Motley Fool Money - Hindenburg Targets Real Estate Lender

Episode Date: June 4, 2024

A juicy short report goes up against business fundamentals. (00:21) Jim Gillies and Ricky Mulvey break down Hindenburg Research’s report on Axos Financial. Plus, Jim discusses why investors should consider adding Academy Sports + Outdoors to their watchlists. Plus, (16:47) Robert Brokamp interviews Eileen Freiburger, Managing Director of the Garrett Planning Network, about what you should expect from meeting with a financial advisor. Learn more about the Range Rover Sport at www.landroverusa.com Companies mentioned: AX, NKLA, CLOV, DKS, ASO Host: Ricky Mulvey Guests: Jim Gillies, Robert Brokamp, Eileen Freiburger Engineers: Dan Boyd, Austin Morgan Learn more about your ad choices. Visit megaphone.fm/adchoices

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Hindenberg Research has another target in its sights. You're listening to Motley Fool Money. I'm Ricky Mulvey, joined today by Jim Gillies. Jim, good to see you. Good to be seen, Ricky. So we've got, when Hindenberg Research goes after a company, a lot of people pay attention, but I'm not going to assume all of the listeners are familiar with this short selling firm and why we would care so much about it.

Why is Hindenberg particularly worth listening to? Why is it worth investors' attention? Well, as with anything in the investing space, I suppose, you are what your record says you are, and Hindenberg's record says they're pretty good at this shorting thing. I'll give you a couple. They went after Nicola, the hydrogen-based electric car manufacturer slash fraud. They went after them, I think, in late 2020, the stock's down about 97%, I think, since then. They went after Clover Health in February, I believe of 2021. I think that stock's down

about 95 plus percent since then. Believe me, there are some shorts who are clown shows and should be ignored or preferably laughed at. I don't think Hindenberg is won. I have a lot of respect for what Hindenberg has done. I may or may not agree with them, but just like other shorts who I like Muddy Waters, Carson Block. He's done some very good work. Of course, Jim Chanos has done, and he's kind of the godfather of shorts, I suppose, for my generation of investors. So, you don't have to agree with all of their calls. I certainly don't. But I think it's always worthwhile paying attention to what they're saying, because I think they can often unearth some things that are worth you knowing at least, at least to say, no, that's not right. No, that's

incorrect. Or, oh, no, this is serious. This is something I should look at. So I'm not someone that demonizes short sellers. I actually think they're a valuable part of the market environment. So let's talk about what Hindenberg is saying about Axos Financial. The original bullcase for the company seemed to be, this is basically a digital bank that's really good investing. deposits in a less risky way. And it seems to seems that what Hindenberg is saying at a large level is actually this bank is taking on a ton of risk in commercial real estate. And a lot of their loans might not be paid back by the borrowers they gave money to. Yeah. I mean, that's that's a risk of banking, right? That, that you've made poor loans that do not get repaid. So it's looking a lot at

the commercial real estate exposure. This is where the spotlight is going. Quote, Quote, Axos total commercial real estate exposure has balloon to 53% of total net loans, end quote, points out that its peers are closer to about 16%. A lot of these loans are in the New York area where commercial real estate has had a bit of a change in valuation. And there are some highlights in the report, Jim. I'm going to give you mine first, and then I'd like to hear what your highlights are. They're talking about one loan in particular. quote, one reason most banks don't lend up to 97.5 million to individuals with multiple indictments

and documented mob ties is that even if things go well, it can be difficult to get your money back. This is made even more challenging when things go poorly, as seems to be the case with this property. End quote. That's pretty juicy. Anything in this report, any of the bullet points, you have a litany of them, any of the bullet points, claims, takes that really stand out to you. Well, that one, actually, that was the one that stuck out to me, mainly because, you know, you got to love something talking about multiple indictments and mob ties, right? But here's the thing when it comes to short reports. And again, I have all the time in the world for Hindenburg.

