The Rational Cloning: Weekly Ideas #1
Alluvial Capital & Bonsai Partners Update, Peter Kamin & B. Riley Making Moves, Clark Street Value, Tobacco, and More
Welcome to the 1st edition of the Rational Cloning newsletter.
One of the biggest pain points in investing is that there are too many ideas in the investable universe and not enough resources / manpower to investigate each one.
This newsletter is meant to alleviate that pain point by sifting through the ideas of other people (13Fs/fund managers, activists, FinTwit, investing blogs) and uncover the highest quality ones for you to prioritize. Note that this is not meant to be a substitute for in-depth research and rational thinking.
We spend the week digging through blogs, fund letters, and filings to find interesting ideas. This will be a weekly edition and expect to send out an edition every Sunday morning.
New Investment Ideas
(1) Alluvial Capital Management
Alluvial’s Q2 letter (LINK) came out: Tower Properties Company (TPRP), Garrett Motion Inc. (GTX), LICT Corporation (LICT), Peter Kamin: Rand Worldwide (RWWI) and Calloway’s Nursery (CLWY), P10 Holdings (PIOE)
1a. Tower Properties Company (TPRP)
Tower is a real estate company that owns over 3.5 million square feet of commercial space and multi-family dwellings in the Kansas City metro area. The company is run by savvy real estate operators. They maintain their properties well, finance them appropriately, and generally are content to enjoy the rewards of long-term growth in rents and real estate values. At the last trade of $19,500 per share, the market values Tower Properties at a capitalization rate of over 9%, corporate overhead included.
If Tower Properties were to sell its portfolio today, I estimate it would collect at least $45,000 per share, pre-tax and net of debt. I doubt Tower will sell, but that’s all right.
Management has substantial skin in the game, and they prove it by investing in property improvements and new properties when they see opportunities and paying special dividends when they do not. Tower paid a whopping $5,000 per share in late 2020. Though Tower Properties will probably not ever be our top performer, I am very happy to hold the company for the long term given its growing asset value, quality management, and discount to net asset value
1b. Garrett Motion Inc. (GTX)
Following the bankruptcy, Garrett Motion is a small company with a confusing capital structure (term debt, Series A preferreds, Series B preferreds, common stock), no analyst coverage, and no guidance from management. On top of that, Garrett’s business model faces long-term challenges as the internal combustion engine gives way to electric. It’s no wonder the market values Garrett at distressed levels.
But Garrett will generate hundreds upon hundreds of millions in free cash flow each year for the next several years, which will allow the company to deleverage and simplify its balance sheet, invest in next-generation products, and reward shareholders. I fully expect the preferreds we hold to be valued at 2-3x the current price in just a few years’ time.
1c. LICT Corporation (LICT)
LICT Corporation continues to buy back shares and will soon announce the results of its strategic review. The company is evaluating various alternatives to increase shareholder value, including a potential SPAC, spin-off, or dividend recapitalization. Any of these would boost the value of LICT shares, though I would prefer the spin-off or dividend.
1d. Peter Kamin: Rand Worldwide (RWWI) and Calloway’s Nursery (CLWY)
Peter Kamin-controlled companies Rand Worldwide and Calloway’s Nursery. Each has been generous this year.
Calloway’s Nursery is earning record profits as Texans spruce up their homes and gardens with flowers and greenery. The company has paid out $1.25 per share in special dividends year-to-date and will likely pay at least $0.50 more, while funding its growth initiatives.
Rand Worldwide is riding high on continued demand for its software solutions and a recent re-financing and has paid out $1.75 per share this year.
1e. P10 Holdings (PIOE)
P10 Holdings remains our largest position, though I reduced our holdings this quarter to manage our exposure and to build cash for other opportunities. It has been a quiet year for P10 compared to the fireworks of 2020, but the company continues working to build a diversified alternative investments manager.
Up-listing to a major exchange remains a priority, though the company will not allow the process to distract from the acquisition hunt, as acquisitions will provide shareholders with much more value in the long run.
The company projects fee-paying assets under management of $16 billion by year-end, which should provide around 45 cents per share in free cash flow. Shares remain very attractively priced and will move on any acquisition or up-listing announcement.
(2) Greystone Capital Management
Mentioned: Thunderbird Entertainment (TRBD.V / THBRF)
From its Q2 2021 Letter (published July 24, 2021):
Thunderbird Entertainment is a microcap production and entertainment studio that creates scripted, unscripted and animated programming for global digital platforms, as well as Canadian and international broadcasters.
I believe that Thunderbird is at an inflection point in their business and is set to benefit favorably from the secular tailwinds of increased content spend and the continued rise in streaming video on demand services.
…our purchase price of around 10x EBITDA feels undemanding. I believe it’s entirely possible for this business to generate around $40mm in EBITDA within a few years, making today’s price, not accounting for the cash on the balance sheet, look like a bargain.
