Stock Sonar

Card Factory (LON:CARD)  — mrkt cap £323mm; Price £0.94; EV/EBITDA 3.6

MORE RESEARCH NEEDED. A UK vertically integrated specialist retailer of greeting cards, gifts, and celebration essentials. The business struggled post-COVID as they shut down their 1,000-store retail footprint and the sale of greeting cards moved to grocery stores. Since then, the company has slowly regained its footing, with revenue growing steadily since FY ’21. The market doesn’t think too highly of the retail greeting card business, probably due to online competition, e-cards, or a general belief that fewer people are buying greeting cards. We have a few reasons to disagree but still have research to do on the industry. Additionally, more research needs to be done on CARD’s growth drivers. But so far, we like what we see.

PubMatic (NAS:PUBM) — mrkt cap $1.1B; Price $23.0; EV/EBITDA 23

MORE RESEARCH NEEDED. PubMatic runs an online marketplace that connects digital content creators with advertisers. They make it convenient for buyers (advertisers) to review ad space supplied by publishers and then have a bidding structure in place that allows for purchase. They generate a large portion of their revenue not only by selling ad space to advertisers but also by selling this ad space to other platforms. The digital ad space is complex and seems to be in a state of constant evolution. We have previously discussed how media fragmentation is an underfollowed megatrend. CMOs are struggling with complexity such as where to advertise (Google, Meta, OTT, Linear TV, etc.). PUBM is solving some of these problems by selling ad space on a variety of formats, including streamed content. The valuation does seem rich but perhaps the business model and market opportunity warrant it. Still more digging to do.

Graftech (NYSE:EAF) — mrkt cap $480mm; Price $1.87; EV/EBITDA NA

PASS. We first wrote about EAF in September of last year. More research was needed to determine how their business was evolving with EV demand. Since then, it has fallen by more than 50%. To recap, EAF is a vertically integrated manufacturer of graphite electrodes. These are used in electric arc furnaces (EAF) to produce steel. Potential green shoots for them involved converting their needle coke into anodes for EV batteries. However, there has been no headway here (with prospects likely years away) and supply from India and China will continue to keep prices depressed in the electrode segment. Coupled with their high margin long-term agreements expiring this year, EAF is in for a tougher time ahead.

Guess, Inc (NYS:GES) — mrkt cap $1.4B; Price $25.76; EV/EBITDA 6.8

PASS. Guess is a global brand and retailer that sells apparel and accessories. They have made recent strides to improve profitability, including closing ~280 stores. While this is positive, cost cutting is now most likely in its final innings, and the business does appear to be fully mature—it is hard to determine where their next growth opportunity lies. In many cases, an acquisition by management is effectively an admission that they lack growth opportunities. We believe Guess’ acquisition of Rag & Bone is an indication of this. We maintain a bias towards organic growth, and although Guess is most likely slightly undervalued, we cannot gain conviction in the business’s future strength. We will wait for a better opportunity elsewhere.

KKR & Co (NYS:KKR) — mrkt cap $86B; Price $97.2; P/E 24

PASS. KKR is a large Private Equity (PE) firm that has grown its assets to 550 billion (up 10% yoy). Private Equity companies enjoy an (unfair?) advantage over public equity managers in that their underlying investments have stable market values, giving LPs the illusion of security. Even if PE expected returns edge downwards, we believe institutions and HNW individuals will continue to increase exposure. Additionally, larger managers enjoy access to large bases of LP capital and have the ability to charge fees on uncommitted capital. In short, these are durable advantages that make them great businesses. It’s important to remember, despite the rebrand, Private Equity firms are LBOs, and as a result, their opportunity set is a function of debt markets and the broader economy. Higher interest rates and a weaker economy will reduce investment opportunities. Fundraising has been challenging for private equity markets over the last year; however, KKR’s geographic diversity has acted as a stabilizer. Unfortunately for us, KKR’s stock price has run up ~75% in the last four months, and we will wait for a better entry point.

Marvell Technology (NAS:MRVL) — mrkt cap $68B; Price $78.73; EV/EBITDA 70

PASS. MRVL is a leading fabless semiconductor company that designs and develops a wide range of components that facilitate the movement, storage, processing, and security of data. This ranges from Hard Disk Drive processors to DPUs to switches. MRVL holds significant market shares across these categories. As data center demand for larger data storage, lower latency switching, and faster data transfer compounds, MRVL will be a large beneficiary. However its lofty valuation, especially given it has legacy segments that are declining, will keep us on the sideline. 

