Special Situation Investments

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 VIC 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 ideas before they become 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.

Note: You will need to register for free guest access to Value Investors Club to be able to access VIC posts with a 45-day delay window.

Market cap is indicated at the time of posting the summary.

Jul 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.

Jul 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.

Jul 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.

Jul 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.

Jul 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).

Jul 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.

Jul 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.

Jul 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.

Jul 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.

Jul 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.

Jul 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.

Jul 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.

Jul 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.

Jul 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.

Jul 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.

Jul 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.

Jul 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.

Jul 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.

Jul 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.

Jul 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.

Jul 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.

Jul 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.

Jul 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.

Jul 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.

Jul 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.

Jul 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.

Jul 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.

Jul 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.

Jul 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.

Jul 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.

Jul 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.

Jul 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.

Jul 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%.

Jul 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.

Jul 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.

Jul 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.

Jul 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.

Jul 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.

Jul 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.

Jul 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.

Jul 2, 2022

Potbelly (PBPB), mcap=$144m, price $4.99 vs $5.50

Owner and franchisor of Potbelly Sandwich Shop undergoing business transformation to a more franchised model (currently 90% owned). Has been COVID recovery laggard due to heavy presence in the Chicago Business District. The base case rests on the new CEO (former COO at $WEN) delivering on the strategic plan of refranchising 25% units in 3 years, reaching $1.3m AUV (vs $1m now) with 16% margins (vs 15% for 2021) and growing units 10% annually.

Jul 1, 2022

OneSpan (OSPN), mcap=$480m, price $12 vs $11

Small cap SaaS providing authentification solutions for financial institutions. Decline in legacy business has been masking 30%+ growth on the digital signature side. In addition, a shift from permanent to term licenses has further muted topline growth, despite ARR growing at a healthy 20%+ with 115%+ net retention. New CEO (hired after former management was pushed out by activists in 2021) with track record of revitalizing security software business and comp incentive to reach $30/share or sell te company.

Jul 1, 2022

Hammond Power Solutions (HPS-A.TO), mcap=C$179m, price C$15.48 vs C$14.87

A cheap canadian manufacturer of dry transformers for industrial power applications - "kleenex" of transformers, especially in public infrastructure projects. Leveraged to benefit from industrial infrastructure build-out and electricity grid upgrades in North America. Recent quarters have been incredibly successful and the trend is expected to continue. Operating since 1920 and profitable every years since going public in 2005. Capital light with longer term 15% ROIC. 7.5% CAGR since 2017. Insiders own 31%

Jun 30, 2022

Charge Enterprises (CRGE) short, mcap=$884m, price $4.58 vs $4.67

Bear thesis – about $80 million of fairly ordinary-looking acquisitions over 2 years, now valued at $1bn+. CRGE positions itself as a growth business in the EV charging station, however, most revenue is from declining low-margin telecom M&A. Negligible revenue from the actual charging stations. Pro forma revenues are shrinking, no profits. The company has a history of chasing various fads (Internet of Value, CBD, and cannabis markets) and is run promotional management. Risks: expensive borrow, recent investments from reputable shops.

Jun 30, 2022

AdaptHealth (AHCO), mcap=$2.5bn, price $18.51 vs $16.60

Semi-busted rollup of home medical equipment products with questionable ROIC from the acquisitions. Author argues that the business acquired in 2020 are actually good and grow nicely - shortfall in growth stems from businesses owned prior to 2020 M&A spree as well as from fixable operational issues of fast expansion. Potential for further M&A with 15% ROIC.

Jun 29, 2022

Apartment Investment and Management (AIV), mcap=$954m, price $6.25 vs $5.82

Multi-family REIT with Class A properties in Boston, NY, Miami, etc. - markets with high barriers to construction and very high construction costs. Demand for rentals in these markets expected to continue to increase ahead of supply. Further tailwinds from higher mortgage rates and resumption of immigration.

Jun 29, 2022

SpringWorks Therapeutics (SWTX) short, mcap=$1.3bn, price $25.32 vs $39.19

A bet that P3 study of the drug previously abandoned by PFE will fail. Result announcement expected in Q2'22 after years of delay, which have rendered the statistical powering assumptions meaningless.

Jun 27, 2022

Biohaven Pharmaceutical Holding (BHVN), mcap=$10.2bn, price $143 vs $140

Merger arb in PFE acquisition of BHVN. Aside from 4% spread to cash consideration, investors ascribe zero value to newco shares to be received in the merger. Regulatory and financing risks are de minimus. Merger to close in early 2023.

Jun 27, 2022

Landstar System (LSTR) short, mcap=$5.5bn, price $148 vs $157

Highly cyclical trucking broker operating on Covid driven peak economics. Historically high spot trucking rates created windfall for $LSTR. The next Covid winner to experience a rapid deterioration in its earnings as industry economics normalize. Antiquated trucking broker model adds further longer term concerns.

Jun 26, 2022

Allfunds Group (ALLFG.AS), mcap=€4.7bn, price €7.53 vs €7.56

Leading mutual fund distribution platform in Europe. Tecurring revenue business model with strong network effects and scale benefits. Track record of double digit growth with less than 10% of adressable market penetrated. Growth set to continue as mutual fund distribution shifts from captive channels to pletforms like ALLFG. Recent 50% sell-off driven by temporary industry environment factors.

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