Friday, August 21, 2015

A Few Ideas From My Watchlist

I'm pretty comfortable with my current holdings, mostly just sitting on my hands during this bout of market volatility, but want to highlight a few interesting opportunities that might deserve further research:

Gabelli Securities Group (GSGI)
Mario Gabelli's GAMCO Investors (GBL) is spinning off their event driven alternative funds, research unit, and broker/dealer into a separate company dubbed Gabelli Securities Group (GSGI).  The larger GAMCO Investors has over $45B in AUM, much of it in retail mutual funds which are in secular decline, the event driven alternative fund business has about $1B in AUM, only a tiny fraction of the total and thus puts it on my radar for a potential post-spin dump.  So why do this spin?  Mario Gabelli is a good investor, a great marketer and asset gatherer, has a great brand name, and the event-driven space is a hot hedge fund category.  I'd guess that Gabelli is going to put a disproportionate amount of weight behind selling the spinoff's products in the early going and increase AUM quickly.  So this is a rare combination of a small spinoff that might get sold off by GBL shareholders, but is in fact the growth business of the two.  Mario Gabelli will maintain his 10% royalty on pre-tax earnings of the new entity, and control the company via super-voting shares, so that will limit the upside, as you're effectively paying a hedge fund like fee to invest in his hedge fund management business.

Hemisphere Media (HMTV)
Hemisphere is the owner of the largest Puerto Rican local broadcast station, WAPA, and 5 Spanish language cable channels (Cinelatino, WAPA America, Pasiones, Centroamerica TV, Television Dominicana) that are typically contained within Spanish language add-on packages.  Hemisphere has held up reasonably well in the overall cable content selloff.  It's controlled by InterMedia, and went public through a reverse merger with a SPAC in 2013.  The pitch behind Hemisphere is the young, growing, and underserved Hispanic population in the United States, plus they're pursuing adding advertising to their top cable channel Cinelatino (Spanish-language movie channel) that was previously advertising free.

Hemisphere doesn't appear particularly cheap on the surface, trades at 12x EBITDA compared with larger U.S. cable television peers like DISCA, VIAB, SNI, and AMCX in the 8-10.5x range.  But Hemisphere might deserve that premium as their subscriber counts are growing whereas most networks have seen reductions as cord cutting takes hold.  Additionally, larger peer Univision has filed for IPO at a hefty implied $10B market cap, look for some of that enthusiasm to spill over into Hemisphere Media.

National Beverage (FIZZ)
Not value or a special situation, but an interesting growth name.  National Beverage is all about the push into healthier/lifestyle focused beverages, mostly via their LaCroix sparkling water brand.  In total they're the 5th largest carbonated beverage company in the United States with a market cap just under $1.2B.  LaCroix is extremely hot, I can't log into Facebook without seeing pictures of someone trying out a new flavor or reading an article about the best LaCroix mixed cocktails.  National Beverage also has legacy soda brands that you forgot existed like Shasta and Faygo, the plan appears to be to milk the cash flow from these sugary beverages and direct it to LaCroix and other growth brands.  The company is family run, controlled by Nick Caporella (his son is the president) who owns 74% of the shares, making the float only $300MM or so and out of the range for a lot of institutional investors.

The company's quarterly news releases read like a small town newspaper, and there are very limited financial disclosures in the 10-Qs or 10-Ks, so it's hard to really get a good picture of how the business is doing.  But after Coca-Cola invested in both Monster and Green Mountain, why wouldn't they take a shot at the sparkling water leader too?

Newcastle Investment Corp (NCT)
I've been close to buying Newcastle several times this year, it's basically a forgotten stub after the Fortress controlled mREIT has spun-off three companies in the last 2-3 years - New Residential (NRZ), New Media (NEWM), and New Senior (SNR) - leaving a pool of legacy commercial mortgage loans/debt and a golf course management business behind.  The quick thesis is the pool of debt securities is near term and liquid, it covers the entire market cap and you get the golf business for free.  Fortress estimates the golf business will do $30-33MM in EBITDA in 2015, there's an easy public comparable in ClubCorp (MYCC) that trades for 10-11x EBITDA equaling ~$3.50 per share in value for NCT which trades just below $5.