Farmer Bros (NAS:FARM) — mrkt cap 76mm; Price $3.59; EV/EBITDA NA

PASS. Farmers Brothers provides a portfolio of coffee supplies for approximately 40,000 businesses, mainly convenience stores and restaurants. Our research on FARM towards the end of last year suggested that “more research was needed” following the sale of their low-margin segment and management replacement. Since then, we’ve had several calls with the new management. While they seem highly competent, it’s evident that significant operational enhancements are necessary for sustained profitability. If successful, these improvements could yield significant operational leverage. However, gaining a concrete understanding of how effectively management will address the numerous operational overhauls required remains challenging for us.

Bayer (OTC:BAYRY) — mrkt cap $32B; Price $7.88; trailing EV/EBITDA 12

PASS. BAYR has had a tumultuous period with zero share price appreciation over the last twenty years. The reason for this is an ill-timed acquisition of Monsanto which saw them pay legal bills to the tune of 11 billion due to a class action suit claiming that Roundup was carcinogenic. Bayer has dropped roughly 70% since that acquisition. At the current valuation, the market is ascribing little value to the 32 pharma drugs in the pipeline which cost BAYR roughly ten billion dollars. There is still some litigation overhang and coupled with a decline in profitability from the crop science segment due to a normalization of prices, we believe a more attractive entry point can present itself in the near future.

Vital Farms (NAS:VITL) — mrkt cap $740mm; Price $17.88; trailing EV/EBITDA 17

PASS. Vital Farms is a company that specializes in producing ethically sourced pasture-raised eggs. VITL has grown revenues at a 30% CAGR for the last five years and currently is in over 25k stores nationwide.  VITL’s brand allows for premium prices which is why their gross margins are almost 2x that of other egg producers. Ethically produced is a core value for VITL; their eggs consistently rank among the healthiest (VITL allows for more than 100 sqft of pasture for each chicken while competitors allocate <1 sqft). VITL has ambitious targets and is aiming to reach 1B in revenue by 2027 with 12% EBITDA margins. We believe it is likely they can reach this however the multiple is a little rich for us and we will wait for a pullback to initiate a position.

Yellow Corporation (YELLQ) — mrkt cap $234mm; Price $4.5; trailing P/E NA

EXIT. We have exited this speculative trade. We first entered Yellow Corporation at less than a dollar a share and our returns have been several hundred percent (we wrote about entering YELLQ originally on 7/19/2023 at $.99c). Clearly, this has worked out unbelievably well and we were fortunate with our timing. Our latest thesis was that asset sales would generate north of 1.5B which would more than offset balance sheet liabilities. However, the risk still remains, and one we were willing to underwrite, that large off-balance sheet liabilities could wipe out equity holders. We have taken gains and are looking to recycle proceeds into other opportunities. Generally, speculative trades are not something we go looking but something that arises naturally from the bottom-up research process.

Coursera (NAS:COUR) — mrkt cap $2.5B; Price $16.52; EV/EBITDA NA

PASS. COUR operates in the online education industry. This is an industry that has almost unlimited supply capacity and has platforms like youtube to udemy to universities having their own online courses. As a result, the only means to bring revenue through the door is with heavy marketing which is why COUR and UDMY spend almost half of their revenue here (this is an advantage that top universities will always have as they already have share of mind and social proof). Although COUR is well capitalized, unit economics will unlikely ever improve given these industry dynamics.

Select Water (NAS:WTTR) — mrkt cap $945mm; Price $7.85; EV/EBITDA 9

MORE RESEARCH NEEDED. WTTR is a water solutions provider for the O&G industry. A necessary input and byproduct of fracking is large amounts of water. It is estimated that almost 2T gallons of water has been used for fracking since 2011 with about 50% of current needs met by recycled water. These water amounts will only get larger as horizontal fracking methods continue. WTTR is building the infrastructure needed to supply and treat water for these players from the pipelines to treatment facilities to storage tanks. Although the trends of the industry are in WTTR’s favor, long term unit economics to be assessed as a large part of WTTR’s current expenses and capex are in building out their infrastructure.

Powell Industries (NAS:POWL) — mrkt cap $1.77B; Price $147.94; EV/EBITDA 20

PASS. We wrote about POWL in our January 17^th stock sonar. We were still in our diligence phase and unfortunately the stock has run away from us on good earnings and is up almost 100% since. We believe that Powell Industries fundamentals will likely continue to do well but it is hard to underwrite the multiple with considerable cyclical exposure. To recap, POWL is a leader in custom design and servicing of electrical distribution solutions and although a large part of its business has been historically tied to the O&G sector, it has recently seen demand from the electrical infrastructure upgrade and data centers.

