One down, eight to go. I mentioned nine individual stocks as short candidates in my RM column yesterday, and Illumina (ILMN) was the first to answer the call. ILMN shares plunged 16% in this morning's trading after the company pre-announced a revenue miss for its second quarter after the close of trading last night. ILMN expects 2Q19 revenues of $835 million, well below the Street consensus estimate of $888 million and a truly anemic growth rate versus 2Q18's reported revenues of $830 million. ILMN management did not mention a profit impact from the slower than expected revenues. One has to assume it will be significant, though, especially since ILMN management noted:
"In light of the Company's lower revenue growth expectations for 2019, Illumina is taking immediate action to adjust operating expenses for the remainder of the year."
So, that's a clear sign of a profit warning in a business that is clearly slowing. ILMN CEO Francis deSouza blamed the miss on transitory issues, but we veteran stock analysts know much better than that. I once had a buy-side client tell me that earnings warnings are like roaches. You see one, but you know there are more to follow.
But, Illumina's pre-pre-annnouncement market cap of $52 billion seemingly priced in zero chance of an earnings miss. And that's the problem with individual stocks in a market that is rolling to yet another new all-time high in today's trading. "Priced for perfection" is an old cliche about highly valued stocks, but that doesn't even begin to capture what is going on in certain sectors of the U.S. stock market. These stocks are priced for fantasy, not perfection. That's a big difference, and, as my new venture, Excelsior Capital Partners, emerges from its current "soft open" phase, I will implement to short positions in wildly overvalued stocks.
As mentioned yesterday, I will keep all numbers generated by screens I run for Excelsior as proprietary data, but I am willing to share some of the categories I use. Illumina was one of the most highly valued names in Bloomberg's U.S stock universe in the categories of trailing EV/sales, forward EV/EBITDA, and forward (next 12 months) P/E. Other than that it looked pretty cheap to me.
Seriously, though, Illumina is now forecasting 6% revenue growth for this year, yet, as of yesterday, was trading at more than 52x forward EPS. Did your head just explode after reading that? If you are a value investor, or any type of investor, you realize a PEG ratio 8.5 times is just bananas. But that's what this market was giving Illumina. 'Was' being the operative word.
It's one thing to place a stratospheric multiple on high growth, but to place such a multiple on mediocre growth is truly nonsensical. It is also expensive for those who are invested in names that fit that profile, as Illumina clearly did.
So, as a reminder, here are the nine names I mentioned in yesterday's column. Paperwork issues (soon I will begin publicly naming the brokerage that is slowing me down) may be slowing the launch of Excelsior's short portfolio, but Excelsior's' guiding principle - cash flow never lies - is in full effect as evidenced by ILMN's downfall. Earnings pre-announcements - colloquially known among analysts as "confession season" - are fun, but that joy pales in comparison to the stock volatility driven by earnings announcements themselves. Earnings season begins in earnest next week. I cannot wait.
Intuitive Surgical (ISRG)
Hon Hai (HNHPF)