Stock Sonar

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.

GCC (BMV:GCC) — mrkt cap $3.2B; Price $10.00; trailing P/E 10

PASS. GCC manufactures cement and concrete and although it is headquartered in Mexico, about 80% of earnings are derived from US plants. Cement capacity has been constrained in the US due to regulations limiting CO2 plant emissions. With onshoring trends and the Infrastructure bill, Inflation Reduction act, and CHIPS act in the pipeline, cement and concrete will continue to see increased demand. Cement imports are exempt from Build America Buy America requirements, however, cement plants in landlocked areas will benefit from increased demand. Although GCC is trading at around 10x earnings, they are entering into a heavy capex cycle and are also looking at making a large acquisition. GCC has been contemplating an IPO in the US and it’s likely the acquisition will be done for optical reasons. We are passing for now.

Sinclair inc (NAS:SBGI) — mrkt cap $806mm; Price $12.74; trailing P/E 5.4

PASS. Sinclair Broadcasting is the second largest television station operator in the U.S. They have recently reorganized and are splitting the company into growth assets (Sinclair Ventures) and non-growth assets (Sinclair Broadcast). The non-growth asset is the legacy broadcasting business which is in secular decline. The growth assets will be a separately siloed private investment fund that will buy controlling interests in media related assets. In sum, the firm is transitioning from a media firm to more of an investment firm with owned content. It is most likely losing its legacy media-focused investor base, but with a sustainable yield of ~8% it should attract enough yield seekers to keep the stock buoyed at current levels. Good news for investors is that with an upcoming election cycle, SGBI will likely see a large boost to earnings, the bad news is there is litigation overhang with an unconsolidated subsidiary, Diamond Sports, suing for 1.5B for what it deems to be fraudulent transfers.

EZCORP inc (NAS:EZPW) — mrkt cap $477mm; Price $8.66; trailing P/E 23

PASS. EZCORP is an American pawn shop operator that runs ~1200 pawn shops under different brands across the U.S. and Latin America. Google trends shows search results for “Pawn shop near me” have grown rapidly in the last six months. The business is a beneficiary of costly credit markets and the post-COVID spending spree on product markets. Unfortunately, upon further investigation, the controlling shareholder (owns 100% voting rights) has been using EZPW to receive large advising fees to direct poor acquisitions. Not surprising to see high levels of executive turnover. The valuation is attractive but this is yet another example of a company with potential that we can’t touch because management isn’t aligned with shareholders (there are hundreds if not thousands of these examples).

Cato Corp (NYSE:CATO) — mrkt cap $157mm; Price $7.75; trailing P/E NA

STARTER POSITION INITIATED. It is becoming clearer to us that the U.S. specialty retail sector is turning into a disaster zone, hence our recent focus here. The market seems to have very little idea about which companies will emerge with their health intact and which ones will fade away. Some businesses that maintain loyal followings and consistently impress customers make our prognostications easier. However, others, like Cato, which appears to make minimal adjustments to its strategy, pose a greater challenge. Cato operates in around 1270 strip-mall locations and specializes in selling fashionable, value-oriented clothing for plus-sized women. There appears to be adequate shareholder alignment and the valuation is at rock bottom. It is currently trading close to its cash value and well below its liquidation value. Our belief is that Cato will find ways to eke out a profit in the short term, and there exists a reasonable probability that it will regain its health in the long term. Although Cato will likely never be a core position for us due to our lack of conviction in the company’s ability to strengthen, its valuation is low enough to justify a small position in our portfolio.

Badger Infrastructure (TSX:BDGI) — mrkt cap $1.16B; Price $33.79; trailing P/E 38

PASS. Badger Infrastructure is the only vertically integrated hydrovac service provider in North America. Hydrovac trucks are used when maintenance work on an existing infrastructure is needed and care needs to be taken to not damage pipes or cabling. Hydrovacs are more efficient and less damaging than alternatives such as excavation equipment or human labor. Due to the delicate nature of the job, BDGI doesn’t compete on price, and instead the determining factor are safety and reliability.  Although there are significant tailwinds from the infrastructure bill such as the replacement of lead pipes and broadband installation, BDGI is trading at almost 40x plus earnings and heading into a heavy capex cycle. We will look for a drawback to initiate a position.

