PRO Weekly Digest: Mathematical Trades With Richard Pearson – American Renal Associates Holdings (NYSE:ARA)

Welcome to the latest issue of the PRO Weekly Digest. Every Saturday for Seeking Alpha PRO subscribers and Sunday for all other Seeking Alpha users, we publish highlights from our PRO coverage as well as feature interviews and other notable goings-on with SA PRO. Comment below or email us at pro-editors at seekingalpha.com to let us know what you think. Find past editions here.

Feature interview

Richard Pearson is an activist investor in U.S. and Chinese stocks. He was previously an investment banker in New York, Hong Kong and London focused on Equity Capital Markets. Notable calls include a bearish thesis on ForceField Energy (NASDAQ:FNRG) and bearish thesis on Keryx Biopharmaceuticals (NASDAQ:KERX). We emailed with Richard about his unconventional (but successful) process for finding short ideas, what causes (and how to profit from) a death spiral financing and why he currently stays away from shorting Chinese equities.

Seeking Alpha: You recently published a very compelling long idea on Dillard’s (NYSE:DDS) – can you walk us through how this was a “mathematical trade”?

Richard Pearson: With Dillard’s, the Dillard family and the company 401(k) plan own more than 50% of the outstanding shares. The family owns non-trading class B shares, which give them voting control, so they can control what the company does. The family is causing the company to use company money to aggressively buy back shares from the public float. It doesn’t matter what metric you use (cash flow, asset values, etc), as the share count decreases, the value per share increases.

The company has already bought back over 80% of the outstanding float over the years. And the company continues to use nearly 100% of free cash flow to buy more and more shares. At the end of this process, there will be no more shares outstanding. At this time, the Dillard family will end up owning the real estate. Various people have debated the value of this real estate. Some say it is worth as much as $6…

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