Gainers📈 & Losers📉

Our Biggest Gainers & Losers of the Day in the $100,000 Build Portfolio

For the 16th December 2024:

• Red Flags Everywhere 🚩

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Red Flags Everywhere 🚩 

They’ve been given the boot. 🥾 

Super Micro Computer (SMCI) have officially been removed from the Nasdaq-100 index.

The re-balancing doesn’t happen until December 23rd. As you might guess, being taken off an index is anything but good news. Index removals tend to hit stocks like a sack of bricks as funds start dumping shares. 📉

SMCI is no exception & dropped over 8% today.

But don’t blame the index entirely. SMCI’s had a few skeletons in its accounting closet & I can hear them starting to rattle again. I’ve been on their side & even been buying the dips but it might be time to move on.

 SMCI’s History🚩

SMCI makes servers & hardware. Critical stuff for an industry that’s all the rage right now. AI. The numbers make them an easy buy… if they’re accurate.

• Revenue up 109% YoY 🚀

• Earnings up 75% YoY 💸

• Valuation? Great value at 20x earnings

That “if” seems to be getting bigger & bigger. SMCI’s financial statements haven’t been squeaky clean for years!

• In 2018, SMCI got caught incorrectly recognizing $150M in revenue from 2015-2017.

• They shelled out $17.5M to the SEC to settle those issues.

• This year? Their old auditor, Ernst & Young, dipped out & basically said, “We don’t trust management’s numbers.”

In isolation, you might be able to brush it off but when it keeps happening? I really was team SMCI but I hate to say there might be no smoke without fire…

 Internal Investigation was A Little Too “In-House”🕵️

When their old auditor left them in the dust, SMCI launched an internal investigation to clear its name. I bought the stock expecting good things. It worked out. Stock shot up 30% in one day when the results dropped.

So what’s the problem?

The “investigation” was led by SMCI itself, using legal advice from Cooley LLP & financial consultations from Secretariat Advisors.

Ok so what does that mean?

SMCI hired people to look into its own books & surprise surprise, everything looked fine. It’s like leaving a student to mark his own tests & him coming out with 100%.

Where does that leave Us? 😕 

Here’s the dilemma I’m having.

SMCI’s reported growth is hard to ignore. Here’s what they’re projecting for Q1 2025:

• Net Sales: $5.9B–$6.0B (+99.7% YoY) 📈

• Gross Margin: ~13% (implies $787M in gross profit, +122% YoY)

• EPS: $0.75–$0.76 (+150% YoY)

These are stupidly good numbers for a company trading at only 20x earnings. If you compare that to the premium you’re paying for other AI plays & it makes it really hard to not YOLO in.

But as we’ve figured out, it’s not cheaper for no reason. If the reported numbers turn out to be fake, then the idea of this massive value play is all an illusion too.

Now what?

Well, I’m going to make a half measure by holding the positions I have. I’m currently 17% in the green (down from about 40% in the past week).

The fact they’ve had these issues in the past & managed to see them off is a double edged sword. It makes me confident they can see them & send the share price to the moon. But also…. why do you keep having these issues?

My average entry at $28 is low enough where if it blows over, great! 100% gains inbound.

Or if the numbers are slightly overcooked, $28 might be a fair valuation so nothing gained or lost.

If it turns out their whole accounts have been written by J.K Rowling then it’ll be annoying but the position size won’t give me sleepless nights.

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That’s all! See you same time tomorrow 👋 

P.S Hit reply & let me know what you thought of today’s newsletter. All feedback is welcomed ❤️