Stock Sonar

Clearfield Inc (NAS:CLFD) — mrkt cap $409mm; Price $26.80; EV/EBITDA 5.6

MORE RESEARCH NEEDED. CLFD manufactures fiber optic management, protection, and delivery products. CLFD has targeted rural fiber optic developers who are poised to take advantage of the $42B of BEAD funding from the IIJA bill. Because of this, penetration of fiber optic to US households is set to increase to 85% by 2028 vs 50% today. Although industry tailwinds are there, and CLFD is optically cheap (CLFD has more than 100mm in cash with no debt due to a timely secondary offering when its share price was $100), more work needs to be done to assess CLFD’s advantages over peers. Otherwise, revenue growth will occur without corresponding FCF conversion.

Red Robin (NAS:RRGB) — mrkt cap $141mm; Price $9.15; EV/EBITDA 4

PASS. Red Robin is a U.S. based casual diner with roughly 500 restaurants located predominantly on the west coast. We spent an hour with the CFO discussing the nuances of their “back to roots” strategy. The new management team is doing away with Virtual Brands, discounting, and lack of investment. They believe past strategies have moved Red Robin away from what its brand stands for: Americana, fun, and family. In addition, almost all marketing spend will now be digital. The company is guiding for 75mm EBITDA in 2023 with about ~40mm of that going to capital expenditure and ~25mm going towards interest payments. This doesn’t leave a lot of FCF leftover however if the company can succeed in stabilizing and growing topline there is ample operational leverage in the model and the re-rating would be significant. We believe management is taking all the right steps but given the intensity of the competition and the pressure the category is under we will pass for now until there is more progress.

Cato Corp (NYSE:CATO) — mrkt cap $140mm; Price $6.83; EV/EBITDA NA

EXIT. We have exited this position down 9%. Cato operates in around 1270 strip-mall locations and specializes in selling fashionable, value-oriented clothing for plus-sized women. Although the company profitability is slightly worse than we currently believed, it is trading close to its cash value and given its liquidity position it will be able to support its 10% dividend for quite some time- more than enough for a good retailer to return to profitability. The primary reason we are exiting is that Cato did not meet the standard for escalation to a core position and we are seeing enough opportunities where having extra portfolio liquidity is helpful.

Advanced Emission Solutions (NAS:ADES) — mrkt cap 70mm; Price $2.14; EV/EBITDA NA

SPECULATIVE POSITION INITIATED. This is a highly speculative position with a likelihood that it can go to zero; however, there is also a chance that it can be a ten bagger (10x return). ADES is on its way to being a pure play producer of a specialized filter (think like a Brita filter) that will be in high demand once a potential landmark EPA regulation is passed. To speak technically, ADES’s legacy business is manufacturing powdered activated carbon (PAC) which is used to capture air contaminants from coal fired generators. ADES is transitioning from PAC to provide granulate activated carbon (GAC) instead. Why? To be able to meet the sea change in demand caused by the proposed EPA ruling on per-and polyfluoroalkyl substances (PFAS). These forever chemicals are highly carcinogenic and were manufactured extensively by companies such as 3M as they had desirable manufacturing qualities. The EPA will be proposing the first ever limit, potentially set to 4 ppt (parts per trillion) for water utilities. The most cost-effective way for utilities to treat water is through GAC. If this happens, ADES will be ideally positioned to take full advantage (see more on our portfolio positionings below).

Enphase (NAS:ENPH) — mrkt cap 12.4B; Price $91.39; EV/EBITDA 14

STARTER POSITION INITIATED. ENPH is a provider of solar micro-inverters and batteries. ENPH has chosen a different approach than other solar providers by opting for a more decentralized layout which ensures higher reliability, safety, and convenience. Along with their products being easy to use for the end consumer, installers also view them as the most convenient and safest system along with providing the highest customer service. This is exhibited by their high NPS scores and the longest warranties in the industry. Although the solar industry has hit a temporary lull due to its discretionary nature and unfavorable regulation in the USA, we believe the industry has secular drivers and ENPH will be able to capitalize on this.

