VIC Idea Summaries

Below are summaries of ideas posted on Value Investors Club. VIC is great! … but noisy. The summaries below are supposed to help sift through that noise.

Around 2-5 new investment ideas appear on VIC daily. Some are really good and some are posted just to meet membership quotas. Initially, these are for members only, but all move to the public domain after 45 days. That’s when summaries will appear here and on Twitter.

Is the 45 days delay on VIC post-opening for the public a big issue? Not at all – only a very limited number of VIC write-ups actually move the markets right away. Usually, the articles age really well, with critical pushback and additional insights in the comments section.

Market cap and share price is indicated at the time of posting the summary with comparison to price at VIC publication.

July 26, 2022

CymaBay Therapeutics (CBAY), mcap=$266, price $3.14 vs $2.29

Sub $200m biotech with a best-in-class Phase 3 asset for primary biliary cholangitis. Existing cash provides runway till early '24. Near-term catalyst - phase 3 readout expected in Q3'23. Steady commercial ramp-up starting in 2025. Unjustifiably sold off with the rest of the $XBI index.
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July 25, 2022

Northrop Grumman (NOC), mcap=$71bn, price $457 vs $460

A bet on the defense industry with NOC being one of the best-positioned players. The thesis is based on the expectation that China will invade Taiwan, which coupled with the current war in Ukraine will escalate the stand-off between China/Russia and the Western world. This will cause generational step change with multiyear increases in defense budgets. The defense industry is characterized by stable and predictable economics due to cost plus contract structures for primary contractors. NOC is best positioned within the two largest areas of spending - space and nuclear deterrence.
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July 25, 2022

Kohl’s (KSS), mcap=$3.8bn, price $29.60 vs $46.6

Merger arbitrage that is best played with 2031 notes rather than equity - bonds have a much more attractive upside/downside ratio. Very poorly executed strategic review with management wanting to stay independent, but there is a good probability deal is announced shortly. Equity offers 20% upside vs 25% downside in case of failure. 2031 notes trade at $91 and have a $101 change of control language. In the deal break scenario bonds would trade down to $87, or 5.3% yield, where similar BBB- 10-years sit.
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July 25, 2022

Unit Corporation (UNTC), mcap=$542m, price $53.90 vs $64.00

Small-cap O&G has launched a process of selling up all of its oil & gas properties and reserves (c. 75% of all asset value). Contract drilling business and 50% JV interest in the pipeline will remain. Value of to-be-disposed properties is based on PV-10s done at much lower strip pricing (year-end 2021 and Jan'22). Media reports suggest disposals might be more lucrative than indicated by PV-10s.
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July 24, 2022

Iteris (ITI), mcap=$120m, price $2.82 vs $3.00

Provider of products and services for traffic monitoring and optimization at intersections. Cheap on 2025 revenue and earnings projections. Large fragmented TAM with $ITI ahead of the competition in terms of dept of the breadth of products and services. ARR at 25% of total revenues and rising. Exposed to positive secular trends from increased use of traffic data for non-public applications, autonomous vehicles, and infrastructure bills. Margins are temporarily suboptimal due to supply chain issues.
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July 24, 2022

ProFrac Holding (PFHC), mcap=$666m, price $16.14 vs $22.75

Pure-play vertically integrated pressure pumper across multiple basins. Set to benefit from the expected multi-year upcycle in N.A. fracking activity. Fracking services capacity is constrained after years of rationalization due to weak commodity prices. Orphaned by investors and at a signific discount to peers due to its IPO (at $18/share) taking place during May'22 stock market lows. PFHC relatively new fleet ranks favorably among peers adding a source of competitive advantage. Insiders have 65% economic and 96.5% voting interest. A good way to gain exposure to the N.A. energy cycle.
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July 24, 2022

Hanover Bancorp (HNVR), mcap=$139m, price $19.11 vs $21.13

Community bank at 1.07x TBV and 6.4x PE. Cheaper than peers. The market was recently disrupted by a wave of M&A of other community banks. Branch-lite bank. Focuses on specialty niches - deposits from municipalities, SBA program, PPPl lending and etc. TBV CAGR of 10%. Loan-to-value of the mortgage portfolio stands at 55%.
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July 23, 2022

