Commentary

It’s certainly been a year to remember for investors, with the benchmark S&P 500 up 30%, the tech-heavy NASDAQ-100 up 37%, and many sectors, including cloud computing, rising further yet. Last year provided great opportunities to make money, as every dip in the market has been an excellent buying opportunity.

But the tech euphoria has gotten out of hand in certain sectors. In many ways, the investing community seems to be repeating its mistakes from the irrational exuberance of the late 1990s. Many investors are buying stocks not due to fundamentals, but rather due to sexy-sounding stories of future growth combined with momentum: as in that previous internet tech era, people are again buying stocks principally because the stocks are already rising and have garnered investor enthusiasm…

Kerrisdale Capital Management issued the following letter on Monday, December 23rd to management, board members and other stakeholders of Lindsay Corporation (NYSE: LNN):

Dear Mr. Parod, Mr. Christodolou, other Members of the Lindsay Board and Stakeholders of Lindsay Corporation,

On October 25^th, 2013, we issued a letter (“October 25^th Letter“) to the executive officers and members of the Board of Directors (“Board”) of Lindsay Corporation (“Lindsay”) with a variety of thoughts on how management and the Board could continue to create shareholder value for the equity owners of Lindsay.

In response to our letter, Mr. Parod and Lindsay’s executive team engaged in a dialogue with us about our ideas and concerns. Through face-to-face discussions as well as communications by email and over the phone, we further discussed ways in which the Board and management can continue to maximize the value that accrues to long-term shareholders…

Kerrisdale Capital Management, a private investment management firm and beneficial owner of approximately 360,000 shares of Lindsay Corporation (NYSE: LNN), issued the following letter on Friday, October 25^th urging the management of Lindsay Corporation to consider new shareholder representation to the Board:

Dear Mr. Parod, Mr. Christodolou, and other Members of the Lindsay Board,

Kerrisdale Capital Management is the beneficial owner of approximately 360,000 shares of Lindsay Corporation. We believe that Lindsay is an overlooked stock with a world-class irrigation business that benefits from agricultural expansion in high-growth international markets. At its current share price, Lindsay trades at just 13.7x FY 2014 P/E, a figure too low given Lindsay’s industry-leading position and promising secular growth trends. While we commend management’s long-term operational performance in the core irrigation business, we believe that the shareholders may be well served by increased Board representation from the shareholder community…

We have updated our report for AMERCO, the holding company that owns the do-it-yourself moving U-Haul business. The updated report includes the most recent earnings figures, current valuation and our updated views on the company’s future prospects.

Our full report can be accessed here, and is also embedded at the bottom of this post.

We continue to think that AMERCO (“UHAL” or the “Company”) is undervalued. AMERCO owns one of America’s most ubiquitous businesses: U-Haul, the nation’s dominant do-it-yourself (“DIY”) moving company. For over 60 years…

Kerrisdale Capital Management, a private investment management firm and beneficial owner of more than 4% of the shares of Morgans Hotel Group (“Morgans Hotel” or “Morgans”), issued the following letter on Thursday, September 5th to the stakeholders of Morgans Hotel Group:

Dear Stakeholders of Morgans Hotel Group,

Kerrisdale Capital Management intends to nominate a separate set of directors to the board of Morgans Hotel Group in the 2014 board of directors election. Kerrisdale believes that the current directors of Morgans Hotel do not adequately represent the interests of the majority of shareholders. We believe that the views of OTK Associates, which owns less than a 15% economic interest, are currently over-represented on the Morgans Hotel board, and the views of the other 85% of shareholders are severely under-represented…

In mid-February, we shared our research report on AMERCO (UHAL), the deeply undervalued and underfollowed holding company that owns U-Haul, the nation’s dominant moving equipment rental company. At the time of our report, we outlined why investors could have acquired AMERCO for only 11x EPS despite the fact that its U-Haul truck rental business has a dominant and unassailable competitive lead in its niche industry, is earning record profits, and is taking market share as a result of its lower cost base, larger fleet and expanding network. In addition, we also highlighted how investors may have overlooked the fact that AMERCO generates nearly 30% of its free cash flow from its very valuable and steady self-storage real estate portfolio…

