I accepted an invite on LinkedIn from a finance student at an Australian University.
Nothing unusual about that.
Said finance student then decided to pitch me a short idea in this case in the hope of getting an internship.
Again nothing unusual. Indeed this is how about a third of our employees joined us.
Just that this one was funny. So here goes.
Finance Student (FS): John, you gotta give me an interview. I have the short to end all shorts!
Me - John Hempton (JH): lets chat, though there are plenty at the moment
FS: Okay great John. The ticker is EPA:OR - L’Oreal. Truly a terrible company.
JH: ha ha. What makes you think that?
FS: John, are you pulling my leg? Surely it is obvious. If you are being serious I can explain.
JH: Please do. What phone number?
JH (later): I am expecting to call you. What number?
FS: John, I only have one shot at this so please give me some time to put my thoughts/thesis together. I will be in touch early next week if that’s okay?
JH: Okay. But I genuinely suspect that you are mad.
The big area of disappointment at L'Oréal is the hair dye business over the past fifteen years.
So I guess explaining what the business is and how it went wrong is a key.
FS: I think after you hear my explanation you will truly realise what a disaster of a company this is. Perhaps even elements of fraud going on.
JH: I am intrigued.
But the hurdle here is high. Company has generated 2-3 billion of free cash per year for a very long time. The business smells very profitable.
You are betting against female vanity - and that is not normally a good bet.
FS: John, sorry, I’m pitching this idea to Jim Chanos from Kynikos in the coming days, are you familiar with him and his fund? Unfortunately this means I won’t have time to pitch it to you, but let’s circle back if he doesn’t go for it.
JH: I know Jim well, but I am deeply skeptical. I am almost certain you are wrong.
Give me 15 minutes as a pitch if you want. If you can get past that it will help with Jim.
If you can convince me I will be deeply surprised
FS: Look, John. Let me have a chat to Jim about this first. I don’t want you front running him and soaking up all the alpha in the trade. If he gives it the green light, I will speak with you first. The last thing yourself, Jim and I would want is a ‘Herbalife-eque’ activist campaign happening on any of either 3 of us hold as result of bad-blood.
Will be in touch.
One thing I must say though, John - I have had MANY girlfriends, all of whom use hair products. I am also a European native, so I am afraid I am beginning with a head start on this one.
JH: I am European and I have had girlfriends might be the height of arrogance...
FS: John, I understand you may be upset... but that doesn’t mean I am wrong
JH: No. But you have already proved that you know nothing about the business. By suggesting that your girlfriend is the target market for hair dye.
That is unlikely to be true unless your girlfriend is 45+.
Genuinely you come across as pig ignorant.
FS: You must know there is a certain something I relish in a 40+ year old Italian woman. They are like nothing else, John 👌
May I ask, do you think L’Oréal is at fair value, under valued or (dare I say it) under valued?
JH: It is not cheap.
But 6x sales is the new normal
Nothing here is cheap.
L'Oreal is 6.8x revenue
Biggest competitor Estee Lauder is 7.4x revenues
Key suppliers
Givaudan - 6.7x revenue
Croda - 7.9x revenue
But telling us that these companies are pricey is not worthy of analysis.
Whatever, see if you can answer the big question - which is why hair dye has been problematic for 15 years?
It goes on. Dear graduate students - this is not how to apply for a job. But it is quite amusing...
JH