Hedge Fund With Many Multi-baggers Sees 230% Upside For This Micro Cap With Tons Of NOLsJacob Wolinsky
Excerpt from the Stanphyl Capital letter to investors for the month of September 2018 discussing their long position in one micro-cap play. Stanphyl was profiled in the second edition of HVS and has had some of the best picks among all the funds (including Stanphyl with several 100%+ returns) we have profiled with 200%+ returns on some pitches.
At Stanphyl's price target the micro-cap below would have a 229% return from today's prices.
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XXXXXXXXXXXX (ticker: XXXX), a designer and manufacturer of XXXXXX for telecom companies, reported in August a solid Q4 for FY 2018, with revenue up XX.8% year-over-year (although they’d guided for even more, but based on the positive stock reaction no one believed them) and a meaningful improvement in earnings and EBITDA ex-restructuring costs. Most importantly, the company reiterated its guidance for FY 2019 (which began in July), projecting approximately $2XXM of revenue (approximately 7% better than 2018) and non-GAAP EBITDA of at least $1X million. Because of its approximately $3XX million of U.S. NOLs, $1X million of U.S. tax credit carryforwards, $2XX million in foreign NOLs and $X million of foreign tax credit carryforwards, XXX’s income will be tax-free for many years; thus, GAAP EBITDA less capex essentially equals “earnings.” So if the non-GAAP number will be $1X million and we take out $X.X million in stock comp and $X million in capex we get $5.X million in earnings multiplied by, say, 16 = approximately $85 million; if we then add in the $XX million of net cash and divide by 5.XX million shares we get $X1/share. However, the real play here is as a buyout candidate; XXX’s closest pure-play competitor,XXXXXXX sells at an EV of 0.7x revenue, which for XXX would be around $X00 million. If we value XX’s massive NOLs at a modest $1X million (due to change-in-control diminution in their value), the company would be worth $2X0 million divided by X.7 million fully-diluted shares = $3X/share.
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