PRO Top Ideas
Top Ideas are high-conviction long or short ideas focused on market mispricings with asymmetric risk/reward profiles.
History May Not Repeat Itself, But If It Just Rhymes, Tecumseh's Share Price Should Shine
- Tecumseh is a global manufacturer of hermetically sealed compressors used mainly in refrigeration and air conditioning applications.
- Though perennially loss making, it has a modest net debt level due in part to cash generated from asset sales and tax refunds. It now trades below 0.4x book value.
- Its share price has returned to levels that attracted activist interest in the past that, coupled with management changes and a turnaround plan, saw its share price triple.
- Though that speculative bubble has burst, the underlying assets and upside potential remains intact. Tecumseh retains valuable non-core assets, USD293 million in NOLs and an attractive commercial refrigeration business.
- Downside is limited by Tecumseh’s significant discount. Re-emergence of past catalysts over a one year investment horizon could see 100% plus upside.
Symmetry Medical: Surgical Maneuver Sets Up A Very Attractive Asymmetric Trade
- In August 2014, Symmetry Medical announced that it had agreed to sell its OEM Solutions business for cash and, simultaneously, spin-off its Symmetry Surgical business.
- Its muted share price reaction enables investors to speculate cheaply that a higher OEM Solutions bid may emerge, whilst buying into Symmetry Surgical at a very attractive price pre-separation.
- Symmetry Surgical has been negatively impacted by a number of acquisition integration issues. Yet, it remains a high margin business capable of generating impressive cash flows.
- Symmetry Medical’s share price implies that Symmetry Surgical is being valued at a significant discount to listed comparables. We estimate there is 70%+ upside potential for Symmetry Surgical.
- This is an 18-month trade with strong catalysts. The low OEM Solutions deal risk combined with SSRG’s inherit discount limits the downside, presenting a very attractive asymmetric trade.
Quartet: Joel Greenblatt Writes A Blank Check For Pangaea Logistics
- Joel Greenblatt is an initial stockholder and special advisor to Quartet, a blank check company that plans to merge with Pangaea Logistics, a maritime logistics provider.
- Pangaea Logistics displays many of the characteristics one would expect from a Joel Greenblatt investment. Sector market leadership, high return on equity, experienced management and attractive growth prospects.
- Quartet’s management highlight that there is a significant valuation gap between the price they are paying for Pangaea Logistics and its publicly traded peers. We estimate about 28% upside potential.
- Key catalysts to unlock value include the successful completion of the merger, growing investor awareness and Pangaea Logistics achieving its net income targets, in particular for 2014E.
- This opportunity should start to realize material upside in the near term, with limited downside risk due to an attractive entry price versus Quartet's current cash balance and the post-merger valuation.
Cash America: Spin-Off Of Its E-Commerce Business Should Unlock Substantial Value
- Cash America is an alternative financing company that operates through two main segments. A traditional pawnshop business and Enova, an online provider of non-secured consumer loans.
- Cash America plans to spin-off Enova by early 2015. This provides a clear catalyst to unlock the value of the two businesses, currently not fully reflected in its valuation.
- Based on comparable multiples, we estimate the two businesses will trade at a 40% plus premium to Cash America’s current market capitalization post-separation.
- We think the downside is limited. Most of the bad news covering regulatory risks, suppressed gold prices and consumer confidence are well-known and most likely already priced in.
- This is a medium-term trade. Around six months for the spin-off to unlock substantial value, then a series of further value creating catalysts could unfold over the next few years.
Kennedy-Wilson: European Venture Should Shine A Spotlight On Its Own Significant Upside Potential
- Kennedy-Wilson is a vertically integrated global real estate investment and services company with a reputation for thriving in distressed property markets.
- Despite generating an average equity multiple of over 1.60x on its investments, the market is currently valuing them at just 1.10x book value. We estimate 25% plus upside for Kennedy-Wilson.
- The investment process that generates these returns is complex, with Kennedy-Wilson normally taking minority equity positions in commingled funds and JVs. This confuses the market, resulting in the gaping discount.
- We believe Kennedy-Wilson’s European venture will act as a catalyst, leading investors to question why its own investments are valued by the market well below their fair value.
- This is a medium-term opportunity. The downside is limited due to the existing discount to market value and Kennedy-Wilson’s proven ability to generate outsized returns from a crisis.
International Paper's Spin-Off And Its Subsequent Merger Creates Veritiv, A Prime Short Candidate
- International Paper’s spin-off, xpedx, will merge with the parent of Unisource Worldwide to form Veritiv on July 1, 2014.
- Veritiv is a prime short candidate. Its core business is in secular decline, margins are razor thin and it carries an outsized debt burden.
- We estimate the downside opportunity is significant if Veritiv’s management is unable to stabilize its struggling business.
- This is a multi-year play. The most likely downside catalyst will be a liquidity crisis, probably triggered by the continued decline in revenue and the failure to realize merger synergies.
- Upside risk is limited, due to the presence of a large stock overhang and a potential earn-out of up to USD100 million due to International Paper.