Synchronoss Technologies (SNCR) short, mcap=$114m, price $1.29 vs $1.53

On a verge of restructuring and shares are worthless. The recent $12.5m settlement with SEC compares with a $20m cash balance as of Q1'22. Topline is stagnant, the balance sheet is over-levered and the business burns cash at $5m per quarter. Reported EBITDA is accounting fiction and the company does not generate any FCF. Likely unable to raise fresh funds in the capital markets.
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July 22, 2022

NFI Group (NFI.TO), mcap=C$1bn, price C$13.18 vs C$13.30

Canadian bus manufacturer. The company went from trading at 15x normalized EBITDA in 2018 to 5.5x today. In the near term facing supply chain challenges due to covid. Pent up demand after 2 years of industry volumes at cyclical lows. Governments in the US, Canada, and the UK provide municipalities with record levels of funding to make diesel to electric transition. EVs have gone from 5% of the market in 2018 to >40% of the current bid universe. Industry shaping up to have the most positive demand backdrop seen in 30+ years. The competitive environment improved with effectively $BYD banned from the market and $PTRA diversifying away from transit buses. CFO and NFI's largest shareholder have been buying in the open market.
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July 22, 2022

Axalta Coating Systems (AXTA), mcap=$5.3bn, price $24.13 vs $28.00

Industrial coating company under-earning due to auto weakness and raw material inflation. #1 or #2 player in its markets. Earnings are set to double to $3.0/share by 2025. Recovery in the auto OEM industry to pre-covid levels will add $0.5/share to earnings. Already taken pricing increases to offset cost inflation (mostly oil-based inputs) will bring EBIT margins back to 15% from depressed 10% levels today. Strong industry-wide pricing power, but tends to lag on pricing during inflationary periods.
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July 21, 2022

C&C Group (CCR.L), mcap=£755m, price £1.92 vs £1.96

UK cider and beer manufacturer that transformed business after the acquisition of UK beverage distributor. Significant recovery was evidenced in the UK, with CCR market share gains. The new CEO is well positioned to drive growth and shareholder value. Strong balance sheet and cash generation supporting significant capital return. Share price already discounts GFC-like recession and full inflation impact.
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July 18, 2022

Herbalife Nutrition (HLF), mcap=$2.5bn, price $22.84 vs $21.76

Successful MLMs are quasi-religions - going long on a flourishing religion is a profitable bet. Cheap at 6x current year mid-point guidance. A Series of temporary factors tipped the company into negative growth. Pressures should get resolved /reversed within a year, with the company returning to mid/high single-digit growth. History of spending more than net income on buybacks. Share count reduced by 35% over the last 4 years.
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July 18, 2022

Hanesbrands (HBI), mcap=$3.7bn, price $10.63 vs $11.93

Manufacturer of branded apparel, with 17% sales from $WMT. At depressed valuation relative to peers and historical multiples. The market does not recognize the inflection in the business. The new CEO is making the right structural changes/divestments to bring the company 'back to basics'. These efforts already show signs of paying off. Recently increased 2024 revenue and margin guidance. Initiated repurchase program for 15% of current market cap.
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July 18, 2022

Shopify (SHOP), mcap=$39.5bn, price $31.27 vs $39.89

Write-up provides an overview of the recent developments that caused shares to drop from $1,657 to $399. The last two earnings releases were disappointing with planned large CAPEX into the fulfillment network as well as a very wide range of revenue growth guidance. Moves by $AMZN are encroaching on the company's business. On the positive side, insiders were acquiring a large number of stocks. The investment thesis from the previous VIC write-up remains intact and the slow down (after supercharged covid years growth) was expected.
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July 17, 2022

Xcel Brands (XELB), mcap=$24m, price $1.2 vs $1.5

Microcap licensor of high-end apparel and home goods brands. 70% interestest in one of the brands was recently sold for $46m net cash compared to the company's pre-sale EV of $62m. Investors are essentially getting the rest of the business for free after accounting for the value of the remaining 30% stake in the brand. After the deal management still expects to generate positive 2022 EBITDA. Track record of successfully building up of brands. Checkered operating history, but positive FCF for 7 years in a row pre-covid (c. $4m/year).
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July 16, 2022

