August 3, 2020 BARRON’S 33
In the rest of the Medici portfolio,
they have a number of companies that
are in early stages. My base case as-
cribes $100 million to those assets. So I
can see a scenario in which Overstock-
.com shares trade toward $110.
You also like Camping World
Holdings [CWH].
It is the leading retailer of recreational
vehicles in the U.S. When we initially
wrote up the stock in April, people
were very skeptical that there would
be any interest in RVs this spring and
summer. Since then, we’ve seen the
start of a supercycle in demand for
camping and outdoor experiences.
One of the bigger outcomes of Covid-19
is that no one’s going on a cruise; no
one wants to get on an airplane. So,
you’ve seen a surge in demand for RVs.
Your original price target was $20.
The stock is now $37, and your new
target is $48.
The stock has had a huge move. They
are the biggest player in this space,
but they still have only a 16% share,
and they will continue to be a share-
gainer. They have an extraordinary
ecosystem around the initial RV sale.
They’ll provide you with financing,
an extended warranty, roadside assis-
tance, service. They have a monthly
subscription business called the Good
Sam Club, and a retail business where
they sell camping products.
They are going to absolutely crush
numbers. We’ve done a survey of RV
dealers: The vast majority have seen
sales in May and June up in excess of
50%. This quarter, Camping World
will generate 25%-plus unit growth
and earn close to a dollar a share. The
current consensus is 62 cents. Next
quarter, they can earn 90 cents to a
dollar, but the consensus is 40 cents.
This is a business that should trade
at 20 to 25 times forward earnings,
because of its higher-margin revenues
from retail, service, and financial
products. I can see a scenario in which
they earn $2.50 to $3 in a year or two.
And that would be a $50 to $60 stock.
Talk about some short ideas.
Let’s start withTrupanion[TRUP].
I would describe it as a structurally
flawed pet-insurance company that
has been marketed to investors as some
sort of technology company. They’re in
the early stages of a classic insurance-
rate spiral, whereby they’re being
forced to increase prices because of
rising losses. It’s starting to hurt their
market share. Slowing growth will
compel them to raise prices again, and
the cycle repeats itself.
For the most part, we’re talking
about dogs. As dogs get older, their
claims experience goes up. Based on
the regulatory filings I’ve reviewed,
year five is where Trupanion starts
to lose money on a pet. The aging of
these pets becomes a huge problem
as the ratio of vet claims to premium
revenues goes up. Trupanion’s pet
acquisition costs are up 60% over the
last two years. There’s been a deluge
of new competition entering this
space:Zoetis[ZTS], Lemonade
[LMND],MetLife[MET],Syn-
chrony[SYF], and Nationwide.
[A Trupanion representative says
that the company’s subscription rates
will rise in line with veterinary costs,
5% to 6% a year. Loss ratios are within
the company’s control, she says, and
pet acquisition costs haven’t kept Tru-
panion from earning an estimated
40% internal rate of return per pet.]
It’s easy to sell insurance, but
harder to make money on it.
Exactly right. At a recent $50, it’s trad-
ing at 13 times book value and four
times revenue. These are absurd
numbers for an insurance business.
What’s a more appropriate value?
Under $10. Comparable transactions
have been done in the industry at
around one-to-1.2 times revenue.
That’s a lot of downside. You are
also short some education stocks.
I have been following the education
space for over 20 years. We’ve been
bearish since the peak of the last cycle,
around 2009. There are three factors
that determine the success of a higher-
education institution: brand, price, and
programmatic differentiation. And in
the cases ofPerdoceo Education
[PRDO]—the entity formerly known
as Career Education—andStrategic
Education[STRA], which owns the
Strayer and Capella brands, they get
failing grades on all three fronts.
Perdoceo has used aggressive en-
rollment tactics to drive growth. In
2019, it settled telemarketing fraud
charges brought by the Federal Trade
Commission without admitting
wrongdoing.
This year, the company was on the
brink of losing access to GI Bill bene-
fits for its students because of its al-
leged marketing tactics. In June, after
some serious push from the Trump
administration, the Department of
Veterans Affairs blinked and allowed
them to maintain access.
There are so many providers of
online degrees now. You have public
entities like Western Governors Uni-
versity or Southern New Hampshire
University that charge incredibly low
tuition. You have the big state sys-
tems. Those trends have accelerated
because of everything that has hap-
pened around Covid-19. Whatever
the competitive landscape was three
to six months ago, it has gotten dra-
matically worse, and tuition prices
are under pressure.
Perdoceo-owned institutions enroll
the lowest-quality students with
extraordinarily low graduation rates.
Bad-debt expense, as a percentage of
revenue, is in excess of 9%. That’s a
level I’ve never seen. Almost 30% of
their revenue comes from need-based
Pell Grants, a measure that correlates
with high student churn and regula-
tory problems. Their stock could be
cut in half, to $8.
[A Perdoceo representative says,
“As an innovator in online learning,
we are proud to provide a diverse stu-
dent population with an individual-
ized way to earn a university degree.
With our award-winning technology
and dedicated faculty and staff, we
have a solid foundation and will re-
main a dependable partner for our
students as they strive to reach their
educational goals.”]
Doesn’t Strategic Education
[STRA] fancy itself a cut above?
They like to talk about the quality of
their brands and enterprise. In reality,
they had a low repayment rate among
for-profit education companies—back
when the government still disclosed
those figures, four or five years ago.
That shows they’re enrolling students
who are having difficulty. Their Pell
Grant exposure has doubled to the
high-20% range. The company’s guid-
ance this week on enrollments and
earnings validates our thesis. We
think the $134 stock could get cut in
half from here.
[Strategic’s financial chief Dan
Jackson says that the government’s
repayment data were flawed. He says
that Pell Grant levels aren’t a problem
and reflect the demographics of the
students that the company serves.]
You have been short the decking
makerTrex[TREX] for over a
year, during which the stock has
gone from $60 to $140.
It has been one of my more difficult
shorts. I continue to be baffled at how
enthusiastic some individuals are
about the prospective earnings power
of a composite-board manufacturer.
Trex’s gross margins are 15% to
20% higher than the average building-
product manufacturer. Composite
decking has seen double-digit growth
for each of the past 10 years, as it takes
share from traditional pressure-treated
wood. But we’ve also seen a massive
increase in competition. The Fiberon
product fromFortune Brands Home
& Security[FBHS], andAzek
[AZEK], which owns Timbertech.UFP
Industries[UFPI] is another public
company, and lastly,CRH[CRH].
Trex is embarking on their biggest
capacity expansion in company his-
tory. Other players in the space are
expanding capacity. So you’ve got a lot
of well-capitalized players making a
push. I think you’ll start to see more
gross-margin pressure. Trex is a
building-products manufacturer trad-
ing at 50 times earnings. After this
year, we’ll likely see it struggle to
maintain high-single digit growth.
So your target price for this $137
stock is in the $30s?
Correct. Which would be like 20
times an earnings base of $1.50 a
share. [Trex declined to comment,
citing a pre-earnings quiet period.]B
Early in the last decade, Safalow warned clients of the coming collapse of online
education stocks. That group, he says, now faces tuition pressures as Covid-19
pushes state universities and other low-cost providers into the action.
Camping World, the top retailer of recreational
vehicles, is “going to absolutely crush numbers.”
Safalow’s
Picks...
Camping World Holdings..................
(CWH)
Recent
Price: $37
Overstock.com
(OSTK)
Recent
Price: $76
...and Pans