Stock Sonar

Xometry (NAS:XMTR) — mrkt cap $582mm; Price $11.9; EV/EBITDA NA

STARTER POSITION INITIATED. Xometry— Another company from the IPO class of ’21 that has seen its stock price crater—is a digital platform leading the charge to digitize the highly analog world of manufacturing (non-contract manufacturing specifically). Xometry provides instant quoting on custom parts and connects buyers to a global network of suppliers/manufacturers. Xometry is the market leader in breadth and depth of services: any custom part that is needed and number of runs is easily streamlined: anything from CNC machining, injection molding, sheet metal, 3D-prototyping, tubing, fabrication, and more. Their aim is to be the customers’ one-stop shop for any non-contract manufacturing – not only will this save customers on direct costs through more competitive pricing but will also replace the management of a long tail of suppliers with a single point of contact. The company is not quite cash flow breakeven but has plenty of liquidity and is exhibiting operating leverage. Xometry’s market opportunity is massive and management will continue to be intelligent about balancing growth and profitability.

Star Group (NYSE:SGU) — mrkt cap $382 mm; Price $10.87; EV/EBITDA 7

MORE RESEARCH NEEDED. We came across Star Group on our screen for companies with little to no coverage. SGU is the largest distributor of heating oil in the USA. It reached infamy when Dan Loeb wrote a blistering activist letters denouncing the governance and operational execution of the company. Management was changed and the company has operated in radio silence since. After speaking with the CFO, we came away impressed with their execution and allocation strategy. SGU has repurchased more than 50% of its shares outstanding over the last decade and has a clear valuation bogey for when to do so. More work needs to be done on the heating oil industry and the underlying trends.

ACCO Brands (NYSE:ACCO) — mrkt cap $445mm; Price $4.65; EV/EBITDA 12

PASS. ACCO manufactures branded office and school products. It owns several well-known brands such as Swingline, FiveStar, and Kensington. ACCO’s end markets have been in secular decline and its share price has declined 80% over the last 20 years. The current strategy of the firm is to streamline the business and deleverage. Although this is bearing fruit with the last quarter showing a marked increase in profitability, it is difficult to own a business that is in secular decline and highly levered. We will keep ACCO on our watchlist for changes in their end market demand.

TerraWulf (NAS:WULF) — mrkt cap $1.5B; Price $4.51; EV/EBITDA NA

PASS. Following the heels of Core Scientific signing a long-term agreement with Core Scientific for a decade long $3.5 Billion AI computing contract, we began looking at other crypto miners. WULF appeared to have good prospects given the power availability at their data centers. However, all data centers are not equal. AI data centers first and foremost need a power supply that cannot be curtailed by utilities. Many crypto miners (WULF included) have curtailment agreements as it allows them to secure lower cost power. Secondly, AI data centers need fiber connections to be able to handle high data bandwidth, another feature that most crypto miners lack. We will continue looking for a well-positioned crypto miner that can take advantage of AI compute demand.

National Resource Corp (NAS:NRC) — mrkt cap $599mm; Price $25.12; EV/EBITDA 14

PASS. Since 1981, NRC Health has generated revenue by providing patient feedback solutions for hospitals. Insurance companies and government agencies like the Centers for Medicare & Medicaid Services (CMS) incentivize hospitals to collect and submit patient feedback, influencing reimbursements and other financial incentives. Patient feedback has grown in importance as payers align financial incentives with patient outcomes. Despite the increased need for patient data, NRC Health faces secular challenges from lower-priced, digitally native competitors like Qualtrics and Medallia. NRC’s retention rate hovers around 90%, lower than expected given hospitals’ slow pace in adopting internal tech changes. Additionally, hospitals increasingly desire greater control over patient feedback processes, driving them to opt for solutions they can set up and manage internally.

FreightCar America (NAS:RAIL) — mrkt cap $67mm; Price $3.60; EV/EBITDA 9         

MORE RESEARCH NEEDED. One screen we typically run is for CEO changes in small to mid-sized companies– the smaller the company, the more impact a CEO can have. And with the right mix, this combination could mark an inflection. RAIL potentially is one of these companies, a manufacturer and servicer of railcars in an oligopolistic industry. The company went through operational mishaps by expanding capacity too rapidly and is now emphasizing a more lean and variable production operation. CEO Randall seems like a great fit having previously been a GM at Precision Castparts, a very well-run lean organization. Although the company’s cap structure has some hair on it with dilutive warrants, RAIL’s future could be very different than its past if the CEO can install the right operational discipline.