Stagwell Inc (NAS:STGW) — mrkt cap $1.3B; Price $4.9; EV/EBITDA 8.2

EXIT. We discussed STGW on our 9/6 Stock Sonar and initiated a position. Stagwell is a new-age marketing agency that serves blue chip companies and has grown through acquisitions. Although STGW fits nicely with the media fragmentation trend, we had trouble digesting the company’s complex accounting. Serial acquirers and companies that go public via reverse merger can tempt management to engage in a degree of accounting creativity so caution is paramount. As their previous auditor stated in the 10k “the volume of contracts and the diversity…introduces significant complexity in assessing the accounting.” To be clear we are not disapproving of their accounting practices, just that it falls into the “too hard” bucket and even after several discussions with IR we are unable to reach a high level of comfort. We have divested the name and were down ~12% since purchase.

CommScope (NAS:COMM) — mrkt cap 521mm; Price $2.46; EV/EBITDA 8.5

SPECULATIVE POSITION INITIATED. COMM provides network infrastructure solutions from broadband to enterprise networks. It has roughly 9B in debt making it a highly levered play on the broadband industry. The 9B in debt was reached through a series of botched acquisitions and operational mishaps, with current CEO Treadway brought in to right the ship. COMM is currently FCF neutral however it has debt maturing in 2025. COMM’s debt load would likely be an insurmountable task however the BEAD program (complements of the Infrastructure Act) is bringing in roughly $43B in subsidies to run broadband to rural areas. COMM will benefit greatly from this and coupled with the large cost savings the CEO has implemented, COMM might be able to pay down debt levels and have another lease on life.

Hooker Furnishings (NAS:HOFT) — mrkt cap 183mm; Price $17.21; EV/EBITDA 7.0

PASS. We are passing on Hooker Furniture but we will likely revisit in the near term. Hooker Furniture is a well-known furniture company that manufactures several brands and sells furniture primarily to residential and hospitality segments. The hundred-year-old company owns the well-known Hooker brand and has a reputation for quality. Few businesses have been hit as hard with the slowdown in housing. The company is currently cash flow positive given it is selling through built up inventory, however we would like to see the company cut its dividend soon to improve its liquidity position. This has a promising setup that we look for: a good company with cyclical earnings being aggressively sold off for short term reasons.

Farmer Bros (NAS:FARM) — mrkt cap 56mm; Price $2.76; EV/EBITDA NA

MORE RESEARCH NEEDED. Farmers Brothers provides a portfolio of coffee supplies for ~40,000 businesses (convenient stores and restaurants mainly). They were close to breaking debt covenants but managed to sell off their direct ship facility for ~100mm allowing them deleverage and improve liquidity. The sale also allows them to offload their low margin segment and re-focus on their core which is to be known by customers as the partner of choice for any coffee needs. If Farmers Bros is currently positioned for profitability the upside could be large but we hope to know more after discussions with management –specifically how the divesture affects, if at all, current operations along with an understanding of contract economics.

Rex American (NYSE:REX) — mrkt cap 667mm; Price $38.12; trailing P/E 25

STARTER POSITION INITIATED. REX is an ethanol producer with about 3% market share in the US. Unlike other publicly listed competitors, REX has no debt, has 300mm in cash, and has consistently been FCF positive regardless of the ethanol cycle. On top of this, REX is in a unique position to capitalize on IRA carbon credits at its One Earth facility given its geographic location and proximity to appropriate reservoirs. The potential windfall of this would be in the range of $200mm to $700mm, a significant amount compared to REX. Although more work needs to be done to narrow down this range, management has shown themselves to be good operators with prudent capital allocation.

