Steven Kiel Of Arquitos Capital Management On His Favorite Stock

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Arquitos Capital Management’s returns since inception have been second-to-none. Last year the fund produced a return of 54.9% net of fees in 2016 compared to 12.0% for the S&P 500. Since launch (April 2012) the fund has delivered an annualized return of 28.3% net for investors (35.4% gross) outperforming the S&P 500 by 68.5% over the period.

In this interview, Steven Kiel, founder of Arquitos discusses one of his favorite stocks with ValueWalk. Below in an excerpt from our exclusive quarterly magazine  on small caps.

Steven Kiel Of Arquitos Capital Management On His Favorite Stock

…..Why do you think the stock is cheap, in other words, what’s gone wrong here in the past?

They almost blew up completely during the financial crisis. Soon thereafter they had to spend tens of millions of dollars restating their financials. While we are now many years removed from that, the company has $437 million of federal net operating loss carryforwards that don’t expire until 2027.

The other reason is that it is a fairly complicated story for its market cap, which is about $130 million, and investors can only own up to 4.9% because of the poison pill that protects the NOLs. So it’s good for small funds and individuals, but it won’t attract larger funds.

The stock is up more than 40% since over the past 12 months. Do you still see upside from here? What’s your price target? 

The stock has run up and is above book value for the first time since I have been following it. GAAP book value is $21.34 as of the last quarter. Their true book value is at least $7 more because of various off-balance sheet assets. I don’t have a price target, but I would feel comfortable buying it somewhere between GAAP book value and $7 above book value.

Is there anything that could de-rail your bull thesis here? 

Higher interest rates do have an effect, but not as much as you would think. They have hedged 80% of their loan portfolio, but every 100 basis point change in funding costs negatively affects the portfolio’s fair value by $20 million.

Policy changes could affect their solar lending business, both good and bad. There may not be as much residual value in the low-income housing tax credit portfolio that they manage with Bank of America, and the value of some of their off-balance-sheet items such as their land ownership may not be as high as I give credit.

Like all financials, the stock has run up since the November elections. Do you see any ‘Trump risk’ here if the promised fiscal stimulus does not emerge? 

This one is a little bit different. I don’t think it is connected to any stimulus. It would be negatively affected by reduced corporate tax rates and regulatory changes. I think it has run up in price because they have started to show that they can monetize their balance sheet. It has more room to run, but clearly was more attractive a few months ago when it traded significantly below stated book value.

Want to know more? 

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The stocks profiled in Hidden Value Stocks last year returned an average of 19.5% for investors.

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