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March 2021 premium update (paywall)
Before we get to the updates- first, thank you so much for subscribing to the premium site!
Second, a quick housekeeping. This month’s housekeeping has three parts:
I mentioned it in my 2021 vision, but my goal for the premium site is simple: 2 posts/month (24 posts a year). One of the monthly posts will be a well thought out and actionable idea (at least in my mind it will be!); the other post is the monthly premium update that will provide thoughts/commentary on any ideas that have news or new thinking behind them.
As we noted in August, we’re now running the premium site through both substack and the blog. The content on both is identical, so there’s no need to sign up for both. However, if you’d like both (or you signed up for one and want the other), obviously we can accommodate that. Simply email Rob at firstname.lastname@example.org and he can make sure you have access to both without incurring additional fees or anything.
I know it’s complicated to have two systems, so thank you for bearing with us. Our hope is that, over time, running the site through the blog will give us the optionality to introduce new features to increase the value of membership. In the mean time, I try to include links to articles for both the blog and substack to make following back to links and ideas as easy as possible.
If we ever have added features on the blog that we can’t have on substack, we’ll of course let you know! Thanks again for bearing with us, and always feel free to reach out if you have any questions / concerns
The premium site is always a work in progress, so feedback is very much appreciated.
You can always reach me at email@example.com with any questions / concerns etc.
I’ve introduced a new segment at the bottom of this post that includes every past idea, both open and closed ones, and links to them for your convivence in looking at / refreshing on past ideas.
In last month’s updates (substack / blog), I called out AMBC, JEF, CURO, SIGA, and WOW as my highest priority ideas. After an absolutely epic run, I’d take WOW off the highest priority list and replace it with SSSS. I still love WOW, but its more than tripled, and the multiple remains cheap but is starting to approach the larger cable players and I don’t see M&A in the near term. I continue to hold the bulk of my position there, but trimming it a little isn’t the worst thing in the world after that big a move! I would also always highlight IAC as an interesting situation; the immediate upside isn’t as large or (potentially) as fast as the other companies but if you asked me for one stock to buy and hold for the next 5/7/10 years and substantially outperform the market, it would be IAC (I mentioned it a little in this post on building conviction).
I had not planned on releasing the monthly update until next week but I thought it was important to get it out today because of GTXMQ. I am closing this idea. I think the rights offering and convert preferreds are very interesting, but they are a different idea than the initial thesis. I just wanted to highlight / ensure that everyone saw this post on the record date and how non-accredited investors cannot participate in the rights offering.
Ok, on to the other updates:
They reported earnings, but no huge updates. The BoA trial has been delayed yet again, which is a real bummer. The company is hopeful the trial will happen in the next 12 months, though at this point it feels a little like Waiting for Godot.
Other than the trial news, the book continues to clean up as legacy credits roll off. I’m not a huge fan of the new growth strategy as I’d rather just see them pursue a flat liquidation over time, but it’s small versus the upside from the trial and they are least focusing on insurance in what appears to be a hardening market and they should have some advantages in it.
Earnings were a little messy, but overall the company continues to clean up the international book and focus on the core U.S. book. The stock has run up a good bit, but I still see a lot of value here. The company is trading right around book value, while their best peers are trading for 1.25-1.5x book (or higher). I continue to think the path here is pretty simple: the company continues to run off legacy international assets, clean up the book and focus on the U.S. assets, and eventually sell themselves.
Note that the new CFO comes from Aspen, which was sold recently. Given his history plus an activist who I’m sure is increasingly itchy given how big their stake in the company is, I think a sale is inevitable over the medium term.
Their investor day is today (March 12) at 10 AM. The slides are already up here; at first glance, nothing jumps out to me. I think they lay out a pretty clear path to cleaning up a lot of their legacy issues (running down or shutting down unprofitable lines) and getting to a ~10% ROE by 2022 (see slide 53), which would support the 1.25-1.5x book valuation discussed above… but it’s tough to say too much without actually hearing the presentation! I’m sure I’ll be posting some updates on post-investor day next month.
Thesis is playing out well. Earnings were fine, and the company bought back >5% of their shares during the year. The international story is just getting started, and the company “believes the post-pandemic environment will have a net positive impact on our international business.” An activist has emerged pushing the company to buyback shares even more aggressively; I think that’s great news as repurchases are very accrettive at these levels and it ensures there’s someone else keeping an eye out for any M&F shenanigans (the current majority shareholder).