Crocs, Inc (NAS:CROX) — mrkt cap $6.07B; Price $98.47; trailing P/E 9.2

PASS. Crocs popularity has experienced a significant surge in recent years, attributed to their innovative products and a skilled marketing team. There do appear to be underlying structural reasons driving Crocs popularity, particularly in how their products empower greater self-expression. They trade at around 11x , and they seem to be actively working on expanding their product range through acquisitions. In the past management has made misteps—allowing too much variety that no longer had the Crocs look and feel. Management’s answer to diversifying products without straining the spectrum of their Crocs line is to find acquisition candidates – their very large acquisition of HeyDudes for 2.5B in 2021 speaks to this. We have a strong bias against managmenet teams that have an acquisition strategy in place for the sake of diversifying. The core Crocs brand just may be strong enough to carry this company through to ever-higher multiples but we will stay on the sidelines for now.

Quantum-Si Inc (NAS:QSI) — mrkt cap $280mm; Price $2.00; trailing P/E NA

SPECULATIVE POSITION INITIATED. We have a strong bias against biotechs as the technology depends on unpredictable variables, and these companies often lack fundamentals . However, this company appeared on our net-net screen and may hold some promise. The company is currently trading at around its cash value and has no debt. That being said, they are burning approximately $120 million in cash annually. Their IP promises to deliver the latest technology in democratizing protein sequencing, for which no reliable platform exists. Mass spectrometers, which are used to ID proteins based on protein fragments and determine their abundances, typically come with a price tag of around $500k to $1 million. If QSI’s technology proves successful, their sequencers, priced at $70k, could revolutionize next-gen sequencing in academic labs everywhere. The company has already received several orders in its pipeline and is actively working to optimize the product for a wide variety of customer sequencing methods. We have a conversation scheduled next week with two industry insiders: one who works with mass spectrometers and another who oversees several labs specializing in protein sequencing. If they view the technology as viable, we are considering allocating 1% of our portfolio to this company. The risk is high but the valuation is low enough where upside could be large.

GoPro (NAS:GPRO) — mrkt cap $582mm; Price $3.78; trailing P/E NA

PASS. GoPro sells miniature cameras for people to capture their adventure lifestyle. They have had surprising staying power here which has persisted over a decade with gross margins still exceeding 30%. GPRO looked interesting as they were bundling their video editing software offerings with their hardware. Essentially, they would subsidize the cost of the software for the first couple of years by giving a 100+ dollar discount to customers if they signed up for the app- which then costs about $50/year afterwards. The strategy was to get customers to use their software offerings enough to not churn when they had to begin paying for it. GPRO has not had much success as their software offerings are still far inferior to that of competitors. They have also seen a unit decline in sales from 4.3mm per year from 2017 to 2019 to about 3mm/year since. This is likely due to the steady technological progression of smartphones and the proliferation of drones. A company transitioning from hardware to software offerings is as difficult as one going from software to hardware.

Quest Resource Holding (NAS:QRHC) — mrkt cap $147mm; Price $7.46; trailing P/E NA

MORE RESEARCH NEEDED. We first examined this company in 2021 when it exhibited slight profitability, and its strategy of serial acquisitions for growth didn’t appear to offer compelling scale economics. The company handles the disposal of around 100 different types of waste streams for businesses across the United States and Canada. Their services are geared towards assisting companies with large brick and mortar footprints in effectively managing their waste, with a commitment to enhancing landfill diversion through composting and recycling. The company’s approach to growth is a simple algorithm: roll-up waste haulers where they need a regional presence, centralize costs and increase client penetration. Although their debt burden is substantial, the management has been gradually reducing this debt over time. The company’s scaling trajectory has been better than our initial assessment, warranting a renewed evaluation.

