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Winners 2016:

SAM: The firm was restarted in 4Q15, with SAM being the first new idea. We published at $213 in December and was $160 by the end of January where clients were covering. We always look to short stocks where a big acquisition has taken place. SAM bought an alcoholic cider company and would be comparing against those numbers in 2016. They were also losing market share from the craft brew industry which was growing rapidly. Budweiser was acquiring the best craft brewer, plugging them into their distribution network, taking market share from SAM seemingly daily. But takeover rumors started to make their way into the stock price, including an intraday move from $168 to $194 after a bad earnings number. At $194 we told clients to stay short; however on Aug 4th, we had had enough, and wrote a cover at $180. It fell one more time to the $140’s after another bad quarter, but without us. Takeovers make us unpopular.

Sample Reports: December 4, 2015
Sample Reports: December 18, 2015

ALGT : We started our coverage of the ALGT short on March 15, 2016 at $179, with a 25-page detailed report. Basically, the company was under spending on maintenance causing several incidents with the aircraft, often involving emergency landings due to smoke in the cabin and other issue. We interviewed several former employees claiming the maintenance books are all fraudulent. Later, we received a FOIA from the FAA showing thousands of maintenance issues. The FAA pressed ALGT to replace half their fleet with newer planes with cash they don’t have. As of this writing, the stock is $153.

Winners 2005 - 2013:

ESI: ITT Education is another for-profit education company we covered. We wrote our first report in April 2009, commensurate with our coverage of APOL. The stock was volatile trading in the $100 to $120 range. We told clients to stay short for many years. At $121 in April of 2010 we told clients “short into the pre-market rally.” By October 2010, the stock was $57 where we suggested clients book profits. By July 2011, the stock was back in the $90s, but then management admitted on a call most of their schools had graduation rates under 25% causing the stock to fall back to $57.30. As we had already recommended clients short ITT for several more years, we never wrote another report. ESI was put out of business by the Department of Education in 2016. At least one client that we know of stayed short into single digits.

Sample Reports: January 21, 2010
Sample Reports: April 19th, 2010

UBNT: UBNT is networking equipment company. It came public with several interesting disclosures that made us want to short it right away. They had been investigated by the US Department of Treasury for making illegal sales to Iran and some questionable sales to smugglers in South America. It came public in the fall of 2011 at $15. We recommended UBNT as a short at $32.30 in early April 2012. We visited the company’s sales office next to Miami Airport in Florida. There we interviewed the head of sales who told us stories of the company constantly buying back inventory from distributors and then reselling it to other distributors. This raised alarm bells regarding the integrity of the sales figures. We sent surveys to several dozen distributors listed around the world on the company’s web page, which raised more questions. Then the CEO came under investigation by the Chinese government. The stock quickly fell to $15.88, where we wrote a cover. The stock fell all the way to $8 without us. The short interest was around 50% of the float, so we were more than happy to avoid the squeeze risk.

Sample Reports: April 2nd, 2012
Sample Reports: April 11th, 2012

RGR: Ruger is a gun manufacturer. Typically, when there is a mass shooting somewhere in the US where an assault rifle is involved, some politician, including the President, may call for legislation to ban assault rifles. This creates a strong demand for assault rifles. RGR’s stock price often trades off its one or two year backlog. We started coverage at $48.05 in June of 2013. The stock quickly rallied through fifty and sixty in the fall. By November, the stock was $73.45. We were clear in our reports that RGR was a great long-term short. Again, ARS temporarily closed in 2014 and part of 2015. Clients later told us it was a big winner with the stock trading down to $35 by December of 2014.

Sample Reports: June 28th, 2013
Sample Reports: June 29th, 2013

TPX: We recommended TPX twice. We started at $36.64 in October of 2007. In November, we wrote a trading cover at $29.66. Sales looked weak due to the housing market; the balance sheet wasn’t pretty, though the company bought back huge quantities of stock with debt, something we love to short into. We stopped writing reports, but the stock kept going, to $9, in fact. We started recommending TPX again in October 2011 at $49.66. The stock quickly traded into the low $60’s in late October. The company was starting to lose market share to Mattress Firm’s new I-Comfort product. TPX was pressing retailers to take inventory, while accelerating advertising to up 50% yoy, far greater than sales growth, slowing earnings. The company was buying back stock aggressively. It spiked to $83.65 in early April. We refused to tell clients to cover; in fact, we pressed them to short more. Then it fell $12 points on lower guidance. Management warned about increased cannibalization. On May 7th, we wrote a cover at $51.54. By October it was $32.87.

Sample Reports: April 11th, 2012
Sample Reports: April 20th, 2012

APOL: was our biggest short as we covered it for ten years, most of which was during ARS. However, we need several charts to communicate where the research was going and what clients were looking at. Our earliest report was in September of 2006 at $49. We wanted clients to be short for an earnings release. Sometimes our investment idea had trading component. The stock fell from a high of $60 of $38.8. We are not always told by clients, but we believe they covered on the weakness. We wrote two more periodic reports after that at in April 2007 at $44 and $48.63, respectively.