Everquote (NAS:EVER) — mrkt cap $508mm; Price $15.50; EV/EBITDA NA

PASS. When originally researching this name, we thought that Everquote was a comparison platform for insurance quotes. Think something like a Booking.com but for insurance. Instead, Everquote is a lead-generation platform. They spend significant amounts of ongoing marketing dollars to drive traffic to their site and then turn around and sell this customer information to insurance carriers – primarily to Progressive and State Farm (~30% of revenues). For Everquote to be successful, there would need to be evidence that they are growing into a consumer brand and providing value to customers by helping them compare and save money on premiums. Furthermore, they have unsuccessfully tried to expand into different insurance verticals and are heavily weighted to the auto insurance cycle.

Cryoport Inc (NAS:CYRX) — mrkt cap $730mm; Price $14.90; EV/EBITDA NA

PASS. Cryoport Systems is a market leader in temperature-controlled supply chains for the life sciences industry. CYRX caters to the growing cell and gene therapy market which in particular needs cryogenic solutions. This market is set to grow 15% annually for the next ten years. Being the IBM of temp controlled solutions, CYRX is chosen as the defacto provider and the growth of the gene industry should accrue to CYRX. CYRX currently does not generate profits and trades at over 5x revenue. Coupled with their pro cyclical share buybacks in which they repurchased shares at almost 3x the current share price, this gives us pause. We will wait for a further drawdown before considering a position.

Vertiv Holdings (NYSE:VRT) — mrkt cap $22.6B; Price $59.12; EV/EBITDA 29

PASS. Vertiv has gone up more than 300% in the last year as data center overhauls driven by AI have exploded. The rise of GPUs has increased the energy consumption of data centers (GPUs can consume about 5x more energy than a CPU). As a result, this has greatly increased the capex spend on anything from new uninterruptible power systems to new cooling systems. Vertiv offers a number of these solutions and has seen revenues increase by almost 30% yoy. SMCI is the other large competitor in the space (it has run up 25x in the last 4 years) and as of yet, the data center capex spend is accruing to these two players. Although in the short-term, demand will exceed supply, in the long term it is hard to predict the long term economics of VRT as the industry becomes commoditized.

Eventbrite (NAS:EB) — mrkt cap $851mm; Price $8.46; EV/EBITDA NA

MORE RESEARCH NEEDED. Eventbrite is an online platform connecting creators and event goers for live experiences. They are the leading platform in facilitating local events and have a marketplace that enjoys network effects as more creators and audience members are added. The company is not currently EBITDA profitable but has taken concrete steps in pursuit of their 20% EBITDA margin goal by the end of 2024. They have increased their take rate to 9%, cut 8% of their workforce in 2023 and should be close to completing their goal of relocating 30% of the remaining workforce. They have issued roughly 360mm of convertible notes which will likely translate to a ~7% dilution over the next three years– a significant overhang but not a dealbreaker. We have a call scheduled with management and will continue to diligence.

European Wax Center (NAS:EWCZ) — mrkt cap $925mm; Price $14.83; EV/EBITDA 31

PASS. European Wax is the largest franchisor of waxing services in the US with over 1k locations. This industry is largely dominated by small operators and being a larger and more sophisticated player, European Wax has local advantages such as marketing and is more operationally efficient. Store unit economics are profitable and shown by existing franchisees making up the majority of new builds. Although this is a good business, we do not believe European Wax will grow fast enough to justify its lofty multiple.

Zumiez (NAS:ZUMZ) — mrkt cap $349mm; Price $17.64; EV/EBITDA 5.4

We have exited ZUMZ. We discuss our exit here.

Carriage Services (NYS:CSV) — mrkt cap $378mm; Price $25.21; EV/EBITDA 9.6

PASS. Carriage Services is a roll-up that owns and operates 173 funeral homes and 32 cemeteries throughout the United States. The funeral home and cemetery industry remains heavily fragmented, with 80% of the market still in the hands of individual operators. The company was formerly led by its long-time founder and CEO Mel Payne, who recently faced health challenges with a stroke. The current management in place has held former positions at Service Corporation International – by far the largest player in the space. Given the industry’s predominant ownership by individual operators, there’s ample room for roll-ups like CSV. Despite our efforts, the impact of the COVID-induced surge in death rates and the growing preference for cremations over traditional burials—priced at a third of the cost—results in an unclear forward-looking profit picture. While this could make an interesting acquisition target for a PE firm, we cannot gain conviction and are passing.