Wise PLC (WISE:LON) — mrkt cap £7.1B; Price £6.96; trailing P/E 63.6

MORE RESEARCH NEEDED. Wise is a global cross-border money transfer company that uses a completely different business model of “matching” which enables it to significantly undercut fees on bank transfers which is the prevailing method for high value transfers. The average price of a transfer using Wise is .64% versus banks which will be 3-4%. Wise also has a large and growing deposit base –the Wise debit card is being used by the savvy traveler as a way to incur cheaper fees when using their debit card. Wise has large runway potential and we believe that it could be only in the second inning. We hope to learn more about the company’s operational nuances in the coming days/weeks.

Patria Investments (NAS:PAX) — mrkt cap 2.0B; Price $13.60; trailing P/E 17.6

MORE RESEARCH NEEDED. PAX is the largest private markets asset manager investing across LatAm. It IPO’d in 2021 with Blackstone as a backer. PAX’s LPs tend to be based in developed markets where it is increasingly being seen as the partner of choice for investments in the LatAm region. We believe that institutions and high net worth individuals will continue to increase alternative exposure and LatAm may be a sound place to invest in the coming years given geopolitical safety, improving governance, and easing monetary policy in the region. All great tailwinds for Patria. More work needs to be done to understand Patria’s institutional capabilities as operators and the investment landscape in LatAm.

Inmode (NAS:INMD) — mrkt cap 2.29B; Price $27.99; trailing P/E 12.89

PASS. To our surprise, we had over a dozen readers write to us wanting to know more about this name. At this time, we are passing. Further research and talks with insiders have led us to believe that Inmode is in danger of becoming a one-product company with the Morpheus8 as their flagship. The platform still maintains a competitive advantage in the marketing department (some clients request Morpheus8 treatments directly) and a slight technological advantage. However, the Radio Frequency Microneedling space has heated up dramatically since 2018 with strong competitors like BTL, Candela, Sciton, Alma, Cutera, Lumins, Lutronic and BENEV having competing products. Couple this exceedingly competitive industry with the fact that Inmode is now charging for demos, has poor customer service, is contending with financing costs that are likely to remain higher for longer, and it is just too many negatives for us.

Dollar General (NYSE:DG) — mrkt cap 22.7B; Price $103.37; trailing P/E 10.59

PASS. After researching DG more, we are passing on it. Despite DG’s impressive operating history and unique retail positioning to low-income shoppers in rural areas, we believe their future growth trajectory is uncertain. Dollar General has fully matured its U.S. footprint having the most retail locations out of any retailer at ~19,000 stores. Growth has come from an increase in store count and SSS. We believe these factors have headwinds as price increases have put pressure on their target demographic. DG is also making increased capital investments to operate more like a traditional grocery store which will put pressure on FCFF and place them in a more competitive market.

Babcock & WIlcox (NYSE:BW) — mrkt cap 300mm; Price $3.39; trailing P/E NA

MORE RESEARCH NEEDED. BW is an energy and environmental technology and services company. They historically produced boilers and combustion systems for plants with aftermarket parts and services making up 30% of revenues. Over the last several years BW has positioned itself to also offer renewable technologies through their Bright Loop technologies and Climate Bright platform. The strategy is to use their existing install base to upsell customers on these newer technologies. This segment has seen significant growth over the last two years, growing about 200% and becoming about 40% of revenues. BW also expects their backlog to grow more than 50% in the next six months given the deluge of projects in the pipeline. Although the growth is there, cash flows have yet to materialize. This is a highly competitive industry and if BW’s strategic positioning is the same as their legacy business, then it’s share price will continue to decline. More diligence is needed to discern if BW’s future will look different than its past.

InMode (NAS:INMD) — mrkt cap 2.33B; Price $28.09; trailing P/E 13

MORE RESEARCH NEEDED. InMode is an Israeli-based medical device company specializing in technology that utilizes radio frequencies and laser equipment to enhance aesthetics. They emphasize their niche position in the growing minimally invasive aesthetic treatment market. Despite being in a growing industry, the current valuation resembles that of a value stock, having decreased by 70% from its highs due to concerns about reduced spending on medical capital equipment. If we can gain confidence in the effectiveness and durability of their technology, we plan to conduct a more thorough analysis. We have a meeting scheduled with a cosmetic industry professional next week who has extensive experience with InMode’s Morpheus 8 and Triton treatments. We hope to learn a great deal more by then.

