Hidden Value Stocks New Issue: Top Emerging Hedge Fund Updates

An excerpt from the Hidden Value Stocks December 2018 Issue, updates from Livermore Partners, Stanphyl Capital and Choice Equities. Readers can see an in-depth excerpt below.

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Update from Livermore Partners on Jadestone Energy:

Livermore Partners picked Jadestone energy as one of its hidden value ideas in the December 2016 issue of Hidden Value Stocks. David Neuhauser, Livermore’s founder, and portfolio manager explained in his third- quarter letter to investors why he continues to believe this company is undervalued:

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"Jadestone Energy (JSE:LN), continued with very strong returns in the quarter (over 10%) and now year (50%). Its new to London given our IPO and the stock is gaining some justified attention. With its Montara acquisition from Thailand National Oil Company (NOC), PTT now officially closed, we should begin to witness strong financial performance and hopefully even higher prices. The company has 50% of current production hedged, very strong cash flows (2X 2019 est.), $100 million in annual FCF, and solid management (Ex-Talisman Energy). Our favorite International producer given its potential to scale to $1 billion market cap and very attractive valuation."

Read the full Hidden Value Stocks  latest issue and all the prior ones right here

A new idea from Stanphyl Capital:

The second ever issue of Hidden Value Stocks featured Mark B. Spiegel the managing member of Stanphyl Capital. Spiegel highlighted his four favorite small caps in the issue all of which went on to produce huge returns for investors. Each of these stocks yielded an average gain of 119% over the next 12 months. Spiegel’s latest idea is Aviat Networks, Inc.

From Stanphyl’s November 2018 letter to investors:

"We continue to own Aviat Networks, Inc. (AVNW), a designer and manufacturer of point-to-point microwave systems for telecom companies, which in November reported a mediocre Q1 for FY 2019, with revenue up   7.7% year-over-year but a slight increase in net loss (from .12/share to .14/share).

 Nevertheless, the company (mostly) reiterated its guidance for FY 2019, projecting approximately $255 million of revenue (a $5 million cut from previous guidance and approximately 5% better than 2018) and non-GAAP EBITDA of at least $12.5 million (a $500,000 cut from previous guidance).

 Because of its approximately $332 million of U.S. NOLs, $10 million of U.S. tax credit carryforwards, $214 million in foreign NOLs and $4 million of foreign tax credit carryforwards, Aviat’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 $12.5 million and we take out $1.7 million in stock comp and $6 million in capex we get $4.8 million in earnings multiplied by, say, 16 = approximately $77 million; if we then add in at least $30 million of expected year-end net cash and divide by 5.42 million shares we get just under $20/share.

However, the real play here is as a buyout candidate; Aviat’s closest pure-play competitor, Ceragon (CRNT) sells at an EV of approximately 0.85x revenue, which for AVNW (based on 2019 guidance) would be around $217 million. If we value Aviat’s massive NOLs at a modest $10 million (due to change-in-control diminution in their value), the company would be worth $227 million divided by 5.43 million shares = around $42/share."

Hidden Value Stocks  - Update from Choice Equities on BlueLinx Holdings:

Choice Equities’ Mitchell Scott picked BlueLinx Holdings Inc. as one of two ideas in the Q3 issue of Hidden Value Stocks. Since the issue was published, the stock has underperformed the market, but Choice is holding on. From the firm’s Q3 letter to investors:

"Early in the quarter, we completed the sales of our positions in building products companies GMS and BMCH which we began exiting earlier this spring. With rates likely heading higher and investors to soon follow the playbook to sell all building products companies, both were sold to lessen our exposure in this area and make room for what we believe are higher returning investments. Though we have lightened up in this area, we still own two building products companies in Bluelinx (BXC) and Beacon Roofing (BECN). We  are holding on to  them, despite the market’s temporary concerns, because we believe they represent highly compelling values."

The letter also profiled a new idea added to the fund in the third quarter, Destination Maternity (DEST):

"There is much work to do, but there is much to build on. Despite the recent issues, the company maintains an impressive customer list with a market leading share in a category known for customer loyalty. The company has a store base of ~1,000, comprised of ~400 company-operated locations and ~600 leased locations inside department stores. The stores operate under the three banners: Motherhood Maternity, Pea in the Pod and Destination Maternity. Together, the company earns an impressive 50%+ gross margin but has an SGA margin that is worst in its class. Combined with a store footprint where ~50% of the stores will be up for lease by the end of 2019, it seems there is an opportunity for addition by subtraction for the company. Additionally, the company has been late to the eCommerce game. But recent initiatives there auger well there too. The online channel has grown from practically zero a year ago to nearly a quarter of the sales mix today and is still growing at a high teens rate. Our conversations with the new CEO point to a team that is intent on furthering these initiatives and cutting costs to create a leaner and more profitable company.

Recently changing hands at a little north of $4 per share today, the company is trading at 5x FY2018 EBITDA  and .4x sales versus peers who generally trade around 6-8x and 1–1.5x TEV / sales. The activist case suggests improved performance could again position the company to soon earn $2 as they nearly did in 2013. It is  unclear if this outlook may prove optimistic. But even if new management is able to get halfway there towards the goal of $2 of EPS, it seems shares still represent a compelling bargain."

See the full excerpt below:

Read the full issue and all the prior ones right here



About the Author

Jacob Wolinsky
Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Prior to ValueWalk, Jacob was VP of Business Development at SumZero. Prior to SumZero, Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver