller, and actually enjoys it, isn’t mentally right. I’ve been doing this for a very long time, and I think I’m really good at it. Even though people ask me all the time, I don’t want to have a fund. But I like helping some people out. And, if I can make a difference in the world, then that’s a good thing. If I can help put bad guys in prison, like Parker Petite, and I expose various forms of fraud, I’m doing the world a favor. If something happened to me tomorrow, people would say: «That guy made a difference. He moved the needle.»

How does your investment process look when you’re looking for potential shorts?

It varies by the name, by the industry, where a company is in the cycle, whether the business is falling apart, whether it’s a fraud, whether competition is getting them or whether they have a balance sheet issue. It all depends, but there always tends to be some central theme behind it which could cause disruption. For instance, I used to be short mattress firms like Tempur-Pedic when foam mattresses were big. That stock collapsed many times. When you have a no growth business, and you induce a gadget to entice growth, it works for a short time, and then invariably blows up.

You’ve also made headlines by shorting the Canadian real estate market, specifically mortgage lenders like Home Capital Group and Equitable. What’s going on with the big Canadian housing bubble?

Those things blew up to smithereens, and Home Capital is exposed as a fraud. I’m so tired of all the nonsense that’s going on in Canada. I’m not short of either one of those stocks right now, just because I’m sick of dealing with all those people. I think they're unappreciative of what I brought to the party. They’re very clannish. But make no mistake: Canada’s the most leveraged G-«pick a number»-country out there. Housing is going to be a disaster, and banking is a disaster, and so is Canada’s economy. Their desire to take on more debt is very foolish. This ship is just bad, and it’s wrong headed.

Are you also betting on more disruption in the oil patch?

I’m not as much in the oil patch, but I’m still short Badger Daylighting, a firm that specializes in soil extraction for oil companies. The stock has blown up, and the company has a lot of troubles. So I like being short Badger.

Are there any other bets people should take a closer look at?

I urge the Swiss to keep thinking for themselves. I think Switzerland’s political neutrality is a good thing. It serves people well. I also know that you guys are into mountain biking. So with respect to the Olympics next year, I want you to put all your Swiss francs on my friend Kate Courtney who’s the world champion in women’s mountain biking. She’s a sure fire to win the gold medal next year, and she’s my number one non-stock long!

Marc Cohodes

In the tight circle of short sellers, Marc Cohodes is a living legend. He is a former General Partner of Rocker Partners/Copper River and worked there from 1985 to 2009. He began his career at the Northern Trust Company in 1982 after graduating from Babson College with a BS in Finance. He has been profiled in various books like Reckless Endangerment, Selling America Short and The Most Dangerous Trade. He was the subject of a Harvard Business School Case study on his efforts to expose Mortgage Fraud at NovaStar. He resides in Sonoma County, California, where he runs the Alder Lane chicken farm. You can reach him on Twitter at @AlderLaneeggs.
In the tight circle of short sellers, Marc Cohodes is a living legend. He is a former General Partner of Rocker Partners/Copper River and worked there from 1985 to 2009. He began his career at the Northern Trust Company in 1982 after graduating from Babson College with a BS in Finance. He has been profiled in various books like Reckless Endangerment, Selling America Short and The Most Dangerous Trade. He was the subject of a Harvard Business School Case study on his efforts to expose Mortgage Fraud at NovaStar. He resides in Sonoma County, California, where he runs the Alder Lane chicken farm. You can reach him on Twitter at @AlderLaneeggs.