yo Bro, is this fraud. legit short?
this dude seems legit: Barry Minkow, Fraud Discovery Institute, Inc.
check out this joint…
MEDIFAST v. MINKOW, 11-55687, Nos. 11-55687, 11-55699., D.C. No. 3:10-cv-00382-JLS-BGS., 2014 BL 156455 (9th Cir. June 04, 2014)
I’ve never looked at this. It’s for sure a crappy business just glancing at it. I also am systematically short anything with a high valuation and a stupid name, and Medifast is pretty stupid.
These anti-short lawsuits are super hard to win, particularly in California. Probably nothing will happen here but I would have to look through the lawsuit in detail to have a good feel for it. I can’t think of a single one of these where the plaintiff has prevailed unless the defendant made completely unsubstantiated claims (you have to try pretty hard). Citron is all vitrol all the time and I don’t think he’s ever lost a lawsuit – in fact, I think he has made money by being sued.
There are plenty of “controversial” stocks like this one. UNXL, UNIS, PVCT, INO, etc. You would think the SEC would step in at some point but apparently not. There are probably at least 100 outright frauds, and another 100 or more that are “basically” frauds in the sense that they are promoted aggressively with no chance of ever being a viable business. The SEC doesn’t crack down on expensive crappy businesses though, nothing illegal about that. On a market cap basis these 200+ are <1% of the stock market, but in absolute number of companies they are 2-3% by my estimate, and ironically some of the most likely for an unsophisticated investor to come across.
Note these estimates exclude very tiny market cap companies, most of which are frauds or totally worthless – I’m talking about 100+ legit market cap companies that someone might actually invest in, not some stock selling for a nickel per share or something.
This could be a great short. I like shorting companies where SG&A = GP $ and sales growth is slowing. When that happens the only options are to increase SG&A and lose money or cut SG&A and slow the growth even more. Companies that have to aggressively “buy” their growth always eventually hit the wall, it’s just a question of when. If you could time that here within a couple of quarters it would probably be a good short.
Can you expand a bit on this thought? I always think of buying growth as acquiring an entity, stripping out the redundancies and being no better off than you were before. That doesn’t seem to be what you’re talking about here, but I’m assuming you’ve got a much better handle on this than I do.
If you spend more dollars on selling and marketing, your sales should be higher all else equal. But there’s an efficiency question to that – you can spend infinity dollars, but the marginal utility of that spend will be less than infinity dollars in return, so where’s the tipping point?
Higher S&M as a % of sales for a well established business while sales are simultaneously slowing is usually a key sign that sales growth is going to struggle in the future. It depends on the circumstances but generally that’s true.
Thanks. After thinking about it more, I assumed that’s what you meant.
Yes buying growth through acquisitions (as you mentioned) can be a good strategy if the multiples paid are low and the synergies are real. Usually on Wall Street “synergies” is corporate speak for “we over paid and are trying to justify the deal” though so you have to be careful.