Tenneco (TEN), mcap=$1.6bn, price $19.24 vs $17.52

Getting acquired by $APO at $20/share in cash. 14% spread with closing expected in Q3'22. Regulatory approvals are unlikely to be an issue - the key ones have already been received and others are on track. Buyers are unlikely to walk away cause of deteriorating economic conditions or rising interest rates.
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July 16, 2022

Global Business Travel Group (GBTG), mcap=$2.6bn, price $5.84 vs $8.35

Business travel management company, #1 player globally. Set to rebound together with corporate travel, which is still well below pre-covid levels. Recent de-SPAC got decimated together with the rest of the SPAC market. Formed when $APO sponsored SPAC merged with Amex Global Business and was spun off from $AXP with the parent retaining 35% ownership. A fragmented market gives an opportunity for further consolidation.
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July 16, 2022

Consolidated Communications Holdings (CNSL), mcap=$758m, price $6.57 vs $6.62

Creating shareholder value through a transformation from a “dying” wireline to a high-quality, “growing” fiber business. The most attractive unit economics of any fiber build-out in the public markets. 94% of footprint in favorable monopoly/duopoly markets. Long-haul fiber infrastructure is already in place. The structural advantage with cost-to-pass is materially lower than peers (FYBR's is 44% higher). Fiber roll-out is already fully funded and ahead of schedule.
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July 16, 2022

Perrigo Company (PRGO), mcap=$5.5bn, price $40.70 vs $39.86

Generic pharmaceutical manufacturer after the recent acquisition of branded OTC consumer Healthcare company. Earnings/FCF set to double in 2 years once merger integration is finished. Multiple re-rating is expected as consumer product stocks tend to trade at a premium to the market. Business strength masked by covid-induced wild swings in OTC healthcare product demand. The new CEO successfully leads the transformation of the company. The CEO has sold two previous ventures and is also expected to sell PRGO around 2024 at a 100% premium to current prices.
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July 15, 2022

G-III Apparel Group (GIII), mcap=$945m, price $19.77 vs $24.48

Manufacturer and marketer of branded apparel including DKNY, Calvin Klein, and Tommy Hilfiger. Sells through leading retailers (such as $M, $TJX) as well as own stores. Priced for bankruptcy despite healthy balance sheet, long-term track record, and 26% ROTE. Relative valuation discount to comps is unwarranted.
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July 15, 2022

Old Dominion Freight Line (ODFL) short, mcap=$29bn, price $251 vs $260

A high-fixed-cost business that has benefited from massive tailwinds (Covid/delivery) and incompetent/ hamstrung competition. A recent shortage of drivers and trucks allowed all industry players ($FEDX, $UPS) to increase pricing. Management's ambitions of ever-increasing operating margins (up to 30%) are not achievable. Margins are set to shrink going forward.
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July 15, 2022

The ONE Group Hospitality (STKS), mcap=$249, price $7.53 vs $9.02

A fast-growing, profitable dual-restaurant concept with a significant amount of available “whitespace” in which to add new locations. Owner of STK Steakhouse and Kona Grill restaurants + food and beverage management company servicing hotels. Best-in-class same-store sales increase. Trades materially below public comps and recent transactions. Attractive acquisition target for larger restaurant operators.
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July 15, 2022

American Express (AXP) short, mcap=$103bn, price $137 vs $160

Investors misunderstand earnings profile - became just another lending business as non-interest income declined 90% from 2007 peak, with the most significant drop during covid years. Way too high valuation - trades at 20x EBIT which is entirely from interest income. A squeeze of the competitive environment and discount pressures are killing margins. With already tiny 2-4% margins, non-interest income is expected to dip into negative. Interest revenue at peak of its yield. Set to miss 10% LT growth targets soon and will need to reset expectations. Will perform poorly in recession.
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July 15, 2022

Atlas Engineered Products (AEP.V), mcap=$25m, price $0.43 vs $0.57

Manufacturer/seller of bulky structural building components pursuing the roll-up strategy. Cheap at 2.4x LTM EBITDA and 3.1x LTM EBIT. Market is fragmented and many companies are family owned. Roll-up and organic growth story regaining traction after a covid pause, with strong results over the last 1.5 years Higher margins due to automation and efficiency improvements. Exposure to the cyclical housing market.
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July 15, 2022

