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Down to the Wirecard

Raphael Fiorentino
27th June 2020 - 3 min read

If an interesting long idea consists of great-looking fundamentals and a high level of controversy, then Wirecard must have been one of the most interesting large-cap stocks we had seen in a while, if only in Europe. Instead, Wirecard went from nearly 200 euros a share two years ago (when it took Commerzbank’s place in the DAX), to 100 euros when the first scandal erupted in January 2019 (FT report), to 70 Euros last month (after KPMG was unable to verify WDI’s third-party profits), to now insolvent (E&Y not signing off on 2019 accounts and CEO arrested) and the European equivalent to Enron.

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While we are more accustomed to seeing low scoring stocks blow up (see for instance The Long Short-Haul), exceptional underperformance is not unheard of amongst the higher scoring ones, as witnessed for instance with Burford Capital last year.

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The reason why Wirecard (and Burford) were ruled out by the engine as interesting research candidates lies in the very make-up of their fundamental score, which is reflected by the red dot next their ticker in the month preceding their demise (see left part of the screenshots above). The red dot is a red flag and it is typically attributed to stocks experiencing twin declines in both relative fundamentals and residual returns. Its appearance denotes a heightened risk of material underperformance in the near term (see the last section of this note or the user guide for more details). However, in these cases, the engine exercised a “too good to be true” precautionary principle. Wirecard’s fitness score of 10, value score of 9.4 and momentum score of 0 put it respectively in the top 1%, top 5% and bottom 1%. The precaution consists of suspecting something is amiss if the highest quality stock out there happens to also be the cheapest yet has horrific (fundamental and technical) momentum. Other symptoms comprised a fast-falling brokers’ view score, a very high market beta and volatility for an electronic payment provider, and a provocatively high controversy score.

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Wirecard’s signal timeline reflects the ongoing tussle within the Butterwire engine between strong-looking fundamentals on the one hand and warning signals on the other hand (e.g. poor residual return profile, red flags, as well as exit or check thesis alerts).

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So while the Butterwire engine was no replacement for a proper deep-dive into the company’s reports and that of short-sellers as well as investigative reporters, it did manage to avoid the trap set by its fraudulently flattering financials.

A quick screen on Butterwire’s stock explorer identifies 10 stocks globally with fitness and value scores above 9.5 but momentum scores below 0.5.

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Another on “electronic payment” providers in Europe shows Worldline with a “Take Profit?” alert. Admittedly, the engine has not been taught how one stock’s sorrow can mean another stock’s joy.

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