The Rational Cloning: Weekly Ideas #2
Greenhaven on Marketwise, Caro-Kann Capital on Burford Capital, Kevin Dart on Tobacco, Share Repurchases & More
Welcome to the 2nd edition of the Rational Cloning Newsletter (Weekly Ideas Series).
Helping you discover the best ideas of others.
Happy cloning.
New Investment Ideas
(1) Greenhaven (MKTW)
In Greehaven’s July 2021 letter, Scott Miller outlined the thesis for Marketwise (MKTW), “a collection of dynamic companies offering our customers a diverse and comprehensive portfolio of independent investment recommendations, strategies, and tools across 12 customer facing brands.” Below are some, may I say, outstanding statistics:
- 86% gross margins (this is better than most software companies).
- Doubled Rule of 40 – software companies are considered healthy if they meet the Rule of 40 (growth rate + profit margin > 40%). MarketWise’s metric is currently > 80.
Capital light – a $50,000 investment 20 years ago was the only capital put into a business that will generate over $550M in revenue this year.
- 20 straight years of profitability.
- Mid-20s historical revenue growth (accelerated recently) while remaining profitable.
- LTV/CAC > 5 (customer lifetime values are more than 5X what they cost to acquire them), with breakeven point at 7-9 months and cash recovered in 3 months
With 20 straight years of profitability and revenue growth in 18 of the past 20 years, there is some historical precedent to suggest that the business will not fall apart.
(2) Caro-Kann Capital (Burford Capital: BUR)
Been reading up on Artem Fokin’s analysis on Burford Capital, the “Blackstone of Litigation Finance”. Founded in 2009, it invests in legal claims from its own balance sheet, manages external capita, trades at ~15x PE, ROE ~30%, 31% IRR on its capital, the largest player in the space, long runway for growth, non-cyclical, aligned management / employees (two founders own 5+% each and each employee is a shareholder as well).
MOI Best Ideas 2019: Burford Capital: Leader in Nascent Litigation Financing Asset Class
Burford: Investing in the Blackstone of Litigation Finance
Focused Compounding: Burford Capital Limited LSE (AIM): BUR
(3) Canadian Value Stocks (DRM.TO)
Canadian Value Stocks wrote a follow-up piece on Dream Unlimited (DRM.TO) and its asset management business. In short, it’s still cheap and overlooked (published August 15, 2021)
A year ago the vast majority of Dream’s value was its balance sheet, and the market has (stupidly) decided it’s not going to value the balance sheet right. So be it, more shares for me and the NCIB.
But not long from now the asset management business will be undeniably worth $1 billion to any observer, just a little under Dream’s market cap today.
The company is shifting the balance sheet away from land, to more income producing real estate, which should stand a better chance at being appreciated by the market (at the very least IFRS will value the assets correctly), and it’s not hard to imagine the market at that point valuing Dream’s invested capital at book value. But with the asset management business growing so fast, and buybacks continuing, we’re not long until the value of Dream is probably split 50% balance sheet 50% asset management.
At that point does 2x book value makes sense? Does 1x book value for the invested capital and 20x FCF for the AM? 1x book and 5% of AUM? 1x and 7%?
The market is going to realize this. It’s being a little slow, and soon we’ll be talking about whether Dream should trade at 2x or 3x book value (by then book value will be over $40 as well), yet the market presents you the opportunity everyday to buy this at less than 0.9x book value even after a good run up.
(4) Mispriced Markets (BGSF)
Mispriced Markets wrote a piece on BG Staffing (BGSF), a small cap temp agency. (published June 22, 2021). Trades ~$13.50, earned ~$1.32 per share pre-Covid (~10.22x PE), debt ~3x pre-Covid earnings, and no tangible book value. Used to pay a $1.20 per share dividend (~9%) but currently pays ~$0.48 (~3.5%).
