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The Short Playbook on TSLA, HLF and QCOR

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Stop me if you heard this before, and I know you have you may just not recognize it.  There is a company who is basically a fraud.  It is a Ponzi scheme.  It has seriously questionable sales practices that border on the illegal.

Sounds disastrous right? Super deadly for shareholders – FOR SURE!  But it doesn’t end there.  It gets worse, way worse.

Governments, foreign and domestic are lining up to stop the company from selling its products and limiting its sales force from doing its job. 

Actually, I am just getting started here.  Let’s get to the deep issue.  The customers of this company are crazy … they pay way too much for something that only costs a fraction of the price to make.

Talk about being duped, the customers don’t even get what they pay for!  The product literally doesn’t work as advertised.  No, worse than that, it is dangerous to the customers!

Same Old Playbook

I know you think that this time it will be different… but it isn’t.  If you didn’t recognize the playbook above, it is the one the shorts used on Herbalife (HLF - Free Report) and Questcor (QCOR) and they are doing the exact same thing to Tesla (TSLA - Free Report) .

Thing is, the end game for the shorts and HLF and QCOR was disaster… so take a wild guess what will happen with TSLA.

Let’s take a look at the similarities here, how the shorts prove they are incapable of thinking outside of the box.

Quick Review Of HLF And QCOR

I lay claim to a particular achievement.  I guided investors into shares of HLF and QCOR and profited by from the short covering and validation for the longs via the pay services I manage at Zacks.  This isn’t a commercial for the services, of which one was long TSLA at less than $40 per share.

HLF was claimed to be a Ponzi, a fraud, have a customer base that essential is its sales force. They said the product didn’t work… but in the end, the shorts covered at higher prices and lost hundreds of millions.

QCOR was said to have questionable sales practices and procedures. Only a handful of doctors were responsible for hundreds of millions in sales. The drug wasn’t as effective as promised.  It mirrored a Ponzi because all the money went to a few at the top. 

What The Shorts Hated

The shorts hated the fact that HLF didn’t have to pay for a sales force. People bought the product and got paid if they could get other people to sell it too. The shorts believed the company preyed upon the uneducated and their product simply didn’t work.

The shorts despised the fact that QCOR bought the rights for Acthar for $100,000 then charged that amount for a single treatment. The real problem was that ANYONE could have bought it, it was publically available for DECADES.  Let’s leave the sales practices aside – the core of it was that a few people turned an old drug into a “blockbuster” and this simply doesn’t compute in the mind of a short.

Products

So let’s bring this back to TSLA.  The Model S has some of the best reviews for a car in its class.  People love their TSLA’s and really that isn’t limited to just the Model S. We see fans of the X, the roadster and most importantly the Model 3.  There has never been a car that has seen 420,000 reservations. 

I am going to simplify things for HLF and QCOR.  Let’s face it, these ideas are mostly in the past.  HLF makes some dust that is mixed into a shake.  At the core of it, it is just some dust.  QCOR makes a drug – and it comes from a complex system that really prevented a generic.  I could go on about the peptides and process to make Acthar… but let’s just say if it was easy, there would be lots of competition.

Sales Model

TSLA has a different sales model than traditional automakers use.  The traditional dealership is no longer part of the equation, so that reduces a drag on margins… but the shorts will tell this is an abomination of everything they hold dear when they purchase a car. 

HLF had its customers as its sales force.  They recruited others to sell more product and got a slice of the sales.  This was the driver behind the Ponzi claims … but at the end of the day, there was a real product, where Ponzi schemes don’t have that real, hard true to life product.

Shorts claimed that just a few doctors were responsible for nearly all the Acthar sales. Of course, there was a salesforce that grew over the quarters, but it was really how the company helped the doctors get reimbursed by the insurance agents that drove them crazy.  That sort of assistance was an example of thinking out of the box, something the shorts just cannot allow.

Government Intervention

On the TSLA front, I have seen the crazy headlines from Norway and a few others.  The shorts want you to believe that a government agency will prevent TSLA from selling cars in some country or another.  That just won’t be the case.  There is worldwide demand for these cars, and that is just a fact.

One the lynchpins of the short case on HLF was that they needed government intervention. A famous investor was interviewed and asked what if the government does not come in, it was clear that the “plan b” was not a good one.

QCOR doesn’t have the storyline that exactly fits the mold here, but the core of the shorts angst is that the company leveraged the system to its advantage. This still drives the shorts mad and the company that acquired QCOR has found some pushback from a few government agencies. 

Ponzi Ponzi Ponzi!