The one interesting angle to add here is this NYT article on how Emergent BioSolutions used their lobbying clout to stuff the emergency stockpile with anthrax vaccine. I’m not sure how things play out on the heels of that article; maybe status quo, maybe the whole anthrax stockpile comes under pressure (hurting SIGA), or maybe the government cuts the anthrax vaccine budget drastically but decides to shift some of that budget to anthrax safety measures (recall that SIGA’s main product is for treatment after smallpox exposure).
Their portfolio is firing on all cylinders. Their reported NAV to end the year was $15.14/share, but if you adjust for the dividend they paid in February and all of the Palantir stock they sold after the end of the quarter, their NAV would be up ~$1/share right now.
There are two real kickers here:
Coursera (now their largest holding, making up >15% of NAV) filed for an IPO. SSSS has Coursera marked at $2.5B, and all indications are the IPO will value the company at at least $5B. That would add >$2.50/share to SSSS’s NAV. If you adjust for a rough mark to market of the Coursera IPO and the Palantir shares they sold, Coursera’s current NAV is approaching $19/share.
The other big news is SSSS has started investing into SPAC founders shares. These are risky, but SSSS appears to be targeting small bets across a bunch of SPACs. The economics of SPAC founders shares can be incredible, and if any one of these pay off it could result in a meaningful boost to SSSS. I continue to view the team here as very astute, and I think the market is underestimating just how good the near term flow for SSSS will be (particularly with SPACs going crazy lobbing in bids for their companies!).
My bullishness on SSSS is ramping up again, so I’m bumping it back to my highest priority list. The management team has done a great job of capital allocation, shares are trading for a huge discount to their adjusted NAV, and in the near future they could be the only way to play an upcoming hot IPO (Coursera). In the past, that combination has lead to big runs in SSSS share price and brief periods of them trading above NAV. I think that could happen again in the near future.
Look, this was just a bad call. Any time a pick is in an article with the tag “bottom of S&P 500 Draws Caution From Wall Street,” you know it’s not going well. The basis of the thesis was “MYL’s assets overall were good, but the corporate governance and management were terrible. The new company will lose all of the barriers to activism and will be run by former PFE execs, so they’ll lose the shenanigans,” and so far the opposite has played out. The new VTRS execs immediately destroyed their credibility by issuing guidance way, way below what they had been talking up just a few months ago when the deal was set to wrap.
I can’t help but wonder if part of the reason they did that was to tank the share price in advance of receiving their RSUs in the new company.
I’m tempted to just take the L, sell my shares, close the rec, and move on here…. but the company is just too cheap. You’re currently paying ~7x EBITDA for VTRS, a substantial discount to peers, and earnings should grow over the next few years as all of their cost cuts kick in and their business stabilizes. Maybe I’m a sucker, but given how cheap they are and that management finally got their RSUs struck, I’m willing to stick around for a few more quarters. Ultimately, I think the original thesis plays out, but I’m wary.
What to say about WOW? The stock has had an enormous run, and the company is finally starting to execute properly. With the company dialing back their edge out plans and looking to increase the penetration of their current asset base, capex is coming down and margins should continue to improve. I continue to think private market value for WOW’s assets is in the 11-12x EBITDA range versus their current ~8x multiple; given WOW’s significant leverage, that would put fair value in a takeout at ~$40/share, still more than a double from today’s share price. Even without that, I think the simple economics of the business will drive this higher over time; at a recent conference, the CFO said the company could be doing >$2/share in levered cash flow by ~2023, and my math is in the same ball park.
Still, despite the upside here, I’m taking it off my highest priority list simply because the multiple gap between WOW and their larger peers with better assets has shrunk considerably. Consider, for example, WOW versus ATUS. ATUS trades one turn of EBITDA richer than WOW, yet ATUS has substantially better assets than WOW. So while I continue to think WOW is well positioned long term and the stock has substantial upside, the huge value discrepancy between WOW and peers has collapsed so I’m just slightly less enthusiastic about it.
Prior Ideas still open / actionable
Prior Ideas, Closed