Stock Sonar

  • Each week, we post interesting highlights from our bottom-up research
  • If we come across a tactical trade idea (about twice a month), we post it here
  • Most posts are meant to be informational

Stock Sonar #65 - 7/24/2024

Big Five Sporting Goods (NAS:BGFV) — mrkt cap $60mm; Price $2.75; EV/EBITDA 3.4

PASS. Big Five Sporting Goods operates a chain of sporting goods stores on the west coast. We initially came across the name while analyzing Russell 2000 deletions. This retailer has seen its stock price crater due to continuing soft sales in key categories like hard goods. Everyone got excited about the outdoors during COVID, but it looks like a lot of that spending has dried up. BGFV’s high operating leverage has cut the other way, and negative comps have driven the stock down 94% since the ’21 highs. The saving grace for the company could be the lack of debt, but it is difficult to gauge how deep the valley is in front of Big Five. It doesn’t appear that they have any advantages beyond their store footprint and waning mind share among west coast shoppers. This name could be interesting for speculators but not for us.

Table Trac (OTC:TBTC) — mrkt cap $19mm; Price $4.19; EV/EBITDA 9.9

MORE RESEARCH NEEDED. This is a tiny company that was pitched to us by an interesting fund manager we had a call with. The company provides Casino Management System software and ongoing tech support for Brick & Mortar Casinos. They appear to have tangible competitive advantages in terms of state regulatory licenses, relationships, and IP. Additionally, their product is priced 20-30% cheaper than larger competitors. More work needs to be done on TAM and an understanding of the software architecture of casinos.

Wag Group (NAS:PET) — mrkt cap $65mm; Price $1.34; EV/EBITDA NA

PASS. WAG is the second largest dog walking platform in the US. It boasts 670k users and generates about $100mm in sales. WAG is down almost 90% from its de-SPAC in 2022. Its largest competitor, Rover, showed a similar decline before it was acquired by Blackstone for about an 8x revenue multiple. Although WAG is growing revenues, they are still unprofitable- they have about a year of runway left. For WAG, the issue is not one of efficiency, but one of scale. Currently their largest expense is marketing, they need to grow revenues by about 30% to reach profitability. We will be keeping a close eye on any change in strategy or potential acquirers.

Stock Sonar #64 - 7/17/2024

Enfusion (NYSE:ENFN) — mrkt cap $1.2B; Price $9.37; EV/EBITDA 64

MORE RESEARCH NEEDED. Another company from the class of ’21. Stock price has been halved since IPO price (which, relatively speaking, is quite good for this cohort). The company was started by software developers who worked for hedge funds and recognized the widespread need for better front/mid/back-office solutions. They provide full integration with order management solutions. Enfusion appears to be the leader for smaller funds needing comprehensive solutions, and the runway still looks quite long here. They are aiming to eventually compete for larger asset managers, but this seems unlikely at the moment. We have more work to do to fully understand their product offering but upon initial research they appear well situated to continue gaining share with smaller fund managers.

Orthofix Medical (NAS:OFIX) — mrkt cap $605mm; Price $16.14; EV/EBITDA NA

PASS. OFIX is a global spine and orthopedics company. We looked at OFIX as it recently underwent a full-blown C suite change due to management violating multiple code of conducts. The new management team that has been bought in has extensive experience with leading companies to a successful exit (sale to another company). OFIX has an impressive portfolio of products however it has a bloated cost structure and a merger that it has to digest, courtesy of the previous management team. It has almost $1B in sales yet is still unprofitable- typically, past the $200mm mark is when medical device companies reach scale and profitability. We will wait to see further crystallization of strategy and cost cutting before considering a position.

Latham Group (NAS:SWIM) — mrkt cap $388mm; Price $3.36; EV/EBITDA 10

MORE RESEARCH NEEDED. SWIM is the largest manufacturer of fiberglass pools, holding close to 50% market share. Although their fiberglass pool sales are down year-over-year, this category is gaining share in the traditional pool market due to lower installation and maintenance costs. They have relationships with dealers all over the country, but we need to better understand the incentives for these dealers. The housing-related sector has seen a slump in demand, and this category is no exception. However, if trends continue, this could be an interesting long-term hold. More work needs to be done on SWIM’s logistical network and competitive advantages, particularly in understanding how the market share mix for fiberglass pool manufacturing will evolve in the future.

Stock Sonar #63 - 7/10/2024

American Software (NAS:AMSWA) — mrkt cap $300mm; Price $9.05; EV/EBITDA 21

PASS. American Software provides supply chain solutions primarily for CPG customers. Over the past few years, the company has undertaken significant cost-cutting measures, divested non-core businesses, and improved its governance structure by eliminating controlling B shares. It has also rebranded with an AI-focused approach to enhance customer query handling. Customer relationships are sticky, which offers stable revenue streams but poses challenges for growth. Revenues have stagnated over the last five years, and without growth, AMWA is worth significantly less than its current trading prices. Although it could be a buyout candidate, our investment decisions do not hinge on potential acquisitions. As the company focuses on its core segment, we will closely monitor its go-to-market strategy.

Eventbrite (NYSE: EB) — mrkt cap $437mm; Price $4.5; EV/EBITDA NA

PASS. Eventbrite is an online platform connecting creators and event-goers for live experiences. We originally researched the name on 2/7 and assigned it a MORE RESEARCH NEEDED. Despite their improved adjusted EBITDA profile as a result of cutting costs and raising fees, their platform is challenged with fewer events and fewer creators. It is unclear to us if this is more due to macro factors or price increases. Furthermore, we are unimpressed with EB’s management team – after many attempts we are still unable to reach them — and get the sense that they are indifferent to valid shareholder criticisms.

Douglas Dynamics (NYSE: PLOW) — mrkt cap $494; Price $21.4; EV/EBITDA 10

PASS. Douglas Dynamics is the leading manufacturer of snowplows and ice control equipment in North America. They sell heavily to distributors located in the Midwest and East Coast. Some of PLOW’s brands have been around for over 70 years. The typical end user has about 10 trucks and depends on these plows for their livelihood. Their sales cycle is dependent on snowfall in the months of October and November, which has been severely below average in their regions, hence the 52-week low stock price. “We approach each year as it could be one of our best or worst” is common to hear from PLOW management. We think PLOW is a good business with significant brand loyalty – we will keep it on our watchlist and wait for a better entry point.

Stock Sonar #62 - 6/26/2024

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.

Stock Sonar #61 - 6/19/2024

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.

Stock Sonar #60 - 6/12/2024

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.

Stock Sonar #59 - 6/5/2024

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.

Stock Sonar #58 - 5/29/2024

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

Stock Sonar #57 - 5/22/2024

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.

Stock Sonar #56 - 5/15/2024

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.