Idea Brunch with Marc Cohodes
Marc Cohodes on exposing frauds and his top ideas
Welcome to Sunday’s Idea Brunch, your weekly interview series with underfollowed investors and emerging managers. We are very excited to interview Marc Cohodes!
Marc is a prolific short seller and former portfolio manager of Copper River Management. Marc has been instrumental in exposing frauds such as Lernout & Hauspie, NovaStar Financial, Home Capital Group, and MiMedx among many others. Today, Marc is a private investor and short-seller and frequently shares his thoughts with his 85,000+ followers @AlderLaneeggs on Twitter.
Marc, thanks for doing Sunday’s Idea Brunch! Can you please tell readers a little more about your background and your passion for exposing fraud?
Edwin, it's hard to believe I've known you for six years. And when we first met you had only like three followers. I'm very proud of you and it's an honor to be on Sunday’s Idea Brunch. I was born with the stock market bug. In high school, I made a lot of money at the time playing gold stock options in Homestake Mining and ASA Limited — for a 16-year-old I had something like $40,000, which was a ton back in 1976. I saw a company that I thought would be a huge winner called Data Access Systems and put half of what I had into it. What was worse is that I told my friends and others about Data Access Systems and it turned out to be a total fraud.
I was so pissed off that I vowed that this would never happen again. As bad as I felt losing my own money, I felt even worse losing money for people I liked. As I got older and got into the business, I felt a sort of inner motivation to go after some of these bad guys. It is just what makes me tick.
You are an all-time great at finding and exposing frauds. What are some of the common red flags you look for when investigating a company? What gets you excited as a short-seller?
There are many red flags out there, one that is both funny and true is my wig indicator. I think my batting average is close to 100% when I find an executive who wears a wig. Mark Trudeau, who ran Mallinckrodt (MNKQ) wore a wig. It wasn't the reason to short the stock, it was probably reason 49, but it was a factor.
I always say bet the jockey, not the horse. An executive’s track record means a lot. If you're going to short stocks, finding career failures, people who screw up in general again and again are much better targets than people who have had success their entire lives. Of course, the balance sheet matters and valuations matter, but I never have shorted a stock based on valuation.
I try to understand the company’s business model to determine if it makes sense. If I can't explain it to an eighth grader it's probably a place to look at as a short. Experience and age also matter and being 62, I have seen an awful lot of stuff. Market cycles come and go, frauds come and go, and bad guys come and go, but there are only so many ways you can run scams. That's the one good thing about getting older.
Another indicator is when a CEO picks fights with a short seller. That is always a terrible sign. CEOs should run their business, understand what the skeptics are saying, and execute. CEOs who focus on the shorts often get distracted and fail.
Finally, I often say thesis creep is fatal and thesis creep with leverage will destroy you twice as fast. Also, anytime a company pays a lot to name a stadium that’s another big red flag for me too. I can't give you all my secrets today, but those are just a few!
What are some interesting ideas on your radar now?
Here are my four most contrarian ideas:
1/ I am really bullish on Overstock (NASDAQ: OSTK — $1.11 billion). I know Porter Collins liked Overstock on his Idea Brunch, but now at $26, I think the stock is cheap. Now everyone knows that the macro of their retail business is terrible. They are taking share and destroying the competition, mainly Wayfair. I think one of the stories for Overstock going forward is how much share and business they take from Wayfair. Overstock's market cap is roughly ~$1.1 billion with $500 million in cash and a retail business that generates cash and is profitable that will do ~$2 billion this year, and some Blockchain assets which I am very excited about. This past February, tZERO (a blockchain technology subsidiary) appointed David Goone as CEO and received a minority investment from Intercontinental Exchange.
Goone, who is 62 years old, took the tZERO job because of the huge potential it has to change markets. He has a three-year plan for tZERO to become the factor in alternative security trading. This includes security tokens, NFTs, and all digital securities and will implement same-day settlement so there will be no funny business on its exchange. The New York Stock Exchange has put its chief operating officer on the board and ICE owns a significant minority stake in tZERO. What excites me to no end is that you can tokenize anything from real estate to music to art to sports figures — this market is beyond huge. The fact that its competitors are blowing themselves up left right and center is a huge plus for tZERO. Whatever tZERO becomes, it sure is not baked into the valuation here.
Overstock also owns a company called Bitt. They are the leaders of individual digital central banking and already received contracts for various countries in the Caribbean. This is a huge market and though I don't know how big it will eventually be, Bitt is the leader today. So, when you look at cash $12 a share, a retail business that is profitable generating cash and earnings, and Medici (blockchain) assets that in my opinion are worth between $3 billion and $7 billion dollars the stock is special here. I could go on for hours on Overstock but with a little patience, I think investors will be rewarded big over the next year or so.
2/ I also like Enovix Corp (NASDAQ: ENVX — $1.56 billion) a lot.