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 #16 - 7/19/2023

Yellow Corporation (NAS:YELL) — mrkt cap $51mm; Price $.99; trailing P/E NA

SPECULATIVE POSITION INITIATED. We believe this company has a ~50% chance of going bankrupt. It may come as a surprise, then, that as part of our tactical trade bucket, we have allocated 1% of our portfolio to the name (the market cap is tiny, but the name is liquid and EV is approximately $1.5B). If it manages to escape bankruptcy, we believe the upside could be greater than 2-3x. We wrote about Yellow a few months ago (below). The company has recently been granted short-term leniency from lenders and is in the middle of a protracted fight against the Teamsters union, of which they employ 22,000 members. Yellow is fighting for concessions from Teamsters to streamline its operations, and Teamsters have repeatedly balked (Teamsters head Sean O’Brien tweeted a picture of a tombstone with the Yellow logo). As a tactic to get Teamsters to the table, Yellow has just announced that it is withholding $50 million from Teamsters’ benefits and pensions. The Teamsters have threatened to strike, but if a strike is carried out, they will not have a company to go back to. Our guess is that the Teamsters will grant concessions to Yellow in the final hour, enabling the carrier to survive.

Aspen Aerogel (NYSE:ASPN) — mrkt cap $580mm; Price $8.26; trailing P/E NA

PASS. ASPN manufactures aerogel which is one of the world’s best insulators as it is 97% air by volume. Although these insulators are typically used for harsh industrial environments such as oil pipelines or outer space, a more common use has been found for them in electric car batteries. Using aerogel as a thermal barrier in car batteries helps reduce the chances of electrical fires. ASPN is rapidly expanding supply to meet future demand with projected capex being more than 3x what it was last year. However domestic competitors are expanding supply along with overseas Chinese competition. This will not bode well for future margins and given current margins are around 10%, ASPN will not be profitable anytime soon.

Petco (NAS:WOOF) — mrkt cap $2.2B; Price $8.29; trailing P/E NA

MORE RESEARCH NEEDED. Petco is reinventing itself by bundling add-on services and creating loyalty and tiered membership awards for its customers. The days of selling non-exclusive and durable items are gone. These ancillary services include veterinary, pet insurance, grooming, and vaccinations. These provide a one stop shop experience for customers and their pets. WOOF has already achieved about $1B in recurring revenues from these membership programs. Given that WOOF has durable competitive advantages in its sizeable retail footprint, what needs to be determined are the unit economics of these add on services. The humanization of pets is one of the strongest trends that we believe will continue to persist and grow stronger; WOOF could be a winning bet on this trend.

Stock Sonar #15 - 7/12/2023

Stagwell (NAS:STGW) — mrkt cap $3.06B; Price $7.51; trailing P/E 17

MORE RESEARCH NEEDED. STGW is a marketing group that helps clients with marketing, developing customer insights, and content creation. Out of the $120B spent in advertising and marketing services, roughly 50% of market share is controlled by the top four players, with STGW generating about $2B in revenues.. STGW’s aim is to be the in-house digital marketing and advertising software choice used by blue chip companies. It’s strategy to do so is to be an all-in-one provider of marketing and advertising services. Along with growing offerings organically, STGW has also been acquiring companies to bolster solutions, acquiring about 8 companies in 2022. More work needs to be done in examining the competitive landscape, but given the tailwinds of the industry and the competency of management, STGW has the potential to be a long term compounder.

Mitek (NAS:MITK) — mrkt cap $493mm; Price $11.04; trailing P/E 166

PASS. Mitek is a major player in check image processing, boasting an impressive 80% market share despite the decline in check usage due to the rise of cards and ACH payments. Their profitable performance in this segment fuels their investments in identification verification, paving the way for future growth. The prolonged USAA lawsuit remains a concern, but after dragging on for over a decade, we believe its impact on Mitek is limited. However, a more immediate issue is Mitek’s failure to file its 10-K report within the allowed 90-day timeframe set by the SEC. This puts them at risk of being delisted from the Nasdaq. Furthermore, management holds only a small amount of company stock, which has been diluted due to acquisitions. Mitek serves as a prime example of a great business that is currently uninvestable due to a lack of shareholder alignment. Let’s hope for an activist investor to step in and create that much-needed alignment for shareholders.

