The following is an excerpt from the Hidden Value Stocks Q2 2020 Issue, discussing Christian Olesen’s stock pick Cambria Automobiles, Logos LP’s stake in Gan PLC and Stanphyl Capital’s deep value positions.
Welcome to the June 2020 (Q2) issue of Hidden Value Stocks.
In this issue, we have our usual two interviews as well as a selection of ideas from funds previously profiled.
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Blue Tower Asset Management features as our first interview.
This is the second time Blue Tower has spoken with Hidden Value Stocks. In the first interview, in 2016, Blue Tower’s portfolio manager Andrew Oskoui picked out Nicholas Financial, Inc and EZCORP Inc as his favorite stocks.
In our latest interview, we asked him how these ideas have worked out over the past three-and-a-half years. We also discussed two new ideas for the fund as well as some of Blue Tower’s other international holdings.
Our second interview is with Ben Claremon from Cove Street Capital. Cove Street was founded in 2011 by Jeff Bronchick. Its main focus is small-cap U.S. equities.
In our interview, Ben explains how the firm uses investing frameworks of Benjamin Graham and Warren Buffett to find ideas, and the three pillars, Business, Value and People, that link each holding.
In the interview, we cover several Cove Street’s best investment ideas, including one large-cap and two undervalued small caps.
At the end of this issue, there is also a table showcasing all of the stocks previously profiled in issues of Hidden Value Stocks.
Rupert Hargreaves & Jacob Wolinsky.
Updates From Previous Issues
In the September 2019 issue of Hidden Value Stocks, Christian Olesen, founder of the Olesen Value Fund, picked out London-listed Cambria Automobiles (LON:CAMB) and U.S. enterprise Laa Co Ltd A California L.P. as his two undervalued small-cap picks.
According to the fund manager’s April investor update, he decided to sell the LAACO (LAACZ) holding in April to free up cash for another investment. Writing in the update, Christian stated that while “I think the stock is undervalued, there do not appear to be any catalysts that are likely to drive the stock price significantly higher.”
With this being the case, he went on to add, “it made sense to re-allocate capital from this investment.”
In his May investor update, Christian also provided an update on Cambria Automobiles' recent trading performance:
“The stock price of Cambria Automobiles, the U.K. car dealership group, rose strongly in May, which offset generally weak returns in the rest of the portfolio. The company released an update to investors during the month and signalled that its cash burn during the coronavirus lockdown was better than expected.
Led by a founder and CEO who owns 40% of the company, the company has an excellent long-term track record of profitability, growth and shareholder-friendly actions. Moreover, I think the company’s earnings will do relatively well over the next few years, as its new dealerships’ profitability should improve substantially as they mature.
The stock trades at only approx. 5x earnings (before the impact on earnings of the pandemic), even after the recent rebound in the stock price.”
Logos LP Buys Gan PLC
Logos LP was one of the funds profiled in the September 2017 issue of Hidden Value Stocks. According to the firm’s latest investor update, Logos’ flagship fund ended May with a return of just under 24% for the month.
For the year to the end of May, Logos had returned 29.3% for its investors and 50% over the previous 12 months. Since inception, March 2014, Logos has compounded investors’ capital at a CAGR of 19.5%.
The firm has been buying software names recently that “generate impressive amounts of recurring revenue,” and solve “real problems for customers.”
In a recent investor update, Logos highlighted Gan Plc as an example:
“Gan PLC (GAN): Gan provides a SaaS solution to U.S. casinos and online sports betting operations, which is currently a greenfield space as the US is only starting to open up to online sports betting and iGaming nationally.
Their end-to-end solution is focused on everything from account management to payment processing to setting up betting lines. The company is growing at a pretty rapid clip (+145% YoY revenue growth in 2019) and has a high single digit take rate on every dollar won by casino operators. Gross margins are around 64% and we expect this to shoot up as revenue starts to materially increase into 2025. It is really one of the only providers in software and development services, and also has a U.S. patent for their U.S. casino management platform.”
Stanphyl Capital's Deep Value Positions
Mark Spiegel’s Stanphyl Capital was one of the first funds profiled in Hidden Value Stocks back in March 2016. Mark picked out four deep value stocks for the issue: MGC Diagnostics Corporation, Lantronix, Echelon and Broadwind Energy Inc. Three of these four holdings subsequently went on to double in value.
In the second half of last year, Mark wrote that he’d acquired several new deep value positions in one of his regular investor letters. The fund manager provided some updates on these positions in his January letter to investors:
Aviat Networks, Inc. (AVNW)
“Valuation-wise, if we assume $14 million in FY 2020 adjusted EBITDA (first-half guidance is $7.5 million) and remove $1.7 million in stock comp and $6.1 million in Capex we get $6.2 million in earnings multiplied by, say, 14 = approximately $87 million; if we then add in approximately $32 million of expected year-end net cash we get $119 million, and if we divide that by 5.4 million shares we get an earnings-based valuation of around $22/share.”
Communications Systems, Inc. (JCS)
“JCS is now making an annualized .68/share (based on the first nine months of the year, so as not to overemphasize one great quarter), however we should tax- adjust that to .48 as it’s been minimizing taxes by utilizing its NOL carryforwards. A 14x multiple on that plus the cash plus a $4.5 million valuation on $15 million of NOLs would value the stock at around $9.40/share. Additionally, the company is in contract to sell its headquarters building for $10 million; if that closes it generates $1/share in additional cash, making the stock worth $10.40.”
Westell Technologies Inc. (WSTL)
“We continue to own Westell because it’s a $30 million/year, 38% gross margin business with over $1.25/share in cash that currently sells for a significantly negative enterprise value. Assuming 15.8 million shares, an acquisition price (by a costeliminating strategic buyer) of just 5x revenue would (on an EV basis) be around $2.20/share.”