Amcon Distribution (NYSE:DIT) — mrkt cap $116mm; Price $191.23; trailing P/E 10

PASS. Amcon Distribution is the sixth largest convenience store distributor in the USA. What attracted us initially to Amcon was the high degree of operating efficiency it exhibited. However, Amcon is being squeezed on both sides of the ecosystem from both suppliers and customers. Distributors exhibit better profitability profiles the more fragmented its ecosystem is as no customer or supplier has significant purchasing power. Unfortunately, the convenience store landscape is heavily consolidated, and DIT primarily distributes branded products from large companies such as Hersheys. Although it is well run, its waning strategic positioning prevents us from looking much further.

Tomra Systems (TOM-OSL) ADR — mrkt cap $3.03B; Price $10.4; trailing P/E 28.8

MORE RESEARCH NEEDED. Tomra, a mid-cap Norwegian company originally founded in 1972, began its journey as a reverse vending machine company. Over the years, it has evolved into a prominent market leader, providing industrialized solutions to companies engaged in waste sorting and processing. Many Material Recovery Facilities (MRFs) responsible for waste sorting have recognized the need to upgrade their facilities to reduce contamination rates in recyclables. Despite its currently high valuation, exploring Tomra further could be worthwhile, especially if we gain confidence that cost pressures have eased. The company presents an intriguing opportunity in the realm of sorting technology and the promotion of the circular economy.

Aston Martin (LSE:AML) — mrkt cap £2.65B; Price £2.68; trailing P/E  NA

MORE RESEARCH NEEDED. Aston Martin is one of the most renowned luxury car brands and it is down almost 98% since it IPO’d in 2018. The litany of reasons for this include pulling forward demand with dealer and customer financing and manufacturing mishaps. This would have been the death knoll for most luxury brands but Aston Martin has such a unique history that there is still a possible chance for reviving and growing the brand. Billionaire Lawrence Stroll (known for being an early investor in luxury apparel such as RL and Kors) has taken the reins and has been leading the turnaround over the last couple of years. His strategy to turnaround the firm is narrowing the focus of the company (pushing back EV plans by three years and launching Aston Martin SUV), increased customer engagement through his own F1 team, and replacing management (the CEO of Aston Martin is the previous Ferrari CEO). Aston Martin trades at about 1x sales and still loses money, however if it can reach a unit volume sales that allows them to be profitable without compromising the integrity of the brand, AML can have an extremely long runway. We will continue our research here.

Skywater (NAS:SKYT) — mrkt cap $265mm; Price $5.69; trailing P/E NA

MORE RESEARCH NEEDED. SKYT is a US-based specialized foundry in the semiconductor space. Skywater is aiming to be the foundry of choice for smaller companies looking to design and manufacture custom chips. These chips have smaller TAMs and will not draw competition from other large foundry players such as TSMC whose facilities are built for long volume runs. SKYT offers both their technological services (as a solution) to help design the chip and their manufacturing to clients. The customization of chips is a trend we believe will continue driven by niche applications in the IOT industry. SKYT is also poised to benefit from the CHIPS Act as it is a domestic manufacturer of chips along with having defense exposure for their ‘rad hard’ chips. SKYT is not trading at a lofty multiple and we will be speaking with management to further assess their positioning.