Looking back a year or two, things look more promising. Pre-covid, the company was earning $1.32 per share. At the current share price of $12.50, that gives the stock a p:e of 9.5. Earnings have dropped in half since then, but if they were to recover, that would look like a reasonably attractive valuation. Debt is a little higher than I’d like at around 3 times pre-covid earnings and the company has no tangible book value to provide a safety net, but then nothing’s perfect, is it?
On the whole, and despite a few lingering concerns, I like this story. The p:e, using pre-covid earnings, is low compared to the overall market. The balance sheet is not too over-extended. There seems to be an obvious short-term catalyst to provide a lift to the company’s fortunes as eviction moratoriums come to an end and the economy reopens, and the acquisitions done immediately before the downturn could provide an unexpected boost to earnings as we emerge from the other side of this pandemic.
(5) Light Blue Value (PMD)
Last week’s issue featured Peter Kamin increasing his stake in PMD to 8.2%. Dug a little more and found Light Blue Value’s writeup: Trucking Along Into A Potential Big Catalyst ($20 PT). A few reasons to be excited:
$PMD is a $39M market cap (similar for EV assuming PPP loan is forgiven) hair follicle testing company.
1. The federal government is in the process of allowing hair testing as an alternative for the transportation department… it appears that there’ll be either 1.5M or 3M hair tests once this fully ramps and hair tests appear to cost about $40 (maybe $20 goes to $PMD?).
Maybe $PMD takes 1/3 of market share, or 500K-1M tests… $20/test…is $10M-20M, which is quite material vs ~$30M in U.S. revenues in 2019. If incremental operating margins are 25-30%…that’s $2.5M-$5M+ in operating income and you can see how this gets pretty exciting pretty quick.
2. Peter Kamin took a 5.9% stake in December. His historical investments have generally been excellent (loved what he did with $CLWY), and his MO is to buy legacy cash flowing businesses and really turbo-charge the earnings.
3. The 2Q:20 10-Q disclosed that they were approached by third parties and hence are undergoing a strategic review. That language dropped off in 3Q:20 strangely…but it seems that there does exist takeover interest. Quest Diagnositics would be a natural buyer IMO, since Quest also operates in Brazil in addition to the U.S. I think this actually is off the table now with Kamin invested.
4. Management was awarded 35K in options ($4.07 strike price) and 150K in RSUs on 11/11/20.
(6) Corner of Berkshire & Fairfax (ALCO)
Interesting thread on Alico (ALCO) on CoBF. $270M grower of oranges (main customer is Tropicana) in Florida.
Current price: $36. Estimated NAV $55-65, 10x PE, 5.5% yield. NAV is comprised mostly of land ranches that the company is currently selling off to buy more groves, pay down debt, and increase dividend. (LINK)
Activists / 13Ds
(1) Kevin Dart (Tobacco: BTI and IMBBY)
It took decades for sustainable investing to become mainstream, but now every week one giant investor after another announces their commitment to ESG.
Kenneth Dart will not be joining that club.
…over the past six months Dart has quietly accumulated one of the classic sin investments… a 7% stake in British American Tobacco… worth $6 billion and a separate $634 million position in rival Imperial Brands
LINK: Secretive Dart Surfaces With $6.7 Billion Wager on Tobacco (May 3, 2021)
Share Repurchases
Cango Inc. Announces Up to US$50 Million New Share Repurchase Program (Aug 19, 2021)
Macy’s board has approved a share buyback program of $500 million (Aug. 19, 2021)
Trimble (NASDAQ: TRMB) announces a new share repurchase program authorizing up to $750 million in repurchases (Aug 19, 2021)
Spotify Announces Stock Repurchase Program, Up to $1.0 Billion (08/20/2021)
First Financial Northwest, Inc. authorized the repurchase of up to 5.0% of the Company’s outstanding common stock (August 16, 2021)
Ayr Announces Stock Repurchase Program of up to 5% of Subordinate Voting Shares – the maximum amount allowed for CSE listed companies (August 25, 2021)