So I turned very negative on U.S. stocks during May. Part of it was seeing the apocalyptic presentation by Stan Druckenmiller at Sohn, and reading the piece in the WSJ about Soros coming back to fund management after an 8 year hiatus, but it also arose from an inherent belief that stocks are expensive, we are in a bear market, and earnings have gone lower for 3 quarters in a row.

The liquidity situation is hard to read. The Fed is the big question mark and biggest decider. Capex and inventories are rising, which suck liquidity out of markets. Earnings are falling, which obviously leaves less cash available for pouring back into markets.

But on the other side of the equation, buybacks and M&A are continuing at a torrid pace, often funded by the excess cash on balance sheets and corporate debt. So there remains a positive force to buoy the markets. If this stops, the market will tank.

Brexit clearly wasn’t anticipated by the market. I don’t think the actual event is all that significant, but I think it provided a catalyst for a market that was looking for a reason to fall. I didn’t have any currency positions, because I didn’t have any conviction as to how the vote would end up. I’m going to use the weekend to rethink my views on currencies and see if I can come up with a thesis.

I wasn’t positioned perfectly for the shock, but my portfolio was up about 3% Friday because of my large SPY short. I also have a number of individual shorts, my two biggest being SHAK and UA.

SHAK

Shack Shack is a short I’ve held ever since the borrow rate came down to reasonable levels. I think even at these prices it’s still way too expensive. I used their own forecast – 14 new shacks a year, average AUV of $2.8-3.2 million for new shacks, Shack-level operating profit margin of 18-22%, projected total of 450 shacks. Even if you use the high end of their internal forecasts, then apply a very generous 7.3% discount rate, you get a $26 share price. Keep in mind this doesn’t include execution risks, and also my projection was that average AUV would still remain very high because of the higher AUV of the New York and East Coast Shacks. Insiders have been selling since lockup and are still selling in droves. I’m still short and won’t cover til it hits $30.

UA

Under Armour is running into issues with its distribution channels, and I think its trying to cover it up. They announced a new inventory management system – I think the channels are stuffed and they can’t move the inventory. Inventories and Accounts Receivable are both rising faster than revenues – a huge red flag. Sports Authority went BK, a sign of the troubles at its distributors. It’s biggest customer is Dick’s Sporting Goods, which hasn’t run into trouble yet, but Dick’s is also launching its own athletic wear line to compete with UA. Oh yeah, and the Steph Curry’s are probably the worst reviewed shoe of all time, plus the Warriors lost.

The company has been growing revenues at 30% a year for the past 3 years, and forecasts 25% growth this year, so the market gives it a high multiple, about 70X trailing earnings. Compare this to Lululemon, which had posted an average 10% growth for 3 years, but just accelerated last quarter to 17% revenue growth, and trades at 37 times trailing earnings. UA may be worth more than Lululemon but not twice as much.

WMS

Okay, maybe I should stop shorting this thing. I read the write up by utah1009 on Value Investor’s Club, and it made a lot of sense, so I shorted. But you can’t fight a promotional management, a promotional Wall Street, AND macro tailwinds. It’s done nothing but lose money for me since I shorted $21. I think it should be worth something in the low teens eventually, but the question is how long can I wait? Luckily the position size was small, so the losses haven’t been huge. But the lesson here is pay attention to the macro – if there is a fundamental reason for this thing to do well, you shouldn’t be short.

MBLY – Mobileye

I read a really good thesis on Mobileye by Suhail Capital on Seeking Alpha, it made sense, and I shorted. The company has shown impressive revenue growth and has huge margins and little competition at the moment. But there is no patent protection, and there are a ton of companies entering the space, including the auto manufacturers themselves. I think, looking two years out, growth will have flatlined and margins will have come down, leading to 2017 earnings that are about the same as those of the last twelve months. Currently it’s trading at a P/E of 124, and if you buy the thesis, then it’s a forward P/E of about the same. I’m short a small position.

I’m still looking for great short ideas. I think Friday’s drop was just the beginning of another market rout, like January-February, like last August. Hopefully, third time’s a charm.