ThoughtWorks (NAS:TWKS) — mrkt cap $912mm; Price $2.86; EV/EBITDA 56          

PASS. ThoughtWorks, another company from the class of ’21 IPO (down ~90% since IPO), is a premium provider of agile digital transformation and software consulting services. These services should be in high demand in a world shifting to AI; however, revenue from Q1 has seen a YoY decline of 19%. Consulting businesses are notoriously difficult to scale as services start to regress from high quality and customized to commodity-like to enable scale. TWKS is a victim of its own growth and increased competition. Although they still retain a strong brand, their premium pricing will likely continue to erode in this environment.

Monro (NAS:MNRO) — mrkt cap $743mm; Price $24.86; EV/EBITDA 9          

MORE RESEARCH NEEDED. MNRO is an automotive service provider that has over 1300 stores in 32 states. About half of MNRO’s business comes from tire sales, which consumers defer spending on during recessionary environments. Combined with the narrative that EV penetration will be the end of automotive shops, MNRO’s share price has seen significant decline and is now where it was 14 years ago. The new CEO who came in late 2021 is from Advance Autoparts and is relentlessly focused on profitability; the first step being either closing or improving the operations of underperforming stores (numbering about 300). These stores are either in a bad location or can be operationally fixed. For mature industries, we always like to see a focus on profitability along with sound capital allocation – in which MNRO’ two policies are to pay down debt and return cash to shareholders. Although the industry is seeing some overall trepidation, we believe that EV penetration will not have as large of an effect as the market ascribes. We have a call with IR to discuss the company in more detail.

Aspen Aerogel (NAS:ASPN) — mrkt cap $2.36B; Price $30.50; EV/EBITDA NA

PASS. ASPN is a manufacturer of aerogel, one of the world’s best insulators.Although this technology has been around for decades, it may be finding a novel use case in electric vehicle car batteries as an insulator between battery cells.  ASPN’s share price has gone up 5x in the last year as investors have eagerly accepted this new growth narrative. However, the aerogel industry is competitive with both national and global competitors. We believe ASPN is trading at much too rich of a multiple at around 6x revenues given the nascency of this EV business and the competitive landscape. Investors in ASPN are making two implicit bets: first, on the sustained use of aerogel in car batteries, and second, on ASPN’s ability to outperform its competitors.

TerraWulf (NAS:WULF) — mrkt cap $838mm; Price $2.51; EV/EBITDA NA

MORE RESEARCH NEEDED. Among the detritus of bitcoin miners there are likely a couple of gold nuggets due to one reason alone- long term access to low cost power. These contracts are in high demand due to AI data centers. Luckily, these bitcoin miners have secured long term power contracts for mining operations and now they are in even higher demand due to the rise of power hungry GPUs. For example, Core Scientific, a bitcoin miner, signed a long term agreement with Core Scientific, for a decade long 3.5 Billion dollar contract, sending share prices up 40%. However, all data center locations are not equal. More works needs to be done to determine the power availability and contract details to find participants in this resurgence.

Genius Sports (NYSE:GENI) — mrkt cap $1.2B; Price $5.24; EV/EBITDA NA

MORE RESEARCH NEEDED. GENI is a sports betting company that procures and distributes sports data to ~500 sportsbooks worldwide. Utilizing its advanced tech stacks, GENI enhances betting solutions for sportsbooks, with its true competitive edge lying in the exclusive in-play rights acquired from major sports leagues like the NFL and Premier League. In-play betting will rapidly gain market share in less mature digital betting markets such as the U.S. As our readers know, we continuously screen for companies in the class of ’21 (IPO’d in ’21) that show promise despite market skepticism –GENI’s stock price has plummeted 75% from its mispriced IPO. However, their latest earnings report indicates positive cash flow for 2024, and fundamentals are steadily improving. To gain more confidence in GENI’s future profit picture, we will take a closer look at rights costs inflation and their M&A strategy.

Cadiz (NAS:CDZI) — mrkt cap $208mm; Price $3.07; EV/EBITDA NA

PASS. Cadiz owns one of the largest contiguous water reservoirs in the USA. It can hold about 30 million acre feet of water -more than Lake Mead- and is located in the Mojave desert. The goal for the last several decades has been to pipe water over to California given the ongoing water crisis. Delivery is expected to start in 2028 barring regulatory hurdles. Although this would be one of the few freshwater sources left to tap, there will be increasing competition from Desalination plants and Potable reuse plants (treated wastewater for consumption). Federal and state regulation will likely continue to hinder pipeline development for Cadiz and we will wait for a better risk reward skew before initiation.