ContextLogic (NAS:WISH) — mrkt cap $107mm; Price $4.5; trailing P/E  NA

PASS. Context Logic is an E-commerce platform that connects buyers to merchants that reside mainly in China. Few companies are as emblematic of the recent tech-bubble buying hysteria as WISH. The company IPO’d in December of 2020 and is down 99% since, losing roughly 18 Billion in market value. The company has no debt and is trading at an enterprise value of negative 430 million! They are burning 80-90mm of cash quarterly which gives them about 12 months of runway. The only way to extract value for shareholders is to cease business activity immediately, fire everybody then distribute cash to shareholders. This is exactly what activist investor Cannell Capital is trying to do with their recent activist letter–they have threatened the board and management with legal action if business dissolution is not imminent. If Cannell gets their wish, distributions could represent close to $20 a share versus the current market price of $4.5. We think this could be an interesting play if the cash burn was less than half of what it is currently. However, cash burn is far too great and we are happy to just be observers on this one.

Dollar General (NYSE:DG) — mrkt cap $25.2B; Price $115.41; trailing P/E 12

MORE RESEARCH NEEDED. DG is a low-cost retailer that has dropped more than 50% YTD. DG targets geographic exclusivity by operating in small rural areas that larger competitors such as Walmart do not enter. DG has recently run into supply-side issues due to recent expansion of new offerings such as popshelf and refrigerated goods, resulting in large inventories and subsequent write downs. These issues are largely self-inflicted and the core business remains strong, however management needs to demonstrate a return to core competencies before DG can become investable.

Sally Beauty Holdings (NYSE:SBH) — mrkt cap $867mm; Price $11.41; trailing P/E 14

PASS. SBH is a beauty retail store with roughly 3000 stores worldwide. SBH has seen anemic FCF growth over the last several years while competitors such as ULTA have roared ahead. SBH has recently undergone management changes and the previous CFO of Sprouts is now the current CEO. In situations like SBH in which there has been non accretive growth and a bloated cost structure, management prioritizing streamlining of costs over growth aspirations is preferable. This is currently underway with over 350 stores shuttered and 2 distribution centers closed over the last six months. SBH enjoys high gross margins (greater than 50%) given a large portion of their revenues come from both private label and exclusivity arrangements. With measured growth initiatives to refresh the brand and continued cost-cutting, SBH could become interesting. We will wait for further turnaround developments before initiating a position.

Pitney Bowes (NYSE:PBI) — mrkt cap $556mm; Price $3.16; trailing P/E NA

PASS. Pitney Bowes is the largest workshare partner of the USPS and provides tech and services to companies to send, track, and receive parcels and letters. PBI also operates an unprofitable e-commerce segment despite repeated promises from management that profits are right around the corner. Activists are calling for an ousting of the CEO and a sale of the unprofitable e-commerce segment. The optimistic case is that activists are successful, and the E-commerce segment sells for ~1 billion. Although this would see the stock pop, to invest we would have to have conviction in the staying power of the remaining underlying business which we do not have given USPS mail volumes have been on a secular decline. 

Smith & Wesson (NAS:SWBI) — mrkt cap $527mm; Price $11.41; trailing P/E 14

STARTER POSITION INITIATED. We spoke with Deana McPherson, Smith & Wesson’s long-time CFO, late last year and opted not to invest in the company. Although NICS figures (indication of demand) were high, there were bloated levels of channel inventory and the company had only spent $20mm of the planned $125mm for its large relocation from Massachusetts to Tennessee. Fast forward to today, although the stock price is higher by 30%, channel inventory is down 35% and the company is close to completion on its relocation (grand opening is Oct 7th), significantly de-risking the investment prospects. We believe in the strength of Smith & Wesson’s brand and the favorable long-term supply/demand dynamics of the gun industry. The company is trading at 14x p/e but this is off a low TTM earnings figure given the expenses related to relocation. On a normalized FCF basis, the company trades at 8x and given their shareholder friendly orientation, this is enough for us to initiate a starter position.