TSLA has been called a Ponzi plenty of times by poorly informed shorts.  Of course just saying it doesn’t make it so.  The reservation system for the Model 3 likened to a Ponzi in that they took money --- but a car was years away.  If TSLA never delivered a Model 3, then yes, it would be a Ponzi… but there was little doubt that would happen – at least by logical people.

HLF and the multi-level marketing platform was often compared to a Ponzi scheme.  Yet as noted above, HLF makes and sells that dust that goes in the shakes.  You would think that could kill the argument in its tracks, because… well that dust is real.

QCOR was called a Ponzi.  There were just a few doctors responsible for the majority of sales, according to the shorts. There were just a few at the top of the corporation that were making all the money.  The shorts never let the fact that there was drug produced, sold and consumed stop them from claiming a Ponzi.

Questionable Customer Base

TSLA shorts want to tell you that people that buy these cars have a screw loose.  They want to point to all sorts of things like the brake test, the problem with the brakes (that was later fixed via an over the air update), the fact that production is seemingly continuously updated means that there are looming issues with the cars that were among the first to be produced.

This was easily my favorite part of the HLF saga.  A short seller brought forward several of the consumers that “harmed” by HLF.  Not from consuming too many shakes, but from the fact that they could not make money from buying the product when they could not then sell it. That instance reaffirmed my position – the total opposite of the intention of bringing those people forward.

The customer base of QCOR, or more specifically those taking Acthar weren’t questioned as much by the shorts.  At least we know that those that are ill are off limits, so I am glad to report that the shorts do have a line they will not cross.

Celebrity Status

QCOR didn’t really have that one central figure willing to step up and play the role of Darth Vader. 

Bill Ackman took the lead role on HLF.  He battled Carl Icahn and a few others, so it was more a story of longs vs shorts.  Ackman eventually gave up and covered. 

Jim Chanos has taken the lead role of the head short in charge. Chanos is a well known short seller, but I for one cannot remember a time when he was so vocal on a position.  It is widely believed that Jim Chanos tweets under the “Diogenes” handle @WallStCynic  - and let’s just pretend that is true for now.

Chanos had 6 points or tweets that spoke to TSLA’s cash position and where that number may be at any point during the quarter.  His analysis aside, I pointed out that this is commonplace to all stocks … but somehow for TSLA it is a problem because they are “burning cash” ( not to be confused with spending it, or maybe even investing it in production facilities ) and they exist at the mercy of their suppliers if they can’t raise additional capital.

The point here is that a commonplace practice is somehow bad when TSLA does it.  And their existence is questionable if it were not for one thing – but that one thing actually isn’t a real concern.  That is what the shorts want you to focus on, the smoke and mirrors argument.

Chanos (if it is him) blocked me… maybe because I like Ohio State and that account posted a picture of a Wisconsin bowl victory.  Diogenes said that longs were doing endzone dance celebrations – and I then shared a link to the Big Ten Championship game in which my Buckeyes routed the Badgers 59-0 on their way to the National Championship.  In light of that, I give you my video of a single moment in time when Bucky Badger himself would have smiled (https://www.youtube.com/watch?v=4-YGg3RQotk). Are we even Jim?

Conclusion

I was long HLF with 100% of my investable dollars.  It worked out rather well. I don’t recall ever owning QCOR, but when bloggers told me that it was the scourge of everything that was wrong with our system that told me they had misplaced anger. Now the same tactics are being used to confuse investors about TSLA.

The similarities are stunning.  It seems that history just keeps repeating itself.  At one point in the HLF saga I decided that every investor that wanted to be part of this on either the long or the short side has pretty much already done so.  I am approaching that point with TSLA as well.

There is still more to the TSLA story, shorts see the future of the company going up in flames.  I see the shorts getting flamed and the stock going to $1500 … but in the end most of you have probably already made up your mind on this story.

The reason I say that is because you never hear about the valuation.  That is usually a valid argument, but it just doesn’t come up anymore with TSLA.  It is all about free cash flow, negative working capital and a bunch of other things that will be resolved in time with more sales.

Finally, I need to point out how this article came to be. The blizzard of inaccurate nonsense that surrounds TSLA pointed me to Charlie from the Wall Street Journal and his defense of Linette Lopez.  He highlighted that she wrote a very “clickbaity” article that summarized the shorts position on Acthar.  Now some will say it is a coincidence… others will see it as just another page from the short playbook.

Disclosure: The author was long HLF at the height of its short position and is now long TSLA in both his trading and retirement accounts.



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