Consumer Portfolio Services (NAS:CPSS) — mrkt cap $167mm; Price $8.01; EV/EBITDA 14.2

PASS. We originally researched this name in our January Stock Sonar and assigned it a “MORE RESEARCH NEEDED.” After a push by the company to be more investor facing, we recently had a chance to speak with their COO. As a refresh, CPSS is one of the few well-run (indirect) subprime auto lenders in the U.S. Their secret sauce is having conservative underwriting standards and a large sales force that maintains relations with ~14,000 auto dealer locations across practically the entire country. They securitize and, through Citi, sell these securities to institutional investors and retain the servicing. According to our talks, the subprime auto loan market is incredibly robust and CPSS spends most its time turning away potential loans. Unfortunately for CPSS shareholders, this is a business that is in a “steady state” with no tangible plans for growth – they are not increasing their credit lines to get more deals done. So unless CPSS plans to pay shareholders large dividends (it has never paid a div) it is unclear what will catalyze their stock price.

Climb Global (NAS:CLMB)  — mrkt cap $250mm; Price $54.60; EV/EBITDA 12

PASS. Climb Global is a distributor to resellers of cybersecurity solutions and data center software. They act as a middleman to the middlemen. CLMB differs from broadline distributors such as Ingram and Arrow Electronics in that they select high quality niche vendors that need a salesforce. CLMB is very selective with vendors and takes on less than ten percent of the vendors that come to them. Another differentiator is that CLMB only distributes software and not hardware, making their revenue stream significantly more predictable. As the US is significantly more consolidated than Europe, CLMB has begun to make acquisitions overseas, with the strategy to cross sell those vendors in the USA. Although management seems disciplined and is targeting a 15% ROIC on acquisitions, we will wait for evidence of execution before initiation.

CS Disco (NYSE:LAW) — mrkt cap $380mm; Price $6.29; EV/EBITDA NA

MORE RESEARCH NEEDED. CS Disco was founded in ’13 and provides cloud-based e-discovery software for use in litigation. Document review during discovery is an onerous legal process that can be greatly assisted with the right software and AI tools. They have rapidly gained share and the feedback for their software is largely commendatory. Disco has hit some revenue hiccups and is currently undergoing a CEO change – the name is down 90% since its peak. This company fits a cohort of companies we have been searching for – namely ones with promising tech that came to market too quickly (Disco IPO’d ’21) and are struggling with setting the right expectations with the Street. We will be further evaluating the leadership change and unit economics to gain more insight

Duolingo (NAS:DUOL) — mrkt cap $7.65B; Price $180.89; EV/EBITDA 37

PASS. When new technology comes along, it either hurts or helps companies. Determining the direction it will take can often be difficult. That is not the case with Duolingo, one of the most popular language learning apps. In a pre-AI world, DUOL boasted significant content and effectively gamified language learning. However in a post-AI world, DUOL’s moat is drastically reduced- With the advent of technologies like ChatGPT, users can engage in interactive conversations and receive personalized learning programs. Given the numerous companies capable of integrating this technology and enhancing it with various wrappers, we believe Duolingo’s legacy tech stack is now severely outdated. The cost of learning a language will likely fall to the cost of compute. While we do not short companies, Duolingo is a prime example of an incumbent being adversely affected by new technology.

Twilio (NAS:TWLO) — mrkt cap $10.3B; Price $60.56; EV/EBITDA NA

PASS. On-premise IT communication hardware for enterprise is dying and being replaced by the cloud and API economy. Twilio’s communication software presents enterprises the ability to connect with Twilio’s APIs and begin messaging/calling clients through a variety of means. This was a former Cathy Wood darling, but in recent months, she has totally divested her position (TWLO is also down ~90% since highs). Revenue growth is likely the cause, as this was a former hyper-grower (>50%) and now growth has slowed to LSD. Twilio has some of the best-in-class developer tools and will continue to benefit from the death of IT hardware. We assume it is only a matter of time before an activist investor addresses the unusually high SBC given their revenue growth slowdown. Valuation is also still high; we will wait for now.

Q.E.P. Co (Ticker:QEPC) — mrkt cap $94mm; Price $28.7; EV/EBITDA 8.6

PASS. QEPC is a major supplier of tools and accessories for installing flooring and recently appeared on our special dividend screen. They have recently completed the exit of some flooring lines and divested their UK operations – we are decidedly biased towards companies that take steps to renew their commitment to core markets. They are on path to becoming debt-free and with a healthy cash balance by EOY. The company has some strong brands and fits the DIY trend nicely, but its customer base is heavily concentrated, with Home Depot representing ~40% of their sales. We appreciate their shareholder alignment but will need a better entry valuation before revisiting.

