The Rational Cloning: Weekly Ideas #88

Alluvial Capital Q2 Letter, Capital Employed (26 Best Stock Pitches (August 1-15)), Tweets/Ideas That Make You Go… Hmm 🤔

The Rational Cloner

Aug 20, 2023

Welcome to the 88th edition of the Rational Cloning Newsletter (Weekly Ideas Series).

Helping you discover the best ideas of others.

Happy cloning.

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Weekly Investment Ideas

(1) Alluvial Capital Management Q2 Letter

Little has changed at the top of the portfolio. Our largest holding, P10 Inc., delivered a pleasant surprise by qualifying for inclusion in the Russell 2000 Index, something that I had thought was at least another year away. Index inclusion, and the passive investors and fund flows that it brings, is one of the best ways for small public companies to reduce their cost of capital. I attended the company shareholder meeting in June and was pleased with management’s strategic vision for the company. Despite a more challenging fund-raising environment, P10’s asset managers continue to deliver. P10’s flagship RCP Advisors just announced it had raised almost $800 million for its RCP Secondary Opportunity Fund IV, well above the $500 million target.
Unidata SpA continues to integrate its acquisition of TWT Group, a purchase which will boost profitability by at least 50% over the next two years. In my last letter, I mentioned Unidata’s efforts to qualify for a higher tier of the Borsa Italiana, the STAR Segment. The application was approved and Unidata shares debuted on the STAR Segment in June. The move is consequential, as companies on the STAR segment receive significantly more investor attention and often, a higher valuation. The company’s other business initiatives, including a submarine cable linking Sicily with Genoa and a new data center, continue to progress.
I rarely write about Rand Worldwide, mostly because there’s not often much new to say. This is a business that simply performs, and that’s why it is a large holding and will remain so. I sometimes describe Rand Worldwide as a revenue royalty on the sale of mission critical industry standard software, and that’s typically a good cash flow stream to own. The good performance continued in the quarter ended March 31 with revenue up 19% year-over-year and operating income up 35%. Rand is likely at a short-term revenue and profit peak, as certain of the products it resells are on multi-year renewal cycles. But shares remain a good value on profits just a year or two away, and the company will remain a prodigious payer of special dividends. All the more reason to hang on.
In May, I made the short drive up to Cleveland for the Crawford United shareholders meeting. Crawford United is our Midwestern conglomerate that is building a niche industrial powerhouse. Since 2017, Crawford’s revenue has increased from $24 million to a run rate of $160 million with earnings increasing in tandem. While other companies might decamp for a flashy downtown office, Crawford remains headquartered in a modest brick building in a weedy section of East Cleveland.
Our most significant newish holding is Logistec Inc. The fund has maintained a small investment in the company for a few years now, but I elected to increase our holdings meaningfully in response to a promising development in May. Logistec is one of Canada’s most successful public companies. It has the extraordinary distinction of being profitable every year for 50+ years, with no indication the streak is about to end. Logistec’s main business is operating terminals at dozens of ports in Eastern Canada and the US. Simply put, this is a great business. Logistec enjoys strong pricing power and consistent demand for its services. Logistec’s other segment is a profitable environmental services business that remediates polluted industrial sites and aging municipal water systems…. I believe Logistec shares are worth in excess of $100 and that the company will achieve a sale price of at least $90 per share. This would represent a multiple of 10x 2022 EBITDA and ~9x 2023 EBITDA, accounting for a recent acquisition and improving results at both company segments.
Hammond Power Solutions has been one of our best performers this year. The company is benefitting from a wave of spending on infrastructure build-out and electrification that will continue for years to come. I added another holding on the same theme this quarter: Preformed Line Products, a family-controlled Ohio manufacturer of all sorts of products that protect cables, especially those used in power transmission and communications. With the nation and the world racing to upgrade power grids and expand broadband internet access, it’s an auspicious time for the company, and the results show it. This year will be a record one for Preformed Line Products, but shares remain very reasonably valued. Preformed Line Products has always taken a cautious approach to its finances, avoiding debt and making measured acquisitions to increase its capabilities. The company also has extremely substantial owned real estate worth around $300 million in my estimation. Preformed Line Product’s market capitalization is approaching $900 million, but its shares continue to fly under the radar thanks to their low liquidity and the company’s humble approach.