Stemmer Imaging (XETA:S9I) — mrkt cap €210.6mm; Price €32.40; P/E 10.8

MORE RESEARCH NEEDED. Stemmer is the largest distributor/assembler of machine vision technology in Europe. The machine vision industry has been steadily growing and could see a step change in demand with the rise of GPUs and AI algorithms such as transformers drastically improving inference ability. As a distributor of machine vision components, Stemmer would be a direct beneficiary of this trend. Stemmer is a value-add assembler with the goal to have them be plug and play. It is positioning itself to be hardware and software agnostic to reduce reliance on suppliers. It will be important to assess the leverage of the component suppliers as that evolution will determine the profitability of Stemmer. The more modularized the value chain becomes, the more value accrues to Stemmer.

Lemonade inc (NAS:LMND) — mrkt cap $1.2B; Price $16.64; EV/EBITDA NA

PASS. Lemonade, a modern insurance player, is making strides in achieving more reasonable loss ratios across various lines of business. The company emphasizes advanced AI modeling, though historical internal data was limited until recently, positioning them as a leader in AI adoption within the insurance sector. For example, Lemonade employs a comprehensive dataset of around 4,000 points for assessing homeowners policies, in contrast to the approximately 40 data points used by traditional carriers. Advanced predictive techniques are at still low penetration rates across the industry. LMND reported improved Q3 earnings, and the stock saw a quick ~50% surge. Notable improvements in loss ratios across business lines and impressive growth in the pet care insurance segment are promising. However, the intensely competitive nature of the insurance market poses a challenge, with larger carriers potentially undercutting Lemonade in larger markets. Unless Lemonade focuses on niche lines, a sustained path towards profitability will be challenging.

Berkshire Hathaway (NYS:BRKB) — mrkt cap $817B; Price $376; P/B 1.6

PASS. We believe that the risk is reasonably high that Berkshire will underperform the market on a go-forward basis. Berkshire relies on two drivers of value – one is their investment portfolio, and the other is their collection of subsidiaries. It is unclear to us how the investment portfolio will continue to be a driver of value it once was, and we believe that Berkshire should officially de-emphasize the importance of the investment portfolio to focus efforts on fixing and enhancing its subsidiaries. Berkshire 1.0 was largely an investment manager and budding conglomerate. For Berkshire to address its vulnerabilities, Berkshire 2.0 would need to complete its transition into a full conglomerate. In case readers missed it, we have written about this here.

Abercrombie & Fitch (NYS:ANF) — mrkt cap $5.2B; Price $103.9; EV/EBITDA 10.7

PASS. ANF is an American lifestyle retailer that also owns the Hollister brand. They have seen an impressive re-rating of their fundamentals in a challenging environment. Recent quarters have seen year-over-year revenue growth of over 15%, with earnings also improving. This is surprising because when we originally researched ANF in 2016, it was dubbed the most hated retailer in America by various consumer surveys. This was due to a ‘models only’ hiring policy and an overall brand image that was viewed as racially alienating. Longtime CEO Franz Horowitz engineered an impressive turnaround by using consumer intelligence to do more ‘chasing.’ They succeeded in their goal of staying true to their American heritage while tactically adjusting to fast fashion trends. After achieving the proper product assortment, ANF successfully used influencers and affiliates to raise awareness about their rebranded image. Although we like the company, in this environment, the price is slightly high, and we will wait for a better price before reconsidering.

Kalray (PA:ALKAL) — mrkt cap €175mm; Price €20.65; EV/EBITDA NA            

MORE RESEARH NEEDED. Kalray is a fabless semiconductor company that designs Data Processing Units (DPUs). DPUs are specialized processors designed to offload specific compute tasks from CPUs. These tasks are workloads such as data transfer, security, and data compression. DPUs essentially orchestrate data transfer from cloud to edge to premise whereas historically data has been more fixed in a central location. Kalray recently partnered with Dell which provides them access with distribution. Kalray competes against larger player such as Nvidia and Marvell and has positioned itself to go after more specific workloads and smaller customers. KLRY has grown 60% yoy and is currently value at about 7x revenue. The DPU market is set to grow to 6B by 2031, roughly a 27% CAGR from today.