APOL: In January of 2008, we wrote a report, “8 years of predatory recruiting.” Several government reports came out showing fraud at APOL. There was also news that the availability of loans would be down due to the financial crisis. By March 28th, 2008 the stock was $45 where we wrote a cover. SLM and other lenders started cutting back loans to for-profit colleges calling them “sub-prime” students.

APOL: From January to March of 2009, we wrote eight substantial reports referring to APOL as a “Ponzi scheme”, knowing we would recommend the stock for several years possibly into bankruptcy. By May 7th, the stock was $55.9 though we did not write a cover. The stock then rallied back into the $70’s followed by a gap down to the low $50’s due to a regulatory event. This negatively affected the industry simultaneously. We wrote a cover at $41 at the end of 2010.

APOL: With the stock at $50.70 in October of 2010, we pressured clients to short the stock in front of the eps report. In fact, we wrote, “Last chance to short APOL north of $50.” Our calls to clients were aggressive. In the following weeks and months, the stock reached a new low of $34.30. By December 28th, 2011 it was back to $56.38 where we wrote, “[APOL] reports next week; 12 months target $25.” The stock collapsed again into the low forties, by June it was in the low $30’s again when we wrote, “The case for zero.” As was typical of management they hid important data in the 10K causing the stock to gap down to $20.43. APOL reached a low of $6 in 2015.

SCSS: We recommended Select Comfort and Tempur-Pedic simultaneously. In a weak housing market, new mattress sales fall as people elect to move less, which when most people buy a new mattress. Further, two large mattress retailers merger, creating a larger company with better buying power. We started SCSS at $14.33 in October of 2007. It was an ancillary investment to TPX. By November the stock was $10.50 where we wrote a trading cover. The stock fell all the way to at $.20.

VFC: is a large conglomerate of apparel and footwear products. We started covering the stock on January 16th of 2007. The growth was flat. The North Face, one of its most popular brands wasn’t doing well. The company guided lower in January and better numbers in April causing the stock to rally. We wrote a cover at $88 and then a re-short at $95. We had a few trades around $80 level, with a cover report at $80. In April of 2008, management warned analysts not to expect a recovery in 2008. We wrote a short report at $77.98. By November, the stock was $40. It can be assumed that clients covered around $50. In April of 2009, we wrote a report suggesting clients short aggressively at $67.32. Two months later, we wrote a report at $56.70. We never wrote a cover.

ZUMZ: During 2006 and 2007, ARS was aggressive in its coverage of the teen retail sector. The research was often overlapping, and we covered the space before ARS as well. PSUN, ZUMZ, ZQK, and GCO had overlapping research. We started covering Quick Silver (ZQK) at $14.20 in December of 2006. With the price was low, the market cap. at $1.7 billion was sufficient to short. The company lowered guidance several times during our coverage. By March of 2007, it had fallen to $11 where we wrote a cover. We suggested clients re-short at $13.34. Inventories were high, receivables were high, and operating income was down 50%. A week later wrote a temporary trading-cover due to VFC’s strong earnings; however, we knew from talking to retailers they were putting ZQK inventory in storage for the following year which mean sales for ZUMZ for the following year would be devastatingly lower.

ZQK: During 2006 and 2007, ARS was aggressive in its coverage of the teen retail sector. The research was often overlapping, and we covered the space before ARS as well. We started covering Quick Silver (ZQK) at $14.20 in December of 2006. With the price was low, the market cap. At $1.7 billion was sufficient to short. The company lowered guidance several times during our coverage. By March of 2007, it had fallen to $11 where we wrote a cover. We suggested clients re-short at $13.34. Inventories were high, receivables were high, and operating income was down 50%. A week later we wrote a temporary trading-cover due to VFC’s strong earnings; however, we knew from talking to retailers they were putting ZQK inventory in storage for the following year which mean sales for the following year would be devastatingly lower. This was very early in the days of ARS where a short from $14 to $11 was still viable.

DECK: Our thesis was the UGG boots would end up being a fad. We started DECK at $126.66. The title of the report was “not the best entry.” Recall, we take our clients’ liquidity needs into account. A multi-billion dollar funds often need to scale into a long-term position. Inventory was up, raw materials were in short supply, and the company lowered guidance. We wrote reports at $134, $144, $158, and $160, hoping clients reached a decent average price. We momentarily panicked and wrote a “cover” at $155. Then it dropped from $155 to $133.55 after that we re-initiated a short in the stock. From there, it fell to $114 and ultimately to $92 in March where we wrote a cover. In July, we re-recommended a short at $128, followed by a cover at $105. Subsequently, the stock fell to $55. We wrote two random reports after that in late 2009 just to see if we should revisit the short again which we elected not to do.