I will absolutely listen to Hindenburg when they come for some of my companies. And by the way, this is a recommendation of mine in the service I run in Hidgen's Canada. But I'm perfectly fine with them coming out here. And so what I want to impress upon the listener is short reports are designed to scare you. They are designed to perhaps invoke an emotional reaction. Because a short, of course, makes money when the stock goes down. And if you read the disclosure here, Hindenberg is short the shares. So they have borrowed shares from other investors.

They have sold them into the market. and they will be looking to buy them back at a later date, maybe even as early as today, probably not. But, you know, they were looking to buy them back at a lower price at a later date and pocket the difference and call it a profit. So short reports are designed to scare you. And sometimes some of the points that they make may be a little dressed up to be somewhat histrionic or convey a sense of, just urgency and scariness that may or may not be there. And the example I'll give you is in October of 2017, a short called Citron Research run by a gentleman named Andrew Left, who I do not hold in the esteem with which I hold Hindenburg. I will put that out there and let you draw your own

conclusions. He came out with a short report on Shopify, which at the time, I think, was about $10 Canadian ballpark, maybe 100. Maybe the split adjusted. Some between $10 and $15 Canadian. I mean, it was histrionics. It was basically saying that, you know, they would have to be shut down by regulators and authorities and they were doing it. And if you actually went through and kind of thought it through, a lot of their bullet points that they made, which were all scary, just like Kenneberg's ones are here, didn't a whole lot of water, like talking about, oh, well, like, there was in the referral business so people could get referrals for starting a new business on Shopify. Or you get $2,500 for starting a referral, blah, blah, blah.

And so people, well, yeah, you could get these finders fees, but you could only get them for people that started giant businesses on Shopify. You and I starting like, you know, a sock reselling business on Shopify wouldn't have gotten a penny. But, you know, if you brought Nestle, say, on board, you know, you'd get a $2,500 finder's fee for bringing a company the size and heft of Nestle onto the Shopify platform. But I'm going to give you, I'm going to give you a couple of things here. And so an investor, when they hear about a short report, first off, the best thing you can do is to do nothing. Take your time. You're not going to get out in front of the people panic selling because of the short report. So the stock, I think it opened up down 15% today. As we speak, it's down about 7% and 8%. So it's already starting to rebound. Second off, forget what Hindenberg has done. But if I tell you here, if I tell you that in the most recent quarter, Axos boosted net income by 38%. Boosted earnings per share. by 44.5% because they have been buying back their own stock. Their net interest margin, a very important metric for banks, was 4.87% up from 4.42 year before. To put that into

context, being Canadian, I watch the big Canadian banks a lot. Again, Axos Financial, formerly known as Bank of Internet, 4.87% net interest margin in Canada, the big banks, which are all beautifully solid and whatever. The average was up 1.74%. Their capital looked good. Their book value was up 24%. They're actively repertching. They had a bunch of cash well above the uninsured deposits. Their deposit growth has been great. The weighted average loan to value of the specialty real estate portfolio was 40%. That's a very safe loan on a lending basis. Are there problem loans in Axos financials books, absolutely, just as there is for every other financial. But tell me why, I've just given you all these wonderful growth metrics and performance metrics from the most recent quarter for Axos.

Tell me why these scary bullet points that Hindenberg has brought out, why should those trump the actual pretty good performance that Axos has been posting up? I'll give you a straw man. I don't know if that was rhetorical. But I think Hindenberg would say it's because they've gone so far out on the risk curve that eventually as many of these projects break down in in terms of especially apartment buildings in New York City, for example, that that's going to dramatically change the returns. And Axos isn't necessarily as forthright about the risks involved with the investments underlying their assets. Sure. Well, number one, and that's a great rebuttal. But number one, how do you know beyond? reading Hendonberg's report, right? And I would argue that given the recency bias going on here, I would argue none of us know that. Second of all, I just did quote you that the average LTV of the