Broadwind (NAS:BWEN) — mrkt cap $80mm; Price $3.81; trailing P/E 26

STARTER POSITION INITIATED. Despite its minuscule size, BWEN has manufactured almost ten percent of wind turbines in the USA since 2008. It has performed poorly in recent years due to low-cost overseas competitors, however the winds are changing. Tariffs along with the Inflation Reduction Act (‘IRA’) have structurally benefited BWEN profitability. Section 45x of the IRA grants tax credits for the domestic manufacturing of certain components of solar and wind energy. Furthermore, these credits are eligible for direct payment from Treasury and the right to the credit can be sold for cash to third parties. It sunsets in 2030. Coupled with almost 300mm of NOLs, BWEN is an asymmetric bet on renewable energy in the USA. We have initiated a small weighing in the name and will be speaking with management later next week.

Stock Sonar #14 - 7/5/2023

PayPal (NAS:PYPL) — mrkt cap $75.9B; Price $68.10; trailing P/E 27

PASS. Paypal is the global leader in alternative payment methods and owns Venmo (P2P) and Xoom (cross border digital remittances). Due to online spending pulling back, growth slowed and margins compressed leading to a 75% downturn in the stock. Bears believe intense competition within digital payments has contributed to an inflection in Paypal’s growth and its high-cost structure reflects misguided “Stakeholder Capitalism.” More work needs to be done to know if Paypal will keep share against competition as ecommerce penetration rates increase. Normalized earnings multiple look reasonable but the company’s cost disciplines have lacked shareholder alignment.

Tredegar (NYSE:TG) — mrkt cap $235mm; Price $6.87; trailing P/E NA

PASS. TG appeared on our special dividend screen and combined with trading at 30 year lows, warranted a deeper dive. Tredegar operates in two segments: aluminum extrusion and polyethylene (‘PE’) films. Aluminum extrusion is based on custom aluminum design for the automobile and home flooring industries while PE films are the protective films that covers LCD screens (think flat screen TVs). These segments are inherently cyclical and combined with a pull forward in demand over the last couple of years, business is now anemic. On a normalized basis, TG generates about $30mm in FCF but given the 150mm in LT debt, the valuation is not yet a bargain. Their PE film segment has recently seen headwinds as certain customers seek alternatives as these films are scrap or waste material that is nonvalue add. However, a potential new growth market may be in semiconductors, although this will likely take time as the requisite qualifications need to be obtained.

Safilo Group (MIL:SFL) — mrkt cap €511mm; Price €1.19; trailing P/E 12

PASS. Safilo manufactures luxury eye frames, competing largely against eyewear titan Essilor Luxottica. SFL owns about half their brands and are a licensee for the other half. Share prices have fallen over the last ten years as its largest customers (LVMH and Kering) moved to producing their eyewear in-house. SFL’s current customer base should be more resilient as they lack the scale and manufacturing capabilities to do this. Along with SFL maneuvering to position their in-house brands as DTC, they are also streamlining costs and are divesting plants that are not operating at capacity. SLF is a durable business and at 12x earnings is trading at about fair value. We will look to initiate a position given a further pullback.

Stock Sonar #13 - 6/28/2023

Topgolf Callaway (NYSE:MODG) — mrkt cap $3.58B; Price $19.92; trailing P/E NA

PASS. The company generates revenue through the sale of golf equipment, apparel, and golf-related entertainment, particularly through its acquisition of Topgolf in 2021. The game of golf has experienced significant growth since the pre-pandemic era, with a 13% increase in total golf rounds played in 2022 compared to pre-pandemic averages. The rise in beginners has been particularly notable, with females and juniors representing a higher percentage. MODG aligns with this trend and contributes to its growth through innovative off-course ways to engage golfers (Topgolf). However, MODG’s acquisition strategies have lacked coherence, such as the non-golf related acquisition of Jack Wolfskin in 2018 for $476 million. Debt levels are high, and management has placed a substantial bet on Topgolf’s growth to drive profitability.

Acushnet Holdings (NYSE:GOLF) — mrkt cap $3.62B; Price $53.78; trailing P/E 18

MORE RESEARCH NEEDED. Acushnet Holdings the owner of renowned golf brands Titleist and Footjoy, is trading at around pre-pandemic levels despite the recent surge in golf’s popularity. Analysts are divided on the longevity of the golf trend, with recessionary concerns impacting discretionary spending. However, Acushnet has a track record of robust revenues during previous economic downturns, driven by its appeal to the more dedicated golfer. The company has effectively resolved recent supply chain issues through infrastructure and logistics improvements. Although the stock is not a giveaway, given the game’s health and ongoing momentum, Acushnet deserves further consideration.