Broadwind (NAS:BWEN) — mrkt cap $88mm; Price $4.15; trailing P/E 22

EXIT. We recently closed out our position in BWEN for a marginal gain (we initiated a small position in our stock sonar on 7/12/2023). We were initially attracted to the name given the tailwinds of the wind industry as renewable energy funding increased gross margins (through AMP tax credits) and manufacturing efficiencies increased wind energy economics. Although gross margins have recently improved, BWEN still has another plant (it has two plants total) operating at low capacity rates given the lack of power distribution in that geographic region along with a more arduous permitting process. It will likely stay this way for the foreseeable future.  BWEN also will not benefit from BABA requirements as its competitors are other large domestic players such as Arcosa.

E-ink (TT:8069) — mrkt cap NT$196B; Price NT$172; trailing P/E 25

PASS. Along with TSMC, Taiwan is home to another monopoly: E ink. If you have ever held an e-reader or looked at digital signage, E-ink technology is behind those devices. Putting it simply, E-ink creates microfluid capsules that, whenever an electric current runs through them, can display a variety of colors. The primary advantage of E Ink over LCD displays is its minimal power consumption; e-readers can operate for nearly a month on a single charge, and some digital signages can last for years. Although the E-reader market has reached maturation, the digital signage market is inflecting, with electronic shelf labels in retailers being a primary example. Although run by a capable management team, for a larger and more mature company, E-ink is trading at a steep earnings multiple and we will wait for a better entry point.

Stagwell Inc (NAS:STGW) — mrkt cap $1.5B; Price $5.6; trailing P/E NA

STARTER POSITION INITIATED. Stagwell is a new-age marketing agency that serves blue chip companies and has grown through acquisitions. We believe media fragmentation is an underfollowed mega trend. CMOs are struggling with complexity such as where to advertise (Google, Meta, Ticktock, Amazon, OTT, Linear TV etc. ), how to best measure attribution, how to use AI to optimize ads, and how to best capture data-driven insights about customers. The legacy Big Four advertising agencies may not be fully equipped to deal with these digital challenges which creates an opportunity for STGW. Given the history of M&A in the advertising space, we would not be surprised to see STGW acquired although an EV/EBITDA at about 8x is enough to warrant a small position.

Graftech (NYSE:EAF) — mrkt cap $911mm; Price $3.50; trailing P/E NA

MORE RESEARCH NEEDED. We first wrote about passing on EAF a couple of months ago and it has fallen almost 20% since then. To summarize, EAF manufactures graphite electrodes that are used in electric arc furnaces (EAF) to produce steel. The reason for this update is that another potentially large demand driver for EAF could be EV battery anodes. Thus far, this EV graphite demand has been almost wholly met by China. However, due to subsidies and the domiciling of supply chains, EV manufacturers are looking at more domestic sources of supply. 90% of the graphite produced in China goes into EV batteries and 10% goes into electrodes; this is the exact inverse of the ratio in the USA. EAF is one of the largest domestic producers of needle coke which the primary ingredient to produce graphite and can be large beneficiary from this trend. EAF is currently dealing with a myriad of issues such as full channel inventories, recovering from a premature plant shutdown, and low electrode prices. We will be working to ascertain whether it will be a beneficiary of the EV trend and if so, it can be an opportune time to pick up some shares.

Zevia (NYSE:ZVIA) — mrkt cap $180mm; Price $2.00; trailing P/E NA

PASS. Zevia is a non-sugar beverage (from energy drinks to tea) that uses stevia as an artificial sweetener. Zevia has been around for almost 20 years and is found nationwide in mass market retailers such as Costco and Walmart. Given the new CEO’s marketing background (previously CMO of Redbull), Zevia’s strategy is oriented to breathing new life into the brand by leaning heavily into social media and other advertising mediums. Zevia has grown at modest rates (around 20%) and has recently hit supply chain snags. Zevia is not trading at a lofty multiple and is valued at around 1x sales, with about $40mm in cash and no debt. Predicting consumer tastes is extremely difficult (we passed on Celsius Holdings and it went up almost 40x since then) however that does not stop us from trying. We will continue to monitor Zevia.