As the year comes to a close, some big short positions are under pressure as shares in the underlying companies have recently rallied. Earlier this week, Whitney Tilson, managing director of Kase Capital, announced that he was covering his short position in Lumber Liquidators (LL).
The following list details Tilson's position in Lumber Liquidators and looks at three other companies that have been targetted by other short sellers this year. The recent rally in the stock price of these companies suggests that the short sellers may be covering their positions soon.
Lumber Liquidators: On Monday, Tilson wrote that he was covering his short position in Virgina-based Lumber Liquidators. The activist investor had been short the company since 2013, but his position gained mass attention following a "60 Minutes" report in March that confirmed Tilson's claims that Lumber Liquidators' laminate flooring products made in China contained formaldehyde. At the time, Tilson suggested that Lumber Liquidators' senior management was aware of the problem and continued selling the product anyway. However, on Monday, Tilson wrote that he received information that led him to believe that senior management was not aware of the problem.
"If this information is correct, then the company was sloppy and naive, but not evil," Tilson wrote.
While Tilson no longer believes that the company is an attractive short, he still maintains that "that the company was, in fact, selling dangerous, formaldehyde-drenched laminate." Shares of Lumber Liquidators are down 55% since "60 Minutes" aired its report, but they up about 30% since Tilson covered his short.
Valeant Pharmaceuticals (VRX): On Wednesday, Canadian-based Valeant -- one of the most widely discussed shorts of the year -- announced that it was lowering its guidance for the fourth quarter and for 2016. The shares responded surprisingly by continuing their upward trajectory. On Tuesday, Valeant announced it had entered into fulfillment agreements with Chicago-based pharmacy chain Walgreens Boots Alliance (WBA), and the stock soared 16%. As part of the agreement, Valeant will be lowering the prices on skin and eyecare products distributed at Walgreen's stores by 10%. It will also lower the price by 50% on average on certain branded products where generics are available.
This agreement comes after Valeant was called out repeatedly this year for dramatically increasing the prices of its drugs, as well as for its relationship with Philidor Rx Services, a Pennsylvania-based specialty pharmacy. Andrew Left of Citron Research called out the relationship between Valeant and Philidor in October, saying the relationship between the two was "Enron, Part Deux." Since Left's report, Valeant cut ties with Philidor and said that Philidor would be closing. With respect to Valeant's recent announcements, Left said some of the firm's recent actions are encouraging but that the company still has a long way to go.
"It is also encouraging that they were able to sign a long-term distribution deal with Walgreens, but we still do not know the economic impact of their previous actions and we do not know how this will change the business going forward," Left wrote in an email to Real Money. "That being said it is nice to watch the company accepting the fact that they have to change their business model."
SunEdison (SUNE): Shares of renewable-energy company SunEdison and its yieldcos, Terraform Power (TERP) and Terraform Global (GLBL), have suffered wild swings in the second half of the year as worries over SunEdison's finances became apparent. The family of companies was further hurt when David Einhorn of Greenlight Capital sold much of his position during the third quarter.
Shares of SunEdison are down 70% for the year but are up 32% since Friday. The upswing is partly attributed to the U.S. signing onto a climate deal, along with nearly 200 other nations. The goal of the accord, which was signed in Paris, is to limit global warming by cutting down greenhouse gas emissions. The deal is considered a boon to the renewable energy sector, as is news that the U.S. is nearing a deal that would extend tax credits for renewable-energy companies.
Still, Missouri-based SunEdison and its yieldcos are not without problems. SunEdison's balance sheet is still stretched thin despite news that terms of its controversial pending merger with Vivint Solar (VLSR) have been amended and that Blackstone Group (BX) has agreed to provide a $250 million credit facility to SunEdison to fund its growth.
Wayfair (W): This online retailer has attracted the attention of notable short sellers Andrew Left and Whitney Tilson. Left said in August that "there is no bull case whatsoever" for the company, while Tilson called the company "a growth story run amok, with a potentially serious formaldehyde problem" during a presentation in August.
Shares of the Boston-based company are up 126% for the year and the stock has climbed in December after it announced that its Black Friday sales increased 109% from the previous year. Still, fundamental issues remain as the company has much in common with other exuberant tech start-ups that eventually faltered. Namely, it has yet to turn a profit, and formaldehyde was found in furniture the company sells.
"I have never questioned Wayfair's ability to grow its revenue rapidly -- at least for now," Tilson wrote in an email to Real Money earlier this month. "What I question is the company's ability to ever earn a meaningful profit." Tilson declined to comment further on his views on Wayfair for this story, but in a previous presentation, he characterized Wayfair's formaldehyde issue as follows:
"Unlike, Lumber Liquidators, I don't think Wayfair is deliberately poisoning its own customers to save a few bucks on sourcing costs. However, to me it is compelling evidence of Wayfair's incompetence and/or business that's completely out of control."
Left told Real Money that Wayfair's formaldehyde issue "is just the risk of selling low-cost imports," and that investors should stay focused on issues with the company's business model. Furthermore, he doesn't believe that Wayfair is equipped to compete with California-based companies, Restoration Hardware (RH) or Williams-Sonoma (WSM), as both companies have an established online presence coupled with stores that allow customers to try products before they buy.
Also, there are signs that Wayfair's revenue gains could be short-lived, as Restoration Hardware CEO Gary Friedman reiterated statements he made on the company's earnings call during an appearance on CNBC's "Mad Money" on Tuesday evening.
"There's some macro trends that are affecting certain regions in the U.S.," Friedman said, pointing to regions in the U.S. that have been hit hardest by lower oil and gas prices such as Texas.
While fundamental issues in Valeant, SunEdison and Wayfair remain, the recent rally in these stocks suggests that the short sellers may soon be rushing to cover their positions.