BrightView (NYSE:BV) — mrkt cap $669mm; Price $7.15; trailing P/E NA

PASS. The company generates revenue through its commercial landscaping services and snow removal operations. These services are considered non-discretionary spends for businesses, making the business relatively durable and recession-proof. Despite being the largest landscape company, BrightView holds less than 3% market share in the highly fragmented domestic landscape industry. The company’s growth strategy heavily relies on mergers and acquisitions, resulting in a long-term debt accumulation of over $1 billion, with an annual interest cost of $100 million. Topline pressures have emerged due to below-average snowfall in the Northeast and significant increases in material and wage costs, leading to financial losses. BrightView has implemented cost reduction initiatives and is working on reducing its debt, but assessing their potential success is challenging.

Stock Sonar #12 - 6/21/2023

Whole Earth Brands (NAS:FREE) — mrkt cap $99mm; Price $3.00; trailing P/E NA

EXITED. We wrote about FREE in a previous Stock Sonar when we initiated a small weighting. It has run up about 30% since then and we are closing out the position. The thesis was predicated around gross margins expansion and sku rationalization, however retailers are pushing back on FREE’s price hikes due to its lack of leverage and size. This was one of the reasons why FREE was intent on acquiring brands early on in an effort to grow. FREE is now turning to private label even though this is in direct competition with their brand portfolio (and has lower gross margins). FREE lacks a coherent strategy that will enable gross margin expansion and subsequently cash flow generation and as such we have closed the position.

Liquidity Services (NAS:LQDT) — mrkt cap $500mm; Price $16.31; trailing P/E 16.27

PASS. LQDT aspires to be the market leader reverse supply chain solutions. Which means they own several market places and distribution capabilities to connect sellers to buyers. Sellers/buyers include commercial and government institutions that are looking to sell/buy excess inventory, idle equipment or real estate. For example, the company is helping Delta to become the first carbon neutral airline by helping offload its CO2-producing ground support equipment. Management appears well aligned with significant insider ownership (~28%). There are several promising trends that can provide nice tailwinds for LQDT. We have reached out to management and look forward to ascertaining a more nuanced segmentation of their revenue.

Hibbett Inc (NAS:HIBB) — mrkt cap $474mm; Price $37.24; trailing P/E NA

PASS. HIBB is a specialty retailer of branded sports apparel with Nike making up a majority of sales (~60%). This company is a good example of one that is run on a good strategy but has poor competitive advantages. Their strategy is to locate stores in underserved communities, primarily in the southeast. Labor and rents are cheaper so the company can compete on costs. The recent surge in labor expenses (over 20% since 2019) has put pressure on what is already a low margin business (normalized at ~5%). As previously mentioned, the competitive advantages are hard to determine as they do not sell differentiated apparel. Their survival will depend on operational efficiency and although their track record is solid in this category, it is not enough to warrant continued interest.

Stock Sonar #11 - 6/14/2023

Advance Auto Parts (NYSE:AAP) mrkt cap $4.08B; Price $68.66; trailing P/E 10

PASS. AAP is an automotive aftermarket parts provider that caters to both professional and DIY customers. The stock caught our attention due to a significant decline of over 50% this year, primarily driven by inventory issues, supply chain challenges, and diseconomies of scale. Unfortunately, their inventory comprises a poor mix and is bloated. Immediate action is required to heavily discount prices, rationalize inventory, and strengthen relationships with vendors to enhance fill rates. Regrettably, the company is currently facing significant operational difficulties and is unlikely to resolve them under the current CEO. On a positive note, there is an ongoing search for a new CEO. It could be the case that this company is trading low enough where one can “hold their nose and buy” but our discipline is to wait for signs the ship is righting itself before considering a position.

Hammond Power (TSX:HPS) mrkt cap $551mm; Price $46.35; trailing P/E 13

PASS. Hammond Power manufactures dry type transformers and has about 25% share in the North America market. They have been around for more than 100 years and their main competitors are independent manufacturers and large players like Eaton and Schneider. Hammond stands to capitalize from the electrification of the USA. This is a megatrend from electric vehicle charging stations to the infrastructure bill to the rise of GPU datacenters. Hammond specializes in custom made transformers and has thousands of SKUs and produces a couple of thousand new ones every year. Although the company is run well and has significant tailwinds, margins are inflated given the supply tightness of transformers in the last year. We will look to buy Hammond given a pullback.