Remitly Global (NAS:RELY) — mrkt cap $4.08B; Price $22.47; trailing P/E NA

HOLD. Remitly is quickly becoming the leader in digital remittance payments for migrants. We first covered RELY in stock sonar on 7/26, where we initiated a position and have since increased it. The stock surged by 30% following Q2 earnings reported on 8/2. Our conviction in holding this stock for the long term is growing. They currently hold a 2% penetration in a 1.6T remittance market. The drivers for increased penetration are clear to us: weak competition from non-digitally native players (Western Union & MoneyGram) and the ongoing shift in remittance trends from cash to digital. Additionally, the remittance market as a whole is expected to continue its multi-decade ~5% growth due to the aging demographics of developed economies. Finding names with the potential for 5+ year holding periods is rare for us, but RELY is likely one of them. We are in the final stages of our research, and IR/Management is assisting us in addressing the list of questions we have sent their way.

Great Lakes Dredge & Dock (NAS:GLDD) — mrkt cap $570mm; Price $8.52; trailing P/E NA

PASS. GLDD is one of the nation’s largest dredgers. To put it simply, a dredger primarily restores harbors, coastlines etc by moving sand and rock around. GLDD benefits from higher margins on large projects that are deeper water as that requires larger ships that they have limited competition on. Closer shoreline projects have stiffer competition as the equipment needed is less rigorous. Dredging should benefit from increased funding from the IIJA, of which GLDD should be a direct beneficiary. Offshore wind generation should also be another avenue of growth as after the first rock layer is poured it is now considered a domestic port and foreign sea vessels are not permitted to work there (Jones Act), leaving only GLDD and a couple other companies able to do so. The Jones act bans foreign carriers from domestic water routes. GLDD is still too expensive trading around 10x in an elevated environment. GLDD is also entering a large capex cycle to replace some of their ships.

Euronet Worldwide (NAS:EEFT) — mrkt cap $4.28B; Price $86.1; trailing P/E 16.7

MORE RESEARCH NEEDED. The stock experienced a 25% decline following the announcement of negative EBITDA guidance. Euronet’s operations are categorized into three reportable segments: the Electronic Funds Transfer segment (with an international ATM network of approximately 50,000), the ePay segment, and the Money Transfer segment (focused on remittances). The first segment boasts a widespread presence of over 600,000 points of sale and 47,000 ATMs operating on a global scale. This segment oversees all ATM-related services and contributed 28% of the company’s revenues by 2022. Although each individual segment exhibits promising growth dynamics we are grappling with identifying synergies among them. The valuation as a whole seems attractive, and we are taking a closer examination.

Yellow Corporation (NAS:YELL) — mrkt cap $175mm; Price $3.4; trailing P/E NA

EXITED. We closed out of our tactical trade and the position is up 243% since our post in July. Many think Yellow was getting short squeezed but to us the price more accurately reflects the value of net assets and the BK was the catalyst for revaluation. Doesn’t hurt when a hedge fund (MFN Partners) buys up 42% of the outstanding shares in a week. BK plays are not normally in our playbook but this situation was unique. Almost always in a BK, the equity holders are wiped out (like they basically were for Yellow in 2009) but our estimates of the recovery value of the net assets (12,000 tractors, 33,000 trailers and 167 terminals) along with the UST owning 30% of the common gave us enough confidence that equity holders would get a fair shake to warrant 1% of our portfolio in the trade.

Argan (NYSE:AGX) — mrkt cap $512mm; Price $38.2; trailing P/E 14.6

MORE RESEARCH NEEDED. Argan has roughly half its market cap in cash and the majority of revenues come from converting coal power plants into natural gas ones. Coal fired generation makes up about 20% of energy generation although it is forecasted to go to 5% by 2030. Natural gas fired generation fuels about 35% of the energy needs of the USA and is set to decline about 1% per year as energy from renewable becomes more widespread. AGX could see an inflection from the retiring of coal plants over the next decade however being that a large part of the value of is in cash, capital allocation is paramount. We will be talking with management next week to discuss this further.

