Hidden Value Stocks issue for the second quarter ended June 30, 2021, featuring interviews with Arkto Capital and Old West Investment Management.
Welcome to the June 2021 (Q2) issue of Hidden Value Stocks. In this issue, we have our usual two interviews and extracts from letters of funds previously profiled.
The first section includes an update from Ben Claremon, the principal portfolio manager and research analyst at Cove Street Capital. Cove Street offers small-cap value investment strategies that capitalize on inefficiencies in public markets.
Mitchell Scott, CFA, the founder and managing partner of Choice Equities, is our second interviewee. Choice Equities’s flagship investment fund, the Choice Equities Fund, returned 29.2% on a net basis in the first quarter of 2021.
Last year, the firm’s concentrated small-cap holdings helped it achieve gains of 76.3% for the year. In our interview, Scott talks about the process that has helped Choice achieve this outstanding return and highlights his two favorite small-cap ideas on the market today.
We hope you enjoy this issue of Hidden Value Stocks, and if you have any questions or comments, please feel free to contact us at [email protected].
Rupert Hargreaves &
Updates From Previous Issues: Arkto Capital
The December 2019 issue of Hidden Value Stocks contained an interview with Peter Rabover, the founder of Arkto Capital.
Peter highlighted Research Solutions Inc (NASDAQ:RSSS) and Gaia Inc (NASDAQ:GAIA) in the interview, and since the issue was published, these stocks have gone on to return -22% and +44%, respectively.
In the year to the end of March 2021, Arkto returned 65.7%, and its portfolio returned 30.9% net of fees in the first quarter of the year alone.
One of the firm’s best-performing positions last year was Hirequest Inc (NASDAQ:HQI). Arkto still owns the position and believes it remains undervalued despite the stock’s recent performance.
Commenting on the holding in his first-quarter letter to investors, Rabover stated:
“The company, led by their impressive CEO, Richard Hermans, and their solid cash positive balance sheet, navigated the tumultuous waters of the past year with $9mm positive cash flow and, in the 1st quarter, added two “tuck in acquisitions” in the South, that increased its system-wide sales by 50%. Between the acquisitions and its own base business, the company is still operating 50% below its pre-pandemic levels while generating impressive cash flow ($4mm in 10 ex acquisitions).”
The letter went on to state:
“With the United States “open for business,” we expect the rest of the year to go gangbusters, especially with the increasing demand for labor, and expect this $250mm market cap company to potentially generate over $30mm in Free Cash Flow in the next twelve months. While we have certainly enjoyed the 200%+ return we have had in the holding so far, we expect at least another 100% to 200% in the intermediate future as the market recognizes the operating leverage and the cash flow generating potential for this impressive company.”
Updates From Previous Issues: Old West
The September 2018 issue of Hidden Value Stocks featured an interview with the Old West Investment Management team.
One of the companies the firm profiled in the interview was Zedge Inc (NYSEAMERICAN:ZDGE), which has since become one of the best-performing stocks profiled in this newsletter. Since the interview was published, shares in the company have returned around 730%.
Old West outperformed the market by a wide margin in the first quarter. Limited partners saw a return of 25% on average after fees, compared to 6% for the S&P 500.
Zedge was spun off from IDT Corporation (NYSE:IDT) in 2016, and Old West continues to support the company as well as IDT’s newest spinoff, Rafael Holdings.
Commenting on the Rafael holding in his first-quarter letter, Joseph Boskovich, Sr. the Chairman and Chief Investment Officer of Old West, noted:
“We believe that an investment in Rafael Holdings represents an extremely asymmetric opportunity where a portion of the company’s current value is protected by its portfolio of real estate properties, LipoMedix and The Barer Institute, while its stake in Rafael Pharmaceutical is potentially worth many, many multiples of its current market cap. We also believe that the investment is hidden from the broader investment community due to its obscure structure, hence the extreme valuation discount. As an example, the company is classified on Bloomberg as an “Investment Company” due to its real estate assets rather than a biotech company where we believe the greatest level of value disconnect exists.”