Dr. Martens (LSE:DOCS) — mrkt cap £750mm; Price £0.78; EV/EBITDA 4.4   

ADD. We initiated a starter position on 12/6/23 following a ~20% drop after a predictably weak earnings report. DOCS, the world’s leading boot brand, went public in 2021 and since its acquisition by a PE firm in 2014, the brand has gradually transitioned from selling through distributors and wholesalers to a DTC mode (now ~50% of current sales). We attribute DOCS long-term growth to effective execution, store expansions in key cities, and improved brand and product awareness. The substantial price drop since IPO  (~80%)  can be attributed to an overvalued IPO, operational challenges in the U.S., and footwear category macro headwinds. However, we believe that DOCS has the potential for recovery in the U.S. and we hold management in high regard, as they take their role as custodians of the brand seriously. Our ongoing discussions with IR increasingly reinforces our view that the stock’s undervaluation presents an attractive entry opportunity (In addition, DOCS pays a 7+% div yield).

Powell Industries (NAS:POWL) — mrkt cap $967mm; Price $81.05; EV/EBITDA 12

MORE RESEARCH NEEDED. POWL is a leader in custom design, manufacturing, and servicing of electrical distribution solutions such as switchgears and power control rooms. A large part of its business has been historically tied to the O&G sector however recently it has seen demand from the electrical infrastructure upgrade along with data centers. Data center capex spending has been exploding with the rise of computationally intensive AI models. POWL revenues increased 32% yoy however this could be the start of a larger trend. POWL has no debt and significant operating leverage. The fragility of its current customer base in the current macro environment is the biggest question mark and more analysis needs to be done here.

ZipRecruiter (NYS:ZIP) — mrkt cap 1.4B; Price $14.1; EV/EBITDA 14.7                            

PASS. ZipRecuiter is one of the largest online job market places in the U.S. with the other two major competitors being LinkedIn and Indeed. We have firsthand experience with the product from previous roles on the employer side and found it to be highly efficient. The company greatly benefited from a hot labor market marked by substantial turnover. The majority of their revenues come from a solid SAAS business model, with over 100k employers on the platform paying on average ~1.7k quarterly. We hold a positive view of the business model and the value proposition of the product. Given the negative macro momentum surrounding job openings and an overall slowing labor market, we think the likelihood that this stock goes on sale is moderately high and it will remain on our watchlist.

Cullen/Frost Bankers (NYSE:CFR) — mrkt cap $6.7B; Price $105.7; P/TBV 2.4

PASS. Cullen/Frost is a regional bank HQ’d in San Antonio, TX. We maintain a strong bias against traditional banking exposure for the foreseeable future. The bond market, both public and private, has been a formidable competitor in taking loan-share and since the GFC, increased bank regulation has been onerous. Regionals aren’t any better – what they gain in reduced regulatory burden they lose in perception. The Fed has unofficially created a two-tier banking system: large banks being TBTF and smaller banks that can fail but with uninsured deposits ‘most likely’ safe. Then there are shorter-term issues such as office exposure and duration losses on HTM assets. Our current hurdle for gaining interest in a bank is when it is trading close to its book value and has an ROE set to improve (unlike the vast majority of sectors, these metrics are relevant for banks because most assets and liabilities are MTM). Although CFR has a history of conservative underwriting and solid management a P/TBV of 2.4 doesn’t meet our very high hurdle.

Miller Industries (NAS:MLR) — mrkt cap $450mm; Price $39.47; EV/EBITDA 7

MORE RESEARCH NEEDED. MRL is one of the largest manufacturers of tow trucks in the world. Over the last 23 years, it has grown revenues from $20mm to over $1B. MRL benefits from the average automobile age being significantly older and more prone to breaking down, construction (IIJA and IRA) causing more accidents, and construction equipment that needs towing. Due to this change in demand, MLR has seen gross margin expansion and looks cheap on a TTM basis. However, we believe that supply will inevitably catch up and margins will return to a normal baseline level. We will revisit the name in more depth if the share price comes down.

Planet Labs (NYSE:PL) — mrkt cap $647mm; Price $2.25; EV/EBITDA NA

PASS. The ‘Bloomberg Terminal’ for earth data. PL has one of the more diverse revenue streams both geographically and by customer type (commercial, government etc). It also boasts high revenue retention rates in excess of 100%. PL has no debt and 300mm in cash and short-term investments, giving it a 4-year runway at its current burn rate.  PL has gross margins of about 50% however does not have the revenues needed to be profitable due to about $250mm in fixed costs. Without massive cost cutting, profitability won’t be reached until PL at least doubles its revenues. PL grew topline 20% yoy and is modifying its go to market strategy to go after both low-touch customers and high touch customers such as government agencies.