specialty real estate portfolio was 40%. Okay, so what that means is, you know, in aggregate, okay, don't come after me for individual loans. But in aggregate, that portfolio could lose 50% of its value and the LTV would still be 80%. The other rejoinder I would offer up is, yeah, Apartments in New York might be coming down on price, but I still think they're probably going to hold their value. I don't think I will ever see a world where New York real estate is terribly cheap. But the point is you've got Hindenberg's assertions, which are front of mind right now for a lot of people. And as I mentioned about that Shopify short report, when that came out, a lot of people panic sold Shopify. Shopify has been about a 10 bagger since then.

Like, not PACP printing that for Axos, but I'm just saying here, yes, what essentially it boils down to for Hindenberg here is they are saying Axos's future is going to look a lot different than it's past. You can have shorts who I respect. Like I mentioned Jim Chanos before. Jim Chanos went after Restaurant Brands International back in the day, franchising parent of Burger King, Tim Hortons, Popeyes, and Firehouse subs. I read his report. I said, I think that's wrong. It's been a great investment since. Another one, Carson Block and Muddy Waters. I have all the respect in the world for them. They took down Sinoforest, which was basically a forestry plantation in China, trade on the Canadian markets, kind of a bit of a fraud. They, of course, protested and screamed and yelled and rent their garments,

and then filed for bankruptcy a year later. So they had the goods there. But Muddy Waters themselves went after Fairfax Financial, which is another Canadian company. A lot of times people equate them to kind of Canada's Berkshire Hathaway kind of style company. extremely puzzling why they'd go after that company because they went after them based on an accounting minutia that frankly was kind of silly. So you can have even a well-respected shortseller who brings receipts, they can still, frankly, come to erroneous conclusions. But let's say they are successful in driving the share price down 10, 20, 30 percent. They're going to be very quiet and cover their position and you won't know it. So there may be smoke here. There may be a lot

smoke here and a lot of fire here, there might not be. The day to figure that out is not on the day when the report drops and everyone's panic selling. Take your time, think it through, try to check up and independently verify. And I will say this, the last thing I'm going to say about this report in Hindenberg, what if I told you there's a mistake in the first bullet point where it says it's headquartered in San Diego? It's not. It's headquartered in Las Vegas. So you've made that little, silly little error in the first bullet point. Got him. you know, are there others? There's a lot of, it's because they have so many bullet points.

All these short sellers want to have as many bullet points as possible. There's one in the report. It's like banking started in Mesopotamia. And I'm like, we got to wrap this up. Speaking of wrapping it up, I want to hit this retail topic because we're running, we're running low on time. We're going to go to the Dick's sporting goods and the Academy Sports Call because Dick's sporting goods is a specialty retailer in sporting goods.

It's gone off like a rocket over the past five years. You think something similar might happen to this Academy Sports and Outdoors, which has had a good track record over the past five years. It's a little bit more of a discount option to your Dick sporting goods, where, for example, you can buy, you can pick up and try on shoes at their stores without having an associate go in the back and grab one for you. But give me the call on this. Let's talk Academy Sports before we go.

Sure. So Academy Sports five years ago, they came up with a five-year plan. plan. And their plan was ambitious. They were one of the, I think at the, I think 2019, they were voted like the most likely to take the sweet embrace of bankruptcy. Management came in, or new management rather, I should say, got revamped. They came out with a five-year plan. Five years later, they hit all their targets. They did a really good job. And they produced a lot of cash flow and they used that cash flow in the service of shareholders. And the interesting thing about Academy Sports is the stock since IPO has, you know, has

has been absolutely just murdered the market. And generally, I say stay away from my POs for a year or two, just to let them get their public feet. Academy Sports would be the exception to the rule. They've done fantastic. So, last year, with the five-year, a successful five-year plan now in the rearview, they came up with another five-year plan. And again, they've hit reasonable targets. And as I've worked through this retailer, as I look at them and say, okay, they talk about, well, here's our store growth plan. I've haircut that. Here's our margin plan. I haircut that. Here are our return on invested capital. Here's how fast we want to turn our inventory. Here's our e-commerce penetration we're aiming for. All of that is haircut. And I run, I like to run, you know, various