Natural Grocers (NYSE:NGVC) mrkt cap $266mm; Price $11.72; trailing P/E 16

MORE RESEARCH NEEDED. A well-managed specialty grocer based in Colorado with a strong commitment to providing healthful foods. The company upholds rigorous standards across all food categories. They currently operate 166 stores in the western and midwestern regions of the United States. In 2018, they temporarily halted their expansion efforts to prioritize profitability. However, they have recently resumed their expansion plans and aim to add 4-6 new stores annually. There is a promising opportunity in the relatively low penetration of their private label products (only 7% of sales compared to competitors like Sprouts at 20%). Additionally, industry trends regarding organics and health foods are favorable. This is a company we will continue to dig through.

Stock Sonar #10 - 6/7/2023

The Joint (NAS:JYNT) mrkt cap $205mm; Price $13.93; trailing P/E 25

PASS. The Joint is a chiropractic care chain. It generates about $100mm per year in revenue and has about 830 stores in USA. JYNT offers subscription/package deals for minor adjustments and competes against the fragmented 40k plus chiropractic offices. Although management is competent, a chiropractic business that relies on recurring revenue from clients seems tenuous. One would imagine that chiropractic care inherently is more of a one-time transaction as opposed to a habitual one. Leaving aside the question of whether chiropractic is a legitimate form of alternative medicine, the misalignment of incentives between the chiropractor and the client gives us pause with JYNT.

TLYS (NYS:TLYS) – mrkt cap $188mm; Price $6.3; trailing P/E

PASS. What initially drew us to this west coast-oriented specialty retailer was their inclination to pay a special dividend. Our view is that a periodic special dividend is much more desirable than what is frequently a procyclical buyback policy. We spoke to IR/CFO this week and while we think highly of the management team and their capital allocation, we will wait until their merchandising strategy is a bit clearer before greenlighting for a deeper dive. They have recently added leadership help in this area so we are a eager to observe how their merchandising evolves.

Playtech (LON:PTEC) – mrkt cap £1.8B; Price £608; trailing P/E 29

PASS. Playtech is a 24-year old B2B company that supplies software solutions to online gambling companies (aka B2Cs, aka operators). Most operators are not capable of maintaining an in-house software development team that can produce solutions that meet customer needs while also satisfying extensive regulatory requirements. The company has grown to a dominant position through in-house growth capex and sensible acquisition strategy. They also acquired B2C operator Snaitech in 2018 under the strategy of “diversification” which we generally view as an inadequate justification for an acquisition. ~30% of PTEC’s B2B revenues are from unregulated markets and there is always the risk of operational deleverage if those revenues fall off. Although there are interesting trends in the online gaming space we will continue searching for a better positioned name.

Stock Sonar #9 - 5/31/2023

Stericycle (NYSE:SRCL) mrkt cap $3.95B; Price $42.83; trailing P/E 80

PASS. Stericycle is as close to a monopoly as companies come. It has about 70% market share in the medical waste industry with the rest of the competitive landscape fragmented with mom-and-pop operators. SRCL shares peaked in 2015 when a class action lawsuit arose due to perceived price gouging. This negative goodwill was then compounded by Stericycle diversifying into multiple other industries, leading to classic shareholder value erosion and high debt loads. Stericycle has begun to right the ship and divest non-core divisions while paying down close to $2B in LT debt.  Although trading at a high multiple, SRCL has significant latent pricing power. We will continue to watch SRCL and wait for a better entry point.

MarketWise (NAS:MKTW) mrkt cap $777mm; Price $2.38; trailing P/E 54

PASS. Marketwise is a company founded on bringing institutional research to retail investors. We began looking at this company a month ago—we ran a filter on companies that have gone public in 2020/2021 via SPAC given drastic price declines (most of these names have sold off more than 80% since highs). Most companies in this space are not worth a second look but MKTW was one of the few companies that was cash flowing nicely. They are capitalizing on the self-directed investor trend and collect subscription revenue on 12 research brands that they have either built in-house or acquired. They have close to ~15mm free subscribers and 1mm paid subscribers. We believe this is a growing industry but MKTW has high churn and high marketing spend. The company is undergoing new leadership and we will wait for more stability in strategy before greenlighting for a deeper dive.

Sleep Number (NAS:SNBR) mrkt cap $422mm; Price $19.04; trailing P/E 12

PASS. Sleep Number is a vertically integrated mattress firm from production to retail.  SNBR has been aggressively pursuing growth with high advertising budgets, spending almost as much as Tempur Sealy, a company with 2.5x the revenues of SNBR. SNBR is a solid brand however its ~$470mm revolver debt level gives us pause. During the last three years, SNBR repurchased $700mm worth of stock at an average share price of $100; the share price today is 1/5 of that. Predictably, share repurchases have tapered off while share prices have plummeted. This lack of sound capital allocation coupled with SNBR being in a more fragile position leaves us unable to proceed further.

