The Rational Cloning: Weekly Ideas #9
Lazard's Outlook on the US, Clark Street Value on Capstead Mortgage Corp, Carlo Cannell/David Kanen Take on Goedeker's, and More
Welcome to the 9th edition of the Rational Cloning Newsletter (Weekly Ideas Series).
Helping you discover the best ideas of others.
Happy cloning.
Weekly Investment Ideas
(1) Lazard Asset Managment- Outlook on the United States (Oct 2021) (LINK)
Our outlook for US equities is bright, with US growth likely to remain very strong through 2022. COVID-19 remains the biggest threat to our optimism as the US vaccination rate is below that of peer countries.
With US inflation running high, we believe higher interest rates and higher discount rates will be the most important market influences on share prices into 2022.
The divergence between low US Treasury bond yields and high inflation indicates to us that something has to give: We believe fundamentals point toward the 10-year Treasury yield normalizing higher and that inflation will prove to be transitory.
In light of the breadth and depth of demand for bonds, we do not expect the Federal Reserve’s anticipated tapering of bond purchases to disrupt the bond market.
We believe that the pandemic was the market equivalent of a major natural disaster and what we are seeing now in the United States primarily reflects a steep climb back to normalcy. It is our contention that inflation is rapidly approaching its peak as year-over-year comparisons begin to look less startling. Nonetheless, we acknowledge that longer-term US risk-free rates are likely too low relative to fundamentals, and we look for the US 10-year Treasury yield to rise from current levels toward 2% in the intermediate term as the global economy continues to recover.
As the reopening progresses, we expect volatility in data and in the path to recovery. We continue to believe that some companies will emerge stronger from the pandemic and others weaker, and this bifurcated recovery will favor security selectors. In addition, as legacy business models are scrutinized for their sustainability, we strongly believe that investors need to focus on lending to viable obligors over a long term. In other words, investors should scrutinize who they are lending to and the terms and conditions under which they are lending.
(2) Q3 2021 Letter: Andvari’s Largest Holding and Chemed (Oct 7, 2021) (LINK)
A new entrant to Andvari’s portfolio is Chemed. We sold our investment in a large, customer-focused enterprise software company to make room for this overlooked holding company based in Cincinnati, Ohio. Chemed’s two subsidiaries are Roto-Rooter (plumbing and drain cleaning) and VITAS Healthcare (hospice care provider). Chemed checks many of the boxes within Andvari’s qualitative-based investment framework:
Stable and predictable revenues from two recession resistant businesses
Low capital expenditure requirements
Roto-Rooter and VITAS have good organic and inorganic growth opportunities as both are the largest players in markets that are still highly fragmented and populated mainly with “mom-and-pop” competitors
Management has demonstrated excellent capital allocation skills; and
Management is long-tenured and highly aligned with shareholders.
(3) Clark Street Value: Capstead Mortgage Corp: Reverse Merger with BSPRT (LINK)
Capstead Mortgage Corporation (CMO) is one of the oldest publicly traded mortgage REITs dating back to 1985. Capstead has a fairly simple business model, they own adjustable rate residential mortgage securities issued by a government sponsored entity like Fannie or Freddie, then lever it up 7-8x and pay out substantially all the resulting net interest spread in the form of a dividend. Capstead is historically well managed, they were one of the few mortgage REITs to maintain their dividend throughout the pandemic and didn’t get portions of their portfolio liquidated due to margin calls like so many others.
But times change, the returns available doing this “arbitrage” aren’t what they used to be, forcing higher and higher leverage to the point where it doesn’t make a lot of sense. In July, Capstead agreed to a reverse merger transaction with a public but non-traded traded REIT, Benefit Street Partners Realty Trust (“BSPRT”), with the proforma entity moving forward with BSPRT’s management team and current middle market CRE loan strategy.
The 6/30 book value of CMO was $6.35/share, 15.75% of that is approximately $1/share in cash. The stock is trading for $6.77/share, if the proforma trades for book value, that’s 8.5% upside for a deal that likely closes in the next month or two.
Additionally, the reverse merger has two structural features as part of the deal that should help support the stock once the proforma company is listed:
(1) $100MM repurchase program, with $35MM being funded by an affiliate of management, the repurchase program would kick in post close if FBRT is trading below book value.
(2) Approximately 94% of BSPRT shareholders will be locked up for 6 months post merger, so there shouldn’t be the fear that this is an immediate liquidity event and all BSPRT shareholders will sell at the first chance they get.
On top of those, they are also going to pay a significant dividend, they cite they’ve done over 10% ROEs and are going to pay it all out in a dividend, meaning if this trades even moderately below book value it would have a double digit dividend yield which should attract retail investors. Overall, a pretty simple and hopefully short duration idea, I’ll flip the shares if they trade for book immediately, otherwise I’ll be content to wait a quarter or two, collect some dividends and wait for the discount to narrow.
Activists / 13Ds / 13Gs
(1) Carlo Cannell- Another activist investor joins siege of Goedeker’s (LINK)
Cannell wrote in the next day.
The longtime investor said it was hard to say much about Fouerti’s letter because Cannell Capital’s inquiries have gotten the cold shoulder recently. But he said his firm had reviewed Kanen’s board nominees and considered most of them better than Goedeker’s. Given that, he wrote, the company shouldn’t spend a dime of shareholders’ money lawyering up for a proxy fight over board seats.
“For the benefit of all owners,” he wrote, “CC calls on GOED to immediately reach a fair and reasonable settlement with (Kanen Wealth Management).”
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