The Rational Cloning: Weekly Ideas #5
Maran Partners on Crossroads Systems, Clarus Corp, Pure Cycle, Turning Point Brands, and More | Private Eye Capital on Kilroy
Welcome to the 5th edition of the Rational Cloning Newsletter (Weekly Ideas Series).
Helping you discover the best ideas of others.
Happy cloning.
Weekly Investment Ideas
(1) Maran Partners Fund Q2 Letter (LINK)
I really liked Dan Roller’s section on free options:
One attractive attribute of some investments is that they offer free options — asymmetric sources of upside that are not reflected in the stock price.
Free options create more ways to win and more potential upside if they pay off.
Examples of such free options include start-up business lines, hidden assets that could be monetized, investments on the balance sheet that investors are ignoring, etc.
For example, Turning Point Brands has a New Gen segment that contains a large portfolio of bets – investments in start-ups, nascent consumer-branded products, etc. Any one of these bets could pay off and generate meaningful returns for the company, but I don’t think the value of these options are reflected in the company’s share price.
Excellent management teams can also be a source of free options.
(a) Crossroads Systems (CRSS)
Crossroads Systems is not an easy company to compartmentalize. Its name provides no hints about what it does. It is small, obscure, and illiquid.
CRSS was ultimately the second-largest PPP lender in 2021 (by loans issued), placing over $7bn of loans with almost 500,000 borrowers in just a few months.
Due to its success in rapidly scaling its business when the opportunity presented itself, CRSS started the second quarter trading at under $10 per share and ended the quarter in the position to announce a special dividend of $40 per share, which is set to be paid out next week.
(b) Correios de Portugal S.A (CTT)
CTT is the privatized monopoly postal operator in Portugal, distributing over one billion pieces of mail and express parcels each year via its network of 500+ post offices. The company also owns a portfolio of real estate assets as well as a bank, and it has a collection of digital assets in payments and ecommerce.
CTT is off the beaten path but has been offered by the market at an extremely attractive valuation (at times, a negative enterprise value, by some calculations). It has a strong moat and numerous hidden assets that I do not believe are priced in.
I saw a profitable core business, hidden assets, free options, and a change in management and culture (at least partly driven by Steven’s presence), all at an extremely compelling valuation. Over the course of our investment, CTT has made progress on many fronts, including resetting its postal contract, improving its Spanish operations, and on capital allocation. It repurchased 1% of shares outstanding in just six weeks during Q2.
(c) Clarus Corp (CLAR)
Following Clarus’s recent acquisition of Rhino-Rack, I’m as excited about the stock as ever.
Clarus’s compounding flywheel is humming at full throttle as it continues to execute on both the M&A and organic growth components of its value-creation strategy.
I believe Clarus is currently generating $70mm+ of annualized EBITDA, which should grow to $80mm+ next year and, conservatively, to $100mm+ in 2024.
Despite Clarus’s success over the past few years, I continue to underwrite the stock as a three-year double, with further upside to $70+/sh in three to five years. Black Diamond Equipment alone could be worth $1.2bn+ ($36+/sh) on $400-500mm of sales over this horizon.
Additionally, the market rarely likes to pay up for future capital allocation, but with the Clarus team, I believe the odds are stacked in our favor that it will be a further source of value creation. I believe Clarus is a company for which the odds of waking up to positive news are greater than the converse.
(d) Pure Cycle (PCYO)
Pure Cycle owns approximately 5,000 single-family housing lot equivalents and a water utility backed by meaningful water rights in the Denver metro area.
I continue to believe that PCYO has $10+ per share of real estate value and $10+ per share of water value, and that each are being actively monetized (the land at $100k+/lot, and the water via $30k+ tap fees, each of which are appreciating rapidly).
I believe the market is still missing a number of critical components of the PCYO story, including:
• A respected nonprofit intends to spend $50mm to build a charter school in PCYO’s community, which should dramatically increase the value of PCYO’s remaining lots
• value uplift as PCYO starts to develop commercial acreage
• optionality on additional water sales to the energy industry
• numerous off-balance-sheet hidden assets, including the rights to a large reservoir; and
• additional capital-allocation-driven upside, including value-accretive land purchases.
(e) American Outdoor Brands (AOUT)
Asset-light, branded, buy-and-build growth company.
American Outdoor Brands reported fiscal full-year 2021 results last week. While results were excellent, AOUT’s typically conservative guidance disappointed the market. AOUT’s valuation at sub-7x EBITDA looking forward over the next year remains cheap. The company will end 2022 with well over 25% of the current market cap in net cash if it doesn’t make any acquisitions in the interim.
(6) Turning Point Brands (TPB)
Asset-light, branded, buy-and-build growth company.
Turning Point Brands remains cheap given its organic growth profile, low capital intensity, and large collection of small, asymmetric bets in vaping and active ingredients. TPB’s Zig Zag brand is among the most well-positioned brands in the US as cannabis legalization marches forward, jurisdiction by jurisdiction.
(f) Whole Earth Brands (FREE)
Asset-light, branded, buy-and-build growth company.
Branded packaged food company Whole Earth Brands, at ~8x 2022 EBITDA, has better organic growth, margins, and returns on capital than many consumer food companies trading at almost twice its multiple. As investors look forward to cleaner 2022 results (pro forma for two acquisitions), I believe there is meaningful room for the company to re-rate.
(2) Kilroy (KRC) (published 07 Sep 2021) (LINK)
Using Columbia Property Trust’s (CXP) go-private deal as a comp, Private Eye Capital suggests significant upside (+33%) for Kilroy:
By my calculations, CXP is getting done at about a 6.3% cap rate.
I suspect the cap rates for NYC/Wash DC portions (60-65% of port) were higher than the SF Bay Area portion. Further, unlike KRC which has an average age less than 10 years old, most of the CXP building are 30+ years old. This makes a big difference when it comes to cap rates because:
1/ Newer buildings tend to re-lease more quickly at higher effective rents and
2/ Newer buildings require less capex/ tenant improvements and thus convert a higher percentage of NOI into actual distributable free cash flow.
Using 5.5% for Kilroy’s office assets (80 bps lower than CXP transaction - given KRC is all West Coast/ big tech tenant base/ newer assets - 5.5% is still more conservative than recent CBRE cap rate survey) and 4.5% for life sciences (in line w/ ARE, private markets) I get to $95 a share.
Even if I used a draconian 6% cap rate for KRC’s office portfolio, I still get to $88/share in NAV (+33% from today’s ~$66).
Share Repurchases
Academy Sports + Outdoors prices secondary stock offering; plans $200M share repurchase
Microsoft Plans $60 Billion Share-Buyback Program, Raises Dividend
Better Choice Company Repurchases Approximately $1.3 Million of Common Stock through Buyback Program
Previous Issues👇
New Book Announcement: Little Book of Investing Ideas
Along with writing The Rational Cloner newsletter, I’m trying my hand at the self-publishing game. Just released The Little Book of Investing Ideas: A Curated Collection of Investing Wisdom. Drawn from over 25 books, the Little Book of Investing Ideas distills fundamental wisdom about investing into concise ideas that you can immediately apply to your life and investments. In total, there are over 200+ curated ideas.
Some topics include:
Ideas on value, growth, and trend following
How biases are affecting your decision-making
What alternative investments are and which ones may be best for you
What you should look for in dividend investing
Valuation methods and how to value companies in different life cycles
And more.
Life is short. Collect good ideas and move on. No need for fluff.