GreenTree Hospitality Group (GHG), mcap=$406m, price $3.95 vs $4.04

Top-5 China hotel company at heavily depressed valuation with 100% upside. Network of >4.6k hotels with a further 1.2k under development. Concentrates on Tier 3 and lower cities, serving value-conscious travelers. Shares trade at depressed levels due to lockdowns in China, wrong governance perception, and limited liquidity as CEOs own 90% of the company. All of these are either temporary or getting addressed by the company.
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July 15, 2022

Vital Farms (VITL), mcap=$345, price $8.61 vs $10.00

Distributor of pasture-raised eggs - the ethical alternative to factory farms. The thesis is based on continued growth from more consumers shifting to much more expensive 'luxury' eggs. Set to grow at 20%-30%. Sources from 300 farms and then distributes from a single facility to 21k retail locations. Commenter pushback - 1x sales distributor in a competitively challenged end market with a little line of sight to earning more than MSD margins.
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July 12, 2022

Bloomin’ Brands (BLMN), mcap=$1.5bn, price $16.49 vs $20.96

Contrarian idea for brave investors. Casual dining restaurant brand operator. Indiscriminately beaten down to below pre-pandemic valuation together with other re-opening trades due to potential recession concerns. However, the company made structural and durable improvements in the business model (SSS growth, overall profitability, and deleveraged balance sheet), that are not being recognized by investors. Trades below historical valuation multiples. FY23 normalized earnings are projected to be +50% above pre-pandemic levels. Expected to re-rate from the current bottom basement multiple of 4.7x to 7x-8x, still materially below high-quality peers.
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July 12, 2022

InPost (INPST.AS), mcap=€2.9bn, price €5.91 vs €6.40

Operator of a network of postage lockers mostly in Poland. Was covid beneficiary and shares sold off 70% from the post-IPO highs. Expected to reach FCF breakeven in 2027 with meaningful scale benefits to the bottom line. In the near term faces a number of manageable headwinds - high-interest rates, competition in a commoditized market, large lease liabilities, and lower than optimal utilization rates.
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July 12, 2022

Liberty Broadband (LBRDK), mcap=$18bn, price $113 vs $124

John Malone's holding company with 26% ownership of CHTR. Charter accounts for 90% of the value with the remaining coming from Alaska-focused broadband provider GCI. Trades at a 17% discount to the value of its holdings, providing additional upside on Charter investment. Charter is undervalued today - it's a growing and low-risk business that is unlikely to be meaningfully impacted neither by fiber nor fixed wireless competition.
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July 12, 2022

OCI N.V. (OCI.AS), mcap=€6.6bn, price €30.34 vs €34.78

Fertilizer companies are currently overearning. Assuming a return to equilibrium, OCI is the most attractive major producer taking into account capital structure and normalized earnings profiles. Set to earn 50% of its mcap in FCF over the next 7 quarters. At 4x fwd EBITDA trades below historical multiples and peers on normalized earnings.
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July 11, 2022

Twitter (TWTR) arb, mcap=$28bn, price $36.81 vs $39.40

Elon is having buyer's remorse and trying to walk away from buying Twitter. Strict contract terms make this almost impossible. High number of arguments and examples of why Musk's attempt is bound to fail. He would almost certainly lose in court. 95%+ chance the deal closes on terms or with a slight haircut. Market is mispricing the situation creating a very favorable risk/reward at current levels.
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July 11, 2022

Eventbrite (EB), mcap=$1bn, price $10.52 vs $12.40

Online self-service ticketing platform. During Covid transformed business towards higher-margin self-sign-on products. Drastic cost cuts allowed breakeven revenue levels to be reduced from $345m to $185m. Demand is expected to inflect with recovery in live-events space. Undervalued on a relative and absolute basis. Further upside from the introduction of marketing services (mirroring ETSY) allowing to expand take rate.
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July 11, 2022

Victoria’s Secret & Co. (VSCO) short, mcap=$2.3bn, price $28.21 vs $42.00

Hasn't sold off with other retailers despite various indications that sales and traffic are down and getting worse. Trades at $4bn EV vs $1.1bn pre-covid valuation. Analyst estimates are overly optimistic. Ongoing structural brand deterioration due to missteps in brand management.
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July 9, 2022