valuation techniques, but one of the more common ones is a discounted cash flow, which is, you know, generally an exercise and false precision. But we try to get around that. And as I work through Academy Sports, and this is another recommendation that hit Jim's Candidus for full disclosure, even as I start haircutting things and start smacking things down, I think the share price is demonstrably undervalued versus what it can do. And then we just saw, as you mentioned, Dick Sporting Goods, their most recent earnings report was really strong, like far stronger than the street was expecting. And the stock reacted accordingly. And so I'm sitting here with a company that is very similar. I mean, it gives a bit more of a discount. It's a bit more regional. They have

more growth expectations and plans than Dix does at this point. But I'm like, okay, I think there's a reasonable case to be made that this thing as they keep on enacting their growth plans, I think there's a reasonable case to be made that the current price is significantly undervaluing the future cash flows of the business. And then what if they actually deliver what they said they were going to do because like I said, I haircut the whole thing. What if they actually deliver what they said they're going to try to do? If they do, then this stock is not just demonstrably undervalue. It is significant. And so that's where I'm coming down on Academy Sports. There have been some strange stories in retail of late. I will grant you that. But I look at Academy Sports and I think,

you know, this one's pretty good. That's a good place to end it. You know, one of these days, Jim, we're going to hit three stories, one of these days, but not today. Not today. All right, Jim, thanks for your time and your insight. Thanks for hopping on. Thank you. In a world full of noise, long-term thinking stands out. On the Capital Ideas podcast, Capital Group leaders explore the decisions that matter most in investing, leadership, and life. It's a rare look inside a firm that's been helping people pursue their financial goals for more than 90 years. Listen to the Capital Ideas podcast from Capital Group, published by Capital Client Group, Inc. All right, up next, a fee-only financial planner sounds very similar to a fee-based planner.

But the difference can be significant. Robert Brokamp caught up with Eileen Freiberger, managing director of the Garrett Planning Network, to discuss what you should expect when you go to see a financial advisor. What is a fee-only financial planner? What makes someone fee-only? What's been fascinating to me is how the industry has changed this term as it's been used. fee only absolutely means the only payments are made from the consumer directly to the advisor. So that would mean no commissions, no kickbacks, no third party reimbursements.

So fee only is that sense of I, the client, am absolutely paying you directly, either from a debit from the account, if it's an assets under management, or by a credit card, if it's advice only, if it's an hourly project by check, by credit card, and by that relationship's project scope. Now, where the industries change a bit is now some people can still be fee only, but still have an arm that might be affiliated with another sector. So maybe it's still affiliated with a broker dealer. Maybe it's still affiliated with the wirehouse. So a lot of people are fee only on one side of the house, but not necessarily the other side of the house. And again, that's all. also come up a little bit, I think, with the use of fiduciary. We'd like to believe that everyone that

says they're a fiduciary is also fee only 100% in compensation only from the client, but you've got to dig. And that's the shame of what I think's happened to the wording of the industry. And I'm hoping, as me being here as part of Garrett, educate the consumer. What you ask for must be confirmed to be true. And you've now got to do a little bit more digging in order to confirm the person you're engaging with really is what you intended. And the last part which you've heard, everyone thinks fee-based is fee-only. Fee-based to me means that person might be wearing the two hats. One side can do the hourly or the project-based or the retainer model. The other side might be doing a little bit more on the product side. So again, the average consumer tosses around all these terms

