The Rational Cloning: Weekly Ideas #13
Maran Capital and Greenhaven on Their Top 5 Holdings, Jeremy Raper on POSaBIT Systems
Welcome to the 13th edition of the Rational Cloning Newsletter (Weekly Ideas Series).
Helping you discover the best ideas of others.
Happy cloning.
Weekly Investment Ideas
(1) Maran Capital Q3 2021 Letter (October 27, 2021)
(a) Clarus (CLAR)
In my 2Q 2018 letter, I shared my (then) perspective on Clarus’s potential. The stock was trading at approximately $8 per share, and I laid out a potential path to $35 per share.
Careful readers may recall the math: 15 + 5 + 5 + 3 + 7 = $35
Given meaningful progress on apparel, footwear, retail stores, the company’s sporting segment, and capital allocation (including the recent acquisition of Rhino-Rack, with more to come), I now believe the stock could climb above $60 per share over the next three years.
Here’s the updated math: 25 + 15 + 10 + 10 = $60
(b) Correios de Portugal, S.A. (Euronext Lisbon: CTT)
CTT remains a top position in the fund. I continue to love the setup, as it has elements of both fundamental growth and special situation/event-driven opportunity.
Earnings should double over the next few years, driven by growth in parcels and a rational pricing mechanism in mail. “Hidden” assets such as real estate and the bank should have their values unlocked. Various embedded “start-ups” including dott.pt, fulfillment, and the payments business should continue to grow and be recognized by investors.
The previously loss-making Spanish segment should swing to meaningful profitability. And excess capital should be used to invest in the business, engage in M&A, and repurchase stock at attractive valuations.
With CTT, we have many ways to win and a board and management team that “gets it.” I think the best is yet to come.
(c) Turning Point Brands (TPB)
At Turning Point Brands, the tail is wagging the dog. TPB has three segments, Zig Zag rolling papers, Stokers smokeless tobacco, and “New Gen,” a collection of investments in vaping and other alternative products. Zig Zag and Stokers are both performing very well, together run-rating approximately $100mm of annual EBITDA. Zig Zag is benefitting from the ongoing trend of cannabis legalization, and Stokers is a low-cost, high-quality competitor in its niche, taking share and operating under a pricing umbrella.
New Gen, though, is struggling and operating at close to break-even levels. It is this third segment that investors seem to be focused on. The stock is cheap even assuming New Gen is worth nothing, and I believe risk-reward is asymmetrically skewed to the upside.
(d) Crossroads Systems (CRSS)
I discussed CRSS last quarter, a core holding turned special situation as the company paid out a $40/sh special dividend. Our investment in the company was predicated on a strong niche business and a highly aligned management team and board, coupled with an attractive valuation.
The company’s entrée into small business lending via the PPP program fundamentally changed the business. CRSS’s success in the first half of 2021 laid the groundwork for it to reposition itself with a broader mandate.
Crossroads remains an ESG-friendly Community Development Financial Institution (CDFI) but now has greater resources and reach. It also has approximately 500,000 new customer relationships with small businesses and sole proprietors that it obtained through its participation in the PPP program.
(e) American Outdoor Brands (AOUT)
American Outdoor Brands has continued to execute and demonstrate operational savvy. Its direct-toconsumer (DTC) reach is best-in-class, and it has managed the recent supply chain backdrop well. The company has built brands and grown brands.
Despite impressive operating performance, AOUT remains a “show-me” story in the eyes of investors on the capital allocation front. I’m pleased that the company has been patient and has not overpaid for acquisitions, but I believe the opportunity exists to create significant value via capital allocation.
(2) Greenhaven Road Capital Q3 2021 Letter (October 2021)
Top Five Holdings
a. PAR Technology (PAR)
PAR Technology continues to make progress towards moving quick-service restaurant chains to a cloud-based point of sale (POS) system, positioning itself to take advantage of all the opportunities that creates, such as integrating payments, inventory management, and loyalty program apps. The company raised capital during the quarter, which some may view as a negative, but I thought was incrementally quite positive.
CEO Savneet Singh’s excellent capital allocation decisions are core to our PAR thesis. So far, every time that he has raised capital, he has made an acquisition. I look forward to seeing what he buys. The other positive development in Q3 was the announcement that PAR’s defense business won a large contract that they had been waiting on. This non-core, non-strategic asset greatly muddles company reporting, and I believe the announcement increases the likelihood that the defense business will be sold, simplifying the story and giving Savneet more capital to invest.
b. KKR (KKR)
This remains an extremely resilient business with an A+ team enjoying the secular tailwinds of the migration of investable dollars toward alternative assets, where large allocators like the returns and love the muted volatility.
c. Elastic Software (ESTC)
Share prices are up more than threefold since our first purchases of Elastic Software. The company continues to report best-in-class net revenue retention (amount generated from existing customers) of 130%. With recent acquisitions, they are continuing their expansion into security. This is the company with the highest product velocity and largest addressable markets in our portfolio. With a massive base of customers using freemium/opensource products, there are fertile hunting grounds for growth.
d. MarketWise (MKTW)
During Q3, MarketWise reported their first quarter of earnings as a public company. I think it is fair to say that the market was underwhelmed.
As of the writing of this letter, shares are down approximately 30% from our purchase price, which I thought was a fair one. As a reminder, MarketWise sells subscriptions to financial newsletters and related products.
It is one of a very small handful of businesses that I know of that has grown to $500M+ in annual revenue with only $50,000 invested in the business to date.
Gross margins are higher than most software companies at 86%, the company has been profitable all 20 years of operation, and revenue has grown for 18 of the 20 years. In the second quarter, they grew revenues 71%, generated over $50M in cash flow from operations, grew paid subscribers 45%, and grew free subscribers 75%.
Tweets That Make You Go... Hmm 🤔
Jeremy Raper discusses POSaBIT $POSAF
