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Hedge Fund With Many Multi-baggers Sees 230% Upside For This Micro Cap With Tons Of NOLs

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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