Six Flags Entertainment (SIX), mcap=$1.9bn, price $21.81 vs $28.05

The largest regional theme park operator in the US. Quality business with great management trading on a below-normal multiple on below-normal earnings due to short-term earnings pressures and confusion over new management's strategy. Newly appointed CEO with a great track record - delivered 28% IRR over 18 years as CEO of MIDD.
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July 9, 2022

Ducommun (DCO), mcap=$514m, price $42.72 vs $41.96

Aerospace and defense supplier at 10x cash earnings. In middle-innings of a multi-year turnaround, the benefits of which were obscured by COVID. Profit margins improving driven by excellent operational execution. Clear sight of high single-digit growth for the next 5 years. New program wins from Airbus and 737 MAX recovery provide upside to growth. Compounding EBIT at 12.5% CAGR. Expected takeout candidate by SPR or private equity.
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July 9, 2022

MRC Global (MRC), mcap=$896m, price $10.73 vs $10.50

Industrial distribution company at a reasonable valuation of 10.5x EBIT guidance for '22. Guidance for 2022 sandbagged. Exposure to cyclical recovery in O&G-focused business lines. FCF is forecasted to increase 150% by 2024 driven by 10% revenue CAGR and SG&A cost efficiencies.
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July 9, 2022

Yatra Online (YTRA), mcap=$148m, price $2.36 vs $1.50

India's second-largest OTA at 4x fwd EBITDA. Trades at 20x discount to its India-listed peer. Activist recently got a board seat aiming for the secondary listing in India (much higher valuations) and/or an eventual sale of the company. Strong competitive position. Expected to be EBITDA and cashflow positive by the end of 2022. Was to be acquired by EBIX in 2019 at $4.9/share vs $1.5 today - canceled mainly due to covid. A number of potential suitors.
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July 8, 2022

Rent-A-Center (RCII), mcap=$1.2bn, price $21.11 vs $23.50

Lease-to-own business at 7x normalized/conservative earnings. Sells through own B&M stores as well as partner's stores/websites (VTLO). Recently shares lost half of their value driven by: (1) higher loss rates in the core B&M business as well as (2) underwriting issues at the VTLO segment. The loss rate reversion to pre-covid levels was expected as stimulus effects subsided. VTLO underwriting losses were due to poor execution but are likely to be in the back window already after remediation steps were taken. Large WC unwind expect to result in massive FCF for the year ($400m or 15% of EV). Conservative assumptions indicate 50-100%upside.
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July 8, 2022

New Relic (NEWR), mcap=$3.8bn, price $56.76 vs $48.17

IT diagnostics provider at a material discount to peers and prior acquisitions in the application performance monitoring/observability space. Was in a difficult and lengthy (since 2019) business transition to a full-stack observability platform. Now at an inflection point with products finally competitive with other solutions in the market. Sticky and relatively price-insensitive customers. Downside limited given current valuation and with a number of potential strategic buyers.
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July 8, 2022

Inotiv (NOTV), mcap=$279m, price $10.94 vs $13.14

Contract research organization focused on drug discovery and pre-clinical development. Trades at 50% discount to peers. In the transition period having recently acquired 10 companies increasing revenues 10x and EV 4x. Combined business sill underearning with 12% EBITDA margins below peers (23%) and long-term guidance (20%). New CEO is successfully implementing a turnaround since 2019. Recent stock weakness was driven by a DOJ investigation, which should have very limited implications for the business. 9 different insiders purchased $1.6m of stock.
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July 7, 2022

Griffon (GFF), mcap=$1.5bn, price $26.09 vs $29.69

Cheap building products company in the process of a strategic review. Stock is depressed due to entrenched management and seemingly unrelated business segments under one roof. Activist Voss Capital won 1 board seat and has already brought positive changes, strategic review being one of them. Comp was acquired at 13xEBITDA vs 7.4 fwd valuation for GFF. Well-positioned to compound value if no sale scenario. Key garage door business segment (70% of EBITDA) is most likely an acquisition candidate in a hot sector.
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July 7, 2022