Golf may or may not be in secular decline, but it's another similar business to New Media or New Senior where it has a long run away of "mom and pop" type acquisition opportunities to create a mini roll-up.  Wes Edens has also mentioned using ERP Properties as a model and diversify away from golf into other recreational real estate assets.  The downside is of course Fortress, and their external management fees and conflicts, its always going to deserve some discount and you have to be careful using their investor presentations as your investment thesis.  All private equity guys are great at spinning a story.

Viad Corp (VVI)
Another company with a history of doing spins is Viad Corp, today it operates in two separate business lines, Marketing & Events Group (mostly conventions) and Travel & Recreation (hotels, lodges, adventure excursions), with no apparent synergies which will eventually lead to either a spin or sale of one of the businesses.  The travel business operates in and around Banff/Jasper, Glacier National Park, and Denali National Park, it's a good but niche business catering to seasonal adventure travelers.  The travel business does about $36MM in EBITDA annually, and would fit nicely into a travel and leisure portfolio like ERP or what NCT wants to build.  If you back out the travel business at 10x EBITDA, the Events/Conventions business is being valued at just under 6x EBITDA (including $10MM of corporate overhead).  Certainly cheap, but it's a cyclical business and a low margin one, it's on my long term watch list as something to return to coming out of a recession.

Side Note: If you're located in Chicago, there's a good special situations/"10-K" group that will be discussing Liberty Global's LiLAC Group tracking stock on Monday at 3:30pm at the CFA Society Chicago's office at 124 N LaSalle, come join, and I'll post my thoughts on the name here sometime next week.

Disclosure: No positions


  1. Excellent blog! Have you looked anything at the oil majors? With historic ROE CVX and XOM are valued around 6-7 EV/EBI. I believe they can offset some of the weakness in oil price with significantly lower cost, the sudden stop in capex have forced their suppliers to lower prices.

    1. I haven't spent much time on the oil majors, my record is pretty terrible on energy companies. The only one I own is Par Petroleum (PARR), which at this point is mostly a downstream operator in Hawaii with a big NOL attached to it (and a minority stake in an E&P). I'm not smart enough to be able to bottom fish in energy, your strategy of the large integrated oils is probably the right one, just doesn't fit my style. Thank you for the kind words and reading.

  2. I hope you get in to the Chicago mtg. Says limited to 15? people...

    1. Yep, I'm already signed up. We meet in a conference room, could probably squeeze a few more chairs in there if needed.

  3. Here is a small liquidation for you SCMR. Has 35 cents per share NAV and recently a 13D filing hit in which a new fund has approached management/Board to consider going an alternate route of preserving and using NOLs (~$800M or so).

    1. Thanks, I forgot about that one, sounds like it's worth another look.

  4. I have an observation on externally managed companies, REITs etc like NCT.

    You see, managements can steal wealth from companies without using these structures, it happens everyday, with handpicked Board members and tinpot comp committees. It happens with self dealing contracts, related party transaction. In some cases, CEOs put their hands directly into the till and steal, some go to prison.

    But when companies spin off the GP, I find that to be a transparent and legal way of signalling to investors that management is not aligned with shareholders who are the real owners of the assets of the company.

    What earthly reason is there to spinoff management? You don't really believe the schtick that it "allows investors to choose between the two disparate businesses"?

    I mean, management is not really an income generating asset, they are hired hands who work for shareholders. These types of spins are nothing more than using financial engineering to take a cost center and pose it as a revenue generating business. One has to be soft in the head to actually buy into such nonsense.

    Such shenanigans work well in a bull market when investors are "fat, happy and stupid" but in a bear market, they fall apart like a house of cards.

    1. Thanks, great comment, lots of wisdom.

      Seems like AINC is running into that now as evidenced by them seeking strategic alternatives for AHP. I don't know if NCT is a great example due to its small size, maybe some of the others in the Fortress family like NEWM where you're paying for a newspaper management team and then a private equity like fee wrapper on top of that. I still like ACAS where they'll be externalizing the manager, but they manage fixed income fund like entities versus operating companies likes FIG.