Total Site Solutions (Ticker:TSSI)  — mrkt cap $26mm; Price $1.4; EV/EBITDA 7

SPECULATIVE POSITION INITIATED. We rarely invest in nanocaps and certainly not ones that have gone up three hundred percent in six months. That being said, we are happy to make an exception with TSSI. The reason? Capable management and modular data centers (AI play). Upon speaking with the new CEO, a former Dell executive, we came away impressed with the turnaround that has been implemented. TSSI acts as both a procurement agent and system integrator for companies looking to build edge/modular data centers. We believe there are significant tailwinds as companies look to build data centers closer to where data is generated – a phenomenon called ‘data gravity’ – a trend significantly accelerated by AI. Management believes there is the possibility of a 10x increase in business demand which would be a large driver of share returns. (TSSI is heavily reliant on Dell for revenue which creates concentration risk, but we believe this is mitigated given that TSSI management are former Dell executives.)

BOX Inc (NYSE:BOX)  — mrkt cap $3.9B; Price $27.14; EV/EBITDA 45

MORE RESEARCH NEEDED. BOX, a key player in cloud content management and file sharing, focuses predominantly on large enterprise customers. This differentiation from competitors like Dropbox, who cater more to general users, is marked by BOX’s robust compliance and security features tailored for enterprise needs. Additionally, its superior interoperability allows seamless integration with other enterprise tools, which is essential for maintaining competitive edge against giants like Microsoft. BOX is actively trying to expand its market share with innovative tools like Box Sign and advanced AI search functionalities, However, with the company appearing to be at a mature phase of its business cycle and trading at a high EV/EBITDA multiple of 45, a deeper dive into its growth strategies and market positioning is necessary before considering a core position.

Shutterstock (NYSE:SSTK)  — mrkt cap $1.5B; Price $42.6; EV/EBITDA 12

PASS.  As a leading provider of digital content, Shutterstock caters to users with a variety of subscription plans and on-demand services, offering access to a vast library of images, videos, and music tracks. It has shed roughly 65% of its market value from previous highs, and currently trades at what appears to be a reasonable valuation. However, the emergence of generative AI poses a significant existential threat to Shutterstock’s business model. In the foreseeable future, generative AI tools will enable the creation of similar digital content at little to no cost. While Shutterstock might pivot to licensing its extensive content library for AI training purposes, the uncertainty of such a transition presents risks.

Innodata (NAS:INOD)  — mrkt cap $266mm; Price $9.30; EV/EBITDA 43

PASS. Although INOD’s stock price surged nearly 40% earlier today due to a positive surprise in top-line results, we believe that INOD is not the AI play that many investors think it is. INOD was founded in 1988 as a publishing and media entertainment company. It has evolved over the years to assist companies with digital transformation and now helps companies with LLM generation through curating data sets. This is likely a very manual intensive process that gets outsourced to INOD and likely will become obsolete soon as this process becomes automated. We believe INOD’s future performance will resemble that of Appen, another AI data company.

United Natural Foods (NYSE:UNFI)  — mrkt cap $576mm; Price $9.7; EV/EBITDA 7.5

PASS. United Natural Foods is one of the largest distributors of natural, organic, and specialty foods to supermarkets and grocery stores. If the market structure is ideal, good distributors can be an example of a great business that has very low margins—usually two traits that don’t often gallop together. UNFI was chugging along just nicely until its self-inflicted and value-destructive acquisition of SuperValu in 2018 for ~3 billion. The goal was to broaden their offering and expand their range of conventional supermarket and grocery chains (pre-acquisition, roughly 1/3 of revenue was from Whole Foods). Integration has not proceeded efficiently, and gross margins have declined despite improving revenue growth—even after the acquisition, UNFI’s customers appear to have too much bargaining power. This is compounded by UNFI being inefficient with its assets. We will keep an eye on this one and look to pivot if they are making strides on the efficiency front.

CompoSecure, Inc. (NAS:CMPO) — mrkt cap $625mm; Price $7.75; EV/EBITDA 7.8

PASS. CompoSecure specializes in producing high-end metallic payment cards (think like an aluminum AMEX card). Traditionally partnering with major banks like Chase and American Express, CompoSecure’s revenue growth has stalled in 2023, with only a slight projected increase from 2022 and a significant drop in gross margin. Despite a sound balance sheet and optically low valuation, the company faces structural headwinds from the rise of digital and contactless payments, which threaten the demand for physical cards. The company is trying to diversify into cryptocurrency cold storage solutions, but efforts in this arena have yet to come to fruition. We generally stay away from businesses that are shrinking regardless of how low the valuation is.