Yesterday, ServiceNow’s (NOW) largest shareholder, Sequoia, filed a Form 4 disclosing its first major divestiture of NOW shares.  The May 1st filing discloses a 6m share distribution that Sequoia quietly made to its limited partners on Monday (April 29th). This reduced Sequoia’s stake to 18.3m shares and transferred ownership of the 6m shares to an assortment of pension funds, endowments, and fund-of-funds that make up Sequoia’s limited partner base. While a direct share distribution partially absolves Sequoia from market timing decisions, it can place heavy selling pressure on a stock. This is because limited partners are typically not equipped to analyze individual public securities, preferring to instead sell shares immediately upon receipt. Since Monday’s 6m share distribution, NOW’s share prices has fallen by 7.8% on an average of daily volume of 2.4m. It can then be argued that this abnormal volume and price activity is the direct result of Sequoia’s distribution. As Monday’s distribution only represented 25% of Sequoia’s total ownership stake, additional forced selling may lie ahead…

Over the past few weeks, we’ve shared our EZCH investment opinion in a pair of articles, outlining our belief that EZCH’s $717m market capitalization, 8.0x 2013E revenue multiple, and 32.7x 2013E GAAP P/E (adjusted to include $0.39/share of stock-based compensation) are wholly unjustified. The Bull case depends on EZCH growing well in excess of the overall router market thorough 2016, a challenge we believe is unrealistic given an avalanche of near- and long-term business risks. Customer concentration is dangerously high, newly introduced competition from Broadcom could pressure design wins, Huawei’s recent order delay proves that in-house design risk is ever present, and weak end-market demand will pressure EZCH’s self-imposed 30% revenue growth hurdle (slide 8). To justify EZCH’s almost 2x valuation premium to the S&P 500, it must overcome this hurdle each and every year through 2016. Most EZCH investors discount these risks, instead trusting a management team that has over-promised and under-delivered for years, growing the revenue by just 11% annualized between 2009 and 2012. But since some took the time to reply to our article, we feel a response is due…

Mellanox (MLNX), a stock that we’ve previously written up as a short recommendation, announced disappointing Q4 2012 results yesterday and gave catastrophic Q1 2013 revenue guidance. Though the stock initially dropped 22% after hours to $41, MLNX shares eventually rallied to $51 signifying a mere 1.4% decline for the day. Given three quarters of massive revenue declines ($157m in Q3 2012, $122m in Q4 2012, and ~$80m for Q1 2013) this is a stock that should be trading at a much lower level. With analysts having issued downgrades en masse and no longer supporting the stock with blind optimism, MLNX should reverse its intraday gains and fall to the $30s…

Mellanox’s third quarter earnings report, released yesterday after the market close, has given us an opportunity to provide an update on the situation. While the Company’s third quarter top-line results were slightly above analyst estimates, beating revenue guidance by 3.5% ($156.5m actual vs. $153m consensus), the Company’s fourth quarter guidance severely underwhelmed expectations. Towards the end of the prepared remarks, Mellanox’s outgoing CFO gave Q4 revenue guidance of $145m – $150m, indicating a sequential fall in revenue from Q3. As a company that traded at 8x forward revenue just before the earnings call, the anticipated slowdown in Mellanox’s revenue is catastrophic. This is particularly true because MLNX is undoubtedly a fast-money growth stock. Even worse, Mellanox expects a Q4 increase in non-GAAP operating expense of 6% – 8%, indicating that earnings per share will be hit by a double-whammy of lower revenues and rising costs…

In this post, we’ll profile an interesting case study that illustrates the potential dangers of owning shares within a dual class share structure where insiders benefit from owning a majority of the class with supermajority voting control. Recently, for instance, we profiled Urbana Corp, which has common shares and A shares. The public shareholders predominantly hold the more liquid but non-voting A shares whereas insiders own a majority of the voting common shares. In this dual share structure, insiders don’t own a majority of the company’s equity, but effectively control the company via owning a majority of the voting shares. Sometimes, insider supermajority voting control can add value; an insider can make decisions that may be unpopular to short-term-oriented public shareholders but beneficial for the long-term interests of the company. Other times, as in the case of MIM, supermajority voting shares by insiders can substantially destroy value for public shareholders…