Northwest Pipe (NAS:NWPX) — mrkt cap $337mm; Price $32.57; trailing P/E 40

MORE RESEARCH NEEDED. NWPX manufactures steel and concrete pipes. It has 55% market share in steel pipes and about 4% market share in the concrete pipe industry. NWPX is a direct beneficiary of the IIJA that is almost tripling the funding for water infrastructure beginning with removal of lead pipes. NWPX’s backlog sits at a record 370mm, an increase of 30% from 2022. However despite this tailwind, gross margins have been anemic at around 12%. More work needs to be done to determine if this is a structural or temporary condition. Fun fact of the day is that the average person in the US uses about 100 gallons per day!

Western Union (NYS:WU) — mrkt cap $337mm; Price $12.18; trailing P/E 6.2

EXIT. We initiated a starter position on 4/19/2023 at $11.00 a share. After conducting a comprehensive analysis, we’ve determined that forecasting Western Union’s market share in the medium to long term is uncertain. Despite retaining some cost advantages, digital-native rivals have effectively duplicated Western Union’s traditional strength – its widespread retail presence. While Western Union still holds a significant position in cash-to-cash transfers, this market is slowly shrinking. Consequently, we have exited our starter position and believe the stock is accurately priced.

Remitly Global (NAS:RELY) — mrkt cap $3.48B; Price $19.57; trailing P/E NA

STARTER POSITION INITIATED. Remitly is quickly becoming the gold standard in remittance payments for immigrants everywhere. The company is rapidly gaining market share from its competitors (most notably Western Union) and continues to grow in popularity. Remitly is close to reaching breakeven on its cash burn, and there are very tangible paths to achieving economies of scale as the company leverages its increased remittance volume to renegotiate variable cost structures with counterparties. The company is well-run with a clear focus on “transforming the lives of immigrants by providing the most trusted financial products and services on the planet.” These are more than just words, and the company consistently executes in line with this vision. They currently hold close to 2% market share, and it is becoming evident that their market share will increase further given the market opportunities and competitors. Paying about 4x sales for a company with attractive economies of scale and a trajectory towards rapidly expanding its market is appealing to us. We have initiated a starter position and are continuing our due diligence.

AZZ Inc (NYSE:AZZ) — mrkt cap $1.1B; Price $8.26; trailing P/E 11

PASS. AZZ is the largest galvanized steel provider in the USA with 30% market share. Galvanized steel is steel with a protective Zinc coating preventing rusting and corrosion. Typically, a finished product such as a guard rail is dipped into a hot batch of molten Zinc, upon which it will have a zinc finish. AZZ has almost 50 plants providing this service along with its other segment specializing in metal paint coating. Given the rise in infrastructure spending, AZZ will see tailwinds. Steel demand is forecast to rise about 10% which should directly benefit AZZ. They have footholds in industries such as transmission lines, towers, bridge rails etc. At 11x PE, it is trading around fair value and we will look to initiate a position given a pull back.

LivePerson (NAS:LPSN) — mrkt cap $382mm; Price $8.26; trailing P/E NA

PASS. LPSN caught our eye as it can stand to benefit from the convergence of LLM (large language models) and customer service. Customer service is a perfect use case for LLMs as it enables a better user experience coupled with cheaper costs. LPSN is a customer service platform that enables businesses to interact with their customers. It has large amounts of proprietary data that it can use to train LLMs. Although a large number of businesses will in-house their customer service, we believe the vast majority of small businesses will need to outsource this competency. Currently, LPSN is a show-me story as there is a significant amount of execution risk and historically LPSN has not been a good performer. With the long-time CEO stepping down, its fortunes may change with new management.