Stock Sonar

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.

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.

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.

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.

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.