Card Factory (LON:CARD)  — mrkt cap £341mm; Price £0.99; EV/EBITDA 3.6

CORE POSITION INITIATED. CARD is now our second largest position. We initially reviewed the company in our 3/13/24 Stock Sonar. CARD is a UK vertically integrated specialist retailer of greeting cards, gifts, and celebration essentials. We normally wait until after we publish our monthly initiation (which is right about the time we finish building our position) to reveal our new Core Position, but Card Factory reports earnings on April 30th and, although market reactions to earnings are impossible to predict, we believe earnings momentum is in CARD’s favor. In our Initiation Report that will be released on 5/1, we discuss why this opportunity exists, CARD’s competitive advantages, and why we expect significant price appreciation in the near term.

Intevac (NAS:IVAC) — mrkt cap $97mm; Price $3.65; EV/EBITDA 5

PASS. Intevac is a producer of thin film deposition systems and equipment for making hard disk drives. What caught our eye is that Hard Disk Drives is a declining industry and typically participants in these industries see significant profitability once supply consolidates (as the threat of new competition is inhibited). Intevac has just underwent a large cost cutting reducing headcount by 25% which is a step in the right direction, however, management is now pursuing growth via a new business segment which adds a significant degree of risk. On top of this Seagate makes up 92% of revenues which adds another degree of fragility.

Lovesac (NAS:LOVE) — mrkt cap $341mm; Price $22.24; EV/EBITDA 12

PASS. LOVE is an American furniture retailer, specializing in a patented modular furniture system called Sactionals. These are modular sofas that are made up of three types of pieces: seats, sides, and backs. The appeal is that they can be rearranged in any configuration and are easy to ship and assemble. Although LOVE has carved out a niche in the furniture industry, its high price point (a full sized sofa can cost up to $10k) is at odds with its minimalist design. Growth will likely falter unless it can position itself as more of a luxury brand. There have also been a large amount of bad reviews as quality has deteriorated, likely due to the large demand swings from COVID.

Alphawave (LSE:AWE) — mrkt cap £904mm; Price £1.24; EV/EBITDA 13.1

STARTER POSITION INITIATED. In our most recent stock report, we discussed AWE. Although we believed it was a promising company to capitalize on burgeoning AI networking trends, we found assessing its competitive positioning challenging and did not take a position. Recently, AWE guided for lower revenues in 2024, which led to a significant 30% decline in share price. This adjustment was primarily attributable to a strategic reduction in exposure to Chinese markets. Concurrently, AWE announced several design victories with top-tier AI and Data Center clients, focusing on cutting-edge chip technologies. These achievements mark initial indicators of AWE’s ability to compete with established industry leaders such as Broadcom and Marvell. Following the recent price drop, we have initiated a starter position in the company.

Match Group (NAS:MTCH) — mrkt cap $8.7B; Price $32.4; EV/EBITDA 11.3

PASS. MTCH, an online/app dating conglomerate, has declined roughly 85% from its all-time high in 2021. Owning major platforms like Tinder, Hinge, and Plenty of Fish, the online dating market has evolved from high turnover to a more oligopoly-like structure, dominated by Tinder, Hinge, Bumble, and Grinder. MTCH faces challenges as Tinder, which generates about 60% of its revenue, has stalled following monetization efforts, casting doubt on its ongoing popularity. Conversely, Hinge, known for its efficient matching algorithm, is growing rapidly and might compensate for declines in other areas. MTCH exemplifies the complexities of managing a conglomerate where some subsidiaries grow while others may shrink, making the overall calculus difficult. MTCH is especially challenging since the overlapping target markets of its subsidiaries pose a risk of cannibalization. Although the valuation might attract some, the inherent difficulties lead us to pass.

MDA Ltd. (TO:MDA) — mrkt cap $1.7B; Price $14.28; EV/EBITDA 12

MORE RESEARCH NEEDED. MDA has served as a provider of advanced space technology services to the global space industry for several decades. The company’s offerings encompass a wide range of technologies, including space robotics, antennas, and engineering payloads. Recently, MDA has benefited from the trend of decreasing costs in space flights, coupled with increased government expenditure. This has resulted in a compound annual growth rate (CAGR) of 25% in revenues over the past four years. With positive trends and a reasonable valuation, we plan to meet with Investor Relations (IR) to discuss the company’s strategic direction and gain deeper insights into their execution capabilities. The trends are positive and the valuation is not demanding. We will be meeting with IR to discuss in depth the company’s strategy and execution.