Stock Sonar #8 - 5/24/2023

Getty Images Holdings (NYSE:GETY) mrkt cap $2.5B; Price $6.32; trailing P/E 24

PASS. GETY owns one of the largest stock photo libraries in the world with over 500mm digital assets. These images are extremely high quality, labeled, and exclusive to GETY. Getty’s platform works by photographers and videographers submitting their content to GETY, once approved by GETY, content creators will then receive a royalty ranging from 20-45% of content revenue. Although forecasting high growth technologies is difficult, we believe generative AI will cause an inflection in content generation and GETY could be a prime beneficiary of this trend given the assets they own. Although GETY is trading at too high of a multiple for us, we will keep it on our watchlist in case of retracement.

SteelCase (NYSE: SCS) mrkt cap $820mm; Price $7.19; trailing P/E 22

PASS. Steelcase is a designer and manufacturer of workspace solutions ranging from ergonomic office chairs to desks. Although the office industry has seen significant fallout (office REITS are down 75% from highs in 2021) we believe hybrid workspaces will supplant the traditional office set up. It is possible we could even see demand for office equipment increase as hybrid workspaces result in more offices as volume is at the heart of their business model. SCS saw revenues organically increase in 2022. Although SCS is a great brand, its FCF is anemic at around 2% net margins. Given management with a more focused eye on cost optimization we would take a closer look at SCS but currently it is a pass.

Thryv Holdings (NAS:THRY) mrkt cap $817mm; Price $23.47; trailing P/E 17

PASS. THRY owns online business directories like (formerly known as the Yellow Pages) that are heavily cash flow generative but deteriorating quickly. THRY has seen success upselling small businesses on its all-in-one SAAS solution Thryv: payments, reviews, task automation, payroll etc. all in one place. Subscriber growth has been trending at double digits per annum but online reviews seem to indicate a heavily promotional sales team. Disaggregating their subscriber base from the different tiers in their offering has also proven difficult. They have begun to expand internationally and it is curious with such a massive TAM domestically (400k+ small businesses in U.S.) why management would divert resources to expanding elsewhere. Even still, if we had spoken to long time SAAS users that loved the product we might have reconsidered this but still haven’t come across them. Ultimately, we cannot fully get behind the product-market fit and are passing.

Stock Sonar #7 - 5/17/2023

Zumiez (NAS:ZUMZ) mrkt cap $312mm; Price $15.94; trailing P/E 14

STARTER POSITION INITIATED. We have taken a position in this name and are looking to make this a core holding. Zumiez is an in-mall retailer with ~600 stores in the United States. They sell edgy apparel to the 14-24 y/o demographic (think streetwear merged with something like a Hot Topic). They have relationships with ~500 brands–many of them micro brands. People go to Zumiez because they have access to brands they cannot find anywhere else. The on-screen P/E multiple is ~14 but this is off a low revenue year and we calculate normalized cash flow in the range of 30-40mm. After netting out cash, ZUMZ is trading at ~4x normalized free cash flow. This company has over 44 years of successful operations, has zero leverage and is well managed. In fact, we think this is one of the best run retailers in the world.

Lee Enterprises (NAS:LEE) — mrkt cap $77mm; Price $12.37; trailing P/E NA

PASS. LEE is the 2nd largest owner of local newspapers in the USA. LEE is engaged in digitizing their offerings along with creating an aggregated ad platform. Lee generates about $700mm per year and operates about break even however revenues are declining at ~5% per year.  Local newspapers are being squeezed from both ends; from people’s attention becoming more globalized along with the emergence of hyper-localized platforms like Nextdoor. Gauging future appetite for local news is difficult and given their 500mm of debt, the margin for error is low. We are passing.

OneWater Marine (NAS:ONEW) mrkt cap $438mm; Price $27.76; trailing P/E 7

MORE RESEARCH NEEDED. OneWater Marine is consolidating the marine dealership space and owns about 100 dealerships nationwide. The vast majority of marine dealerships are mom and pops. New boat sales make up 70% of ONEW revenues and are its highest margin business followed by services and parts. Management’s capital allocation decisions are questionable given aggressive acquisitions financed by shareholder dilutions (by over 30% last two years) and ~700mm in debt. Despite this, ONEW could be an interesting candidate given the fragmented nature of dealerships and the possible synergies in rolling them up. We will be speaking with management next week to learn more.