and the future advisor nods their head, but it doesn't mean that they got what they were expecting. Yeah, and one of the points, of course, is that if you are paying the planner directly, as opposed to commission, there are fewer conflicts of interest because if someone is being paid by a commission, you're not always sure they are recommending something to you that is best for you or it's best for them because they're getting the biggest commission. Correct. And I'm going to take this even further by saying there's always conflicts in every one of these relationships, even if someone is fee only and is charging an asset under management. A lot of people will say there's a conflict because then the advisor wants more assets under wing. But again, a true fiduciary is going to say, hey, I understand that you're considering buying a property. Let's look at the mortgage situation. Should we take 100% of those monies out of your account to have you, with no mortgage, or should we look at the planning and see of maybe keeping some portion of

a mortgage makes more sense for you? What's best for the consumer? So even in the world of fee only, and again, fee only would also encompass somebody that's managing assets, there's always conflicts. And in some cases, and again, because I've worn so many hats in the industry, in some cases, maybe a one-time commission is still better for the consumer than an ongoing retainer relationship, and ongoing assets under management. There's never really going to be an absolute, you have to do it this way, consumer must continue to ask the questions and become educated. So let's say someone has used Garrett or Napfer or any other of the other networks and they've identified, let's say, three financial planners that look like could be a good fit. What's the next step and how do you

narrow it down to the one person you want to work with? I think that's a great question. I would, I would, encourage it a consumer to say to the advisor, am I a good fit for you? Have you worked with other people like this? How much experience do you have in this specific type situation? So you're asking them to really, you're interviewing each other. And it's just as important that the advisor feels that you're a good fit for them versus also, are they a good fit for you? Because you don't want to be with someone that took you just because, but that's not really their strength or their background or their experience. So I personally, experience, and sometimes you look at someone's profile, and it might say they've only had

their advisory office for a year or two. But you know what? They had background in the industry. So they didn't open their own firm, but they had very strong industry background. Or now when I talk to many second career people, maybe they had a disabled child. Maybe they've done life planning on behalf of parents that are now in care facilities or end-of-life planning and hospice planning. You wrap that person with that person. not necessarily having run their own advisory firm for many, many years, but having life experiences and have pursued the CFP and passed the CFP and have experience now, it's a whole different world. So again, I think a lot of it comes back to, are you familiar and experienced enough

in my situation or under what I'm describing, are you learning on my time? And I would be very open in asking those questions. And it's the same on someone that might need budgeting help, maybe a very, very experienced planner, maybe that's not the right person to call and say, hey, I want to work on getting out of debt or budget planning. That might no longer be that person's specialty, but it may have been when they first opened 10, 15, whatever years ago. And perhaps now they have someone else in their office. So under that same question, are if I later hire you, I'm talking to you today, are you the person I'm interacting with in the future? Or did I get assigned to someone else or a team?

how often if I'm interviewing you or you might point in the future, you're looking for us at the right fit on all these different levels. Yeah, the examples you use emphasize an important point. When people think of financial advisors, some people might think of mostly portfolio management, but it can cover everything, retirement, tax planning, estate planning, insurance planning, college planning. And I think if you are looking for a planner, one thing to do is to write down exactly what you are looking for beforehand. So you're clear on what you want from that person. So when you have that first discussion about whether you're a good fit, you know exactly what type of financial planning you're looking for. Ask what kind of output. Is it a financial plan?

Is it an on the fly? Are we talking through this together? I'm a really firm believer under the current advisory scene, anyone that's paying for assets under management. And again, for some people that might be right and they might be willing to do it. But I really hope if you're paying a percentage, it came with a financial plan. And what I call a financial plan is the person you're working with should be able to say, here's where you are today, here's your spending, here's what you're putting into savings towards retirement. So gee, if we look at today's financials and we fast forward 15, 20, 30 years in the future, what might it look like? And then if that's the appropriate long-term relationship, and again, then this can be hourly project.