I’m happy to let management execute on our behalf as they continue to grow and create high quality content, the value of which should help the business grow multiples above the price we paid.
From its Q1 2021 Letter (published May 12, 2021):
5a. Micron Technologies (MU):
Micron is a manufacturer of memory semiconductor chips.
With the semiconductor cycle in full swing, sentiment continued to improve for major DRAM and NAND suppliers. Spot pricing for DRAM continues its upward march due to supply shocks across the industry and sustained demand levels that continue to outstrip supply.
As a result, Micron showed improving results for the fiscal first quarter, raised guidance intra-quarter for the fiscal second quarter, and offered strong guidance for the fiscal third quarter in both growth and margins.
While the cyclical nature of DRAM hasn’t changed, the cycles themselves continue to become more benign, leading to long-term economic improvement across these businesses. Micron is now continuously profitable, with industry players in a dramatically stronger position than even just five years ago.
The biggest negative surprise in the quarter came from Micron’s exit from its 3D XPoint hybrid memory business. The company also announced its decision to sell its accompanying Utah fab. Fortunately, this development does not alter the investment thesis much since 3D XPoint was an option ticket for future growth. While it’s unfortunate this product didn’t pan out, now is an excellent time to sell a fab, so perhaps it is a blessing in disguise?
5b. LKQ (LKQ)
LKQ is the largest provider of alternative collision and mechanical automotive parts in the United States. In Europe, they are the leading distributor of general automotive maintenance parts and supplies. Its shares appreciated 20.1% during the quarter.
During the quarter, LKQ shared its fourth-quarter results: showing a slight revenue decline and a nearly 30% increase in quarterly profit Vs. the same period last year. COVID has proved a surprising catalyst for my investment thesis which revolves around optimizing their recent large acquisitions that were never efficiently integrated.
Admittedly, in addition to LKQ’s quarterly performance, thematically, there has been broad enthusiasm for “re-opening” trades, of which, LKQ has been a beneficiary. Most importantly, the prior overhang related to LKQ’s debt burden is now all but behind us. Their net debt to EBITDA ratio now sits below 2x, a stark change from the near 3x leverage ratio before the pandemic. At that time, LKQ’s leverage had the potential to spiral upward to nearly 4-5x if the business experienced a prolonged shutdown. It’s good to be past this issue.
5c. Taiwan Semiconductor (TSM)
Taiwan Semiconductor is the world’s largest outsourced foundry of logic semiconductor chips. TSMC’s shares appreciated 8.9% during the quarter.
Similar to last quarter, the supply-demand imbalance in semiconductor chips continues to benefit TSMC. To fuel new technological advances and meet the current supply imbalance, we see significantly increased capital spending across the industry over the coming years.
TSMC has an extraordinary track record of return on these large investments despite their rapid historical cadence of expansion. I remain hopeful that the large capital expenditure plan they now have ($100 billion of investment over the next three years) will be money well spent and not lead to industry oversupply in the medium term. Hopefully, future returns on these investments will look as good as those of the past.
(4) Cedar Rock Capital
Interesting that a fund that buys companies that are “capable of compounding in value indefinitely” and has British Tobacco as its biggest position (15.5%), Phillip Morris as its 5th biggest (8.3%), and Swedish Match as its 11th (4.24%).
Maybe tobacco isn’t going away just yet.
(5) Clark Street Value
One of my favorite investment blogs. He recently released a piece on PFSweb (published August 17, 2021) (LINK):
PFSweb (PFSW, ~$280MM market cap) is reader suggestion to the recent theme of companies that have sold a major business segment leaving the proforma stub business looking cheap, and here again, the company is continuing to pursue strategic alternatives, which will likely lead to a sale of the remaining segment.
Activists / 13Ds
(6) Peter Kamin: Psychemedics Corp (PMD)
Peter Kamin now owns 8.2% of PMD and has been adding ~$6.80.
PMD is provides hair-based drug testing, mainly in the US and Brazil. It trades EV/Sales of 1.6x, has historical ROE of 26% and historical ROIC of 24%.
(7) Adam Kenneth Peterson (NICK)
The Co-Chairman / Co-President & Co-CEO of Boston Omaha Corp (BOMN) added to Nicholas Financial (NICK), boosting its stake to 31.15%. Recent buys include ~104K shares at ~$11.40.
NICK is a $90M subprime auto lender trading at 0.8x BV and 11.7x PE. Historical ROE has been ~10%.
(8) B. Riley (RILY) Takes 8.2% Stake in Charrah Solutions (CHRA)
RILY filed a 13D on 08-13-2021 showing an 8.2% stake in CHRA, a $150M ($326M EV) waste management company that provides environmental services to the power generation industry in the US. It trades at 1.33x EV/Sales and and 0.55x P/Sales.