FOSL: We recommended FOSL for a couple of reasons. We thought they had several tired licensed brands whose sales were starting to flatten out. They were reaching anniversary from acquisitions creating difficult yoy comps. The short was essentially delayed by the acquisition of Skagen and again later by the joint-venture with KORS. By 2013, we knew KORS was reaching an anniversary, and AAPL was close to launching the Apple watch, which we thought would crater FOSL. At one point in July 2012, we flew to Europe, hired a translator, and did channel checks throughout Germany. That saved clients from a loss as we wrote a cover at $66 upon our return.

FOSL: Over the next few months, the stock rallied back $112. We wrote several reports through the remainder of 2012 and early 2013, but no one was shorting it as far as we know, mostly due to the KORS agreement As the threat of the new AAPL watch loomed, FOSL’s stock started to reflect the feared slowing ahead. As was mentioned, ARS temporarily closed at the end of 2013. Still, clients stayed with our recommendations of which FOSL was one. FOSL eventually fell from north of $100 into the $20s.

GCO: Genesco is a teen retailer. Approximately 40% of revenue was coming from UGG at the time. This was an ancillary play on DECK. Plus, we were also covering VFC, which sold shoes into the GCO retail channel. We started at $68.59 in September of 2012. It traded as low as $55 on weak guidance and then rallied back on missed revenue, lower guidance, and lower comps. GCO got away from us.

LNCE: This stock turned out to be a little small for most clients; however, it was an interesting story. Most think of LNCE as a pretzel company. In fact, they were making money from selling routes to individuals that paid a franchise fee for a specific territory; however, this was an adversarial relationship at best and highly hostile at worst. We spoke to several disgruntled route owners/distributors that never made money and could only sell the routes back to the company at a deep discount. What a scam! We never wrote a cover.

QSII: was a healthcare software company. The company was capitalizing huge amounts of R&D to keep margins up artificially. The high margin license sales remained strong, while maintenance sales with low margins remained low. Given the magnitude, we believed the company should’ve written off capitalized R&D and/or Accounts Receivables. DSO’s were in the 140-day range. Earnings were artificially high due to the high license component in the mix. We first recommended the stock at $42.42 in October of 2006. In September the stock hit $45. In October of 2008, it dropped to $36 on market weakness where we wrote a cover. The SEC started questioning the company about its revenue recognition.

MATW: Before 2006, MacArthur covered the funeral home industry. MATW manufactured bronze products for the casket companies. We started coverage at $41 in Nov. 2006. The company was reaching an anniversary from an acquisition. Raw material prices were increasing. The company guided lower. Once they announced another acquisition, we covered at $49 in January of 2008.

MIDD: is an industry supplier to the restaurant industry. The balance sheet was quite weak at the time. They were missing estimates, while the economy was shedding restaurants creating a glut of used equipment. Raw material prices were up for new equipment. We started covering the stock at $91.90 as a short and covered three months later at $72.

EDMC: was a for-profit education company that we recommended. This was a big gain for us as the stock fell from $23.27 to $8 in 4 months. It would be a mistake to say we re-recommended it at $11 on its way to $20 and call that loss. This was a particularly corrupt company. It ended up in bankruptcy. While we failed to write more reports, we pressed clients to short it as it was large and liquid. Again, our for-profit call included a strong understand of the regulatory shift affecting the industry, so writing individual stock reports became less necessary. APOL reports covered everything.

CECO: Before ARS, MacArthur was already recommending for-profit education stocks. MacArthur originally recommended CECO in the 60’s and 70’s around 2003, after that the stock fell below $20. It was clear that CECO could go bankrupt. By mid-2013 it was $2.

BRE: Properties was a real estate investment trust we covered for the financial crisis. See also our Essex (ESS) work. Both companies had a disproportionately high amount of residential properties exposed to Southern California real estate, which at the time was termed “ground zero” for the real estate blow up. We never wrote a cover. It was a scratch while we cleaned up in ESS. Vacancy rates were up; the companies were getting behind on maintenance, etc.

CSH: is a payday lender. Payday lenders charge excess interest fees on one-week loans. Regulators were coming down on the industry for violating usury laws. We started at $29.50 and wrote a cover at $41.73. There was a loophole for payday lenders in new legislation in Ohio where CSH had a heavy concentration of stores. We wrote a report recommending clients re-short it at $37.55, it fell to $25 though we never wrote a cover.

RATE: RATE was another play on the housing market. Much of RATE’s revenue was coming from mortgage broker advertisements. At the peak, one could find up to 20 brokers advertising interest only mortgages at a time. That number later dropped to near zero, leaving a handful of legitimate lenders using RATE. We wrote a “neutral at $33 in March of 2007 followed by a short recommendation at $39.26 a few months later. It traded as high as $46 and then fell to $40 where we wrote a “trading cover.” Even with the trading cover we lost some money as it traded up to $56 following a Street upgrade. Countrywide Credit was a loud competitor coming straight for RATE. Shortly after, management announced 35% price cuts. Then FNM raised their lending standards collapsing the refinance market. The stock fell into the high $20’s where we wrote a cover generating a45% return.

* We do not have a chart for RATE because it was taken over.