based. But an appropriate long-term relationship means you then periodically say, okay, now I veered a little bit. When we did the original plan, we looked at spending less, retiring at different ages, college planning for kids. Life happens. Things change. Anyone you interview should be able to explain to you how they will be able to be there in the future to answer whatever financial question comes up for you. And I'm going to go so far as to say when I had my advisory firm, I've had clients call me saying, hey, I'm in this other state on vacation, and oh my gosh, I think I saw the perfect property. What can I afford to bid up to? That's not a question that you want to say, oh, we've never built a financial plan. I really don't know. You want to be able to say,

oh, my gosh, that's a great question. And since we've already spent the time working on baseline planning, let me give you a, you know, let me factor in some ranges. Are you still retiring at these times? I can look at the tax ramifications. I can look at the down payment, I can look at the mortgage. Let me get back to you and I'll be able to give you a better sense of what do you think you can afford. And we can discuss what you might have to give up if you're making a little bit above that range to just be fair to the conversation.

But that financial planner should be the first person you go to. Illnesses, life happens, college planning, special decisions, all of that's a part of it. It shouldn't be, oh, I only manage your portfolio. I wish I could help you with this. No, that's what you should be paying a financial. planner for? Let's move on to the discussion of becoming a financial planner. And I know there are many Motley Fool readers and listeners who have become so involved in learning about finances. They become very interested in it. And they think, well, golly, maybe I should make this my career. And it's

sort of one of Garrett's specialties in that it helps people move on from one career to another to transition to the financial planning profession. So let's start with that. that. And if someone is thinking about it, what are some of the things they should start doing to investigate whether it's a possibility for them? Great, great questions, because there's such a need and what a great career path. So for starters, the industries, NAFA, National Association Personal Financial Advisors, go to their meetings, go to the website, start meeting people. As you've mentioned earlier, Michael Kittsis and XYPN is very similar to the Garibn.

at Planning Network. You're looking for local organizations that would membership-driven organizations that if you wanted to hang a shingle, how do you get through the RIA process? How do you, you know, file? Are you getting insurance? Are you getting training? I'm going to toss out something that is, I think, has become very new, but Hannah Moore, I'm happy to give her a pitch, is Amplify Planning. She's doing an eight-week externship program. And at rates, $350 for eight, weeks to be able to monitor and view and practice real client meetings, get a sense of the technology. So again, if you think you're interested in this, find ways to incorporate, how would I do it? What does it look like? Go to NAFA, go to Garrett, go to XYPN, find advisors in your community,

ask to meet them for socially. Can they do a Zoom meeting just to talk about the industry? can they invite you to some of the various sessions or retreats or conferences that are going on out there? There's so many people that enjoy doing what we do that even in retirement are managing their own monies, they're playing with the software, they're doing all of this because they enjoy it. And again, this is taped, but come on, if it's no longer a hobby, but it's a business, think about all of what you can be doing around this profession. And for anyone that's earlier in their careers, starting entry levels, I've recently, I saw an advisor was posting a position for over six figure with the partnership track. I know, depending on the affluence of the communities, I've seen entry level positions with people in the CFP profession, meaning they're pursuing it and they've started it 60 to 90,000 for starting positions.

So don't get yourself. This is not something, this is a career and a profession that has so many different ways to develop and explore. And more and more so for the I'm core career, second career person, this is also the opportunity for a lifestyle firm. If you're not managing assets and you're working hourly project based, one of the reasons why so many, it's difficult to find an advisor, they might not be working a full year. They take off also around certain seasons. When you're managing assets, there's a much, much different lifestyle. that you have to be there daily. When you're working on an hourly project basis and helping people self-implement, it is a little easier to go, you know, to take it a lifestyle if someone

chooses to. But on the other side of that, the fun part about me coming back to the Garrett Planning Network is folks that started with me when they were first starting out are still there. They're running some very, very large firms now. So again, what kind of firm do you want to create? What's your vision in the future or earlier in your career? What a whole thing? phenomenal profession. As always, people on the program may have interests in the stocks they talk about, and the Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely on what you hear. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.