Guilty Until Proven Innocent
Or, why Super Micro Computer is in the penalty box
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Adopting the “innocent until proven guilty” philosophy was one of the best inventions of modern society. It keeps bad incentives, authoritarian behavior, and emotions at bay when deciding to charge someone with a crime. You have to stick with the facts instead of any gut feeling, bad vibes, or negative predisposition against a person.
I think you need to take the opposite approach to your investment portfolio.
If there is even a hint, circumstantial evidence, or some strange coincidences that make you feel queasy about a company, don’t buy the stock. Put them in the penalty box.
Guilty until proven innocent, you might say.
You should take this approach because:
Companies guilty of fraudulent accounting (the main crime we are worried about as investors) have a HIGH risk of going to zero. Remember rule number one, don’t lose money.
It will not hurt anyone if you believe a company might be a fraud and you are wrong. Let the SEC, DOJ, and court system prove anything if actual evidence comes to light. Give yourself a higher standard.
There are plenty of fish in the sea. You won’t have zero stocks to buy if you exclude yourself from any suspect management teams.
Which brings us to Super Micro Computer.
First off, the name Super Micro Computer is a red flag when we are in an AI/semiconductor/computer boom.
The stock is up 1,000% in the last three years. Another red flag. Never buy the hottest stock in the hottest industry.
Revenue went nowhere for many years then shot up in the last two. Another red flag.
Now, we have a short report from Hindenburg Research. Long story short, the company has a lot of suspicious activity. Accusations include:
Re-hiring executives who were fired for improperly boosting revenue in a 2018 accounting scandal.
Partial shipments and fake projections are given to distributors to boost revenue.
Related party suppliers owned by family members of the executive team that solely do business with Super Micro Computer in suspicious circular transactions that may be artificially boosting revenue.
Undisclosed related parties.
Potentially selling to Iran, China, and Russia illegally (the trifecta of sanctions!).
Hyping up a new technology (liquid cooling) when the reality on the ground is a lot more bark than bite.
This is easy. Put Super Micro Computer in the penalty box. They should be guilty until proven innocent.
If they are guilty, the downside is 90% for the stock. You obviously don’t want to own that.
And if they are innocent, what’s the upside again?
We talked about this and more during last week’s Power Hour (links above).
-Brett
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