Hapag-Lloyd Aktiengesellschaft (HLAG.DE), mcap=€47.8bn, price €272 vs €445

A bet that the shipping industry cycle has already peaked and will revert in the mid-term driven by: (1) new ships entering the market, (2) release of currently port-congested capacity, and (3) unwinding of the pandemic-era spike in demand. Just as the pandemic created an unprecedented supply shortage, the reverse could take hold as it unwinds. HLAG trades at a huge premium to peers or cyclically-adjusted long-term multiples.
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July 5, 2022

Rexel (RXEEY), mcap=$4.6bn, price $14.69 vs $18.74

Global distributor of electrical products. Sells 55% to Europe, 35% to NA, and 10% to Asia. The business benefits from the secular shift to electrification and is expected to grow above its historic low-single-digit rate. Activists brought new management in 2016 and subsequently, the company invested heavily in digitalization and improved customer retention. Preferred supplier due to good service and availability rather than the lowest price. A fragmented industry where smaller competitors are unable to keep up investments with the likes of RXEEY. Further industry consolidation should drive margin improvement from 5% to 6%.
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July 4, 2022

Grayscale Bitcoin Trust (GBTC), mcap=$2.2bn, price $12.25 vs $18.74

Crypto fund at 31% discount to NAV aiming to convert to ETF. If successful, this would immediately close the discount. The application was initially denied by SEC due to the lack of 'real' exchange on which the underlying assets (mainly Bitcoin and Ethereum) trade. GBTC argues its underlying assets are hardly different from Bitcoin futures. The fund is soliciting people to write to SEC to petition for allowing the conversion. SEC will make a final ruling again on July 6th. Hedging available vai Bitcoin futures.
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July 4, 2022

Euroseas (ESEA), mcap=$168m, price $23.00 vs $26.04

Operator of feeder and post-panamax container ships. The vast majority of its vessels are under contract providing cashflow visibility through 2024. Conservative SOTP valuation results in significant upside from contracted cashflows, newly ordered vessels at 50%+ discount and scrapping of other vessels. Loosing money from $26/share would require inane assumptions.
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July 4, 2022

Industrial Logistics Properties Trust (ILPT), mcap=$930m, $14.22 vs $13.97

A cheap logistics-focused REIT with properties with assets in Hawaii and mainland U.S at 9.4% yield. High quality assets under long term leases - distribution centers of the likes of FDX, AMZN and RH. Externally managed by (in)famous RMR. Recently completed a very large acquisition (80% of today's TEV) and significantly levered up the company. Since ILPT was able to find JV partner for the deal, it is unlikely they overpaid.
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July 4, 2022

Adient (ADNT), mcap=$2.85bn, price $30.02 vs $32.19

A play on post-covid recovery in automotive industry. The largest supplier globally of automotive seating. A mediocre business - capial-inefficient widget maker forced to absorb pricing pressures - but one with overly punitive present valuation. Company expected to re-rate upon return of volumes to pre-covid levels as well as succesful streamlining and restruturing effors driving core earnings to mid-cycle (or better) levels.
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July 4, 2022

Local Bounti (LOCL), mcap=$304m, price $3.23 vs $5.20

Indoor farming SPAC, that is riddled with related party transactions and that has just spent 100% of SPAC cash to acquire a no-growth leafy greens supplier to the likes of WMT, TGT, KR and ATCI for $120m or 12x gross profit. LOCL original de-SPAC business will do under $2m and booker $8.5m loss in Q1'22. all of this for $550m market cap. Expensive borrow, however lock-up just expired. Another SPAC from the same sponsor DMS trades for $1.66.
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July 3, 2022

Redbox Entertainment (RDBX), mcap=$277m, price $6.11 vs $3.73

Bet on short squeeze to deflate. RDBX is undegoing a takeunder at $0.63/share with no minority shareholder approval required and limied/zero equity value if the transaction fails. Shares trade at multiples of the offer price due to limited float and the resulting short squeeze. Expensive/not available borrow.
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July 3, 2022

Bluerock Homes Trust (BHOM) – BRG Spinco Pitch

Multi-family REIT getting acquired by BX at $24.25/share + 1 spin-co share of single-family assets BHOM. BHOM NAV stands at $5.6 (at 9.7% cap rate) vs $2 per share implied cost. BHOM peers trade at much lower 4% cap rates. Spin-off will be taxable.
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