Seeking Alpha

PRO Weekly Digest: Focusing On Overleveraged Companies As Potential Short Ideas

by: SA PRO+ Editors
SA PRO+ Editors
The editorial team for SA PRO, looking for SA's best ideas

We highlight a noteworthy PRO long idea and use the Idea Filter to search for overleveraged companies as potential short ideas.

Revisiting the bullish thesis on Lifetime Brands.

Welcome to the latest issue of the PRO Weekly Digest in which we publish highlights from our PRO coverage. Comment below or email us at pro-editors at to let us know what you think. Find past editions here. PRO subscribers can access interviews by following the SA Interviews account and view past interviews under the same account.

Click here to read the interview with Adventures In Capitalism.

PRO idea playing out

Merit Medical Systems (NASDAQ:MMSI) is up ~55% (and significantly exceeded the price target) since Boris Marjanovic called it a GARP idea in December 2016 and projected double-digit revenue growth and rapidly expanding margins driven by its exposure to the fast-growing cardiovascular disease (CVD) space, a recall by a key competitor and expansion into non-CVD markets.

Subsequent earnings releases validated the core thesis of an increasing top/bottom line as in the mrq MMSI reported record revenue and non-GAAP net income, raised 2017 revenue/earnings guidance and provided preliminary guidance for 2018/2019 of 8% top line growth, a 100-150 bp gross margin improvement and bottom line growth of 13-15%.

Call from the archive - LCUT

Investors can take advantage of Lifetime Brands (NASDAQ:LCUT) being ~unchanged since Thomas Niel called it a buy in May 2017 as it appears management continues to execute despite a challenging retail environment by making many of the same changes an activist would to maximize shareholder value - and the latest earnings reflect this.

In 1Q17, constant currency revenue increased 5.1%, gross margin increased 220 bps and EBITDA increased from $0.3M to $2.3M. Management expects several key initiatives (aimed at improving gross margins and e-commerce capabilities) to deliver $10-13M of additional annual pre-tax profit over the next 18-24 months. As the original price target is ~45% above the current price this may be worth another look.

PRO Weekly Digest idea playing out

Wirecard (OTCPK:WCAGY) is up ~40% since Edward Schneider, CFA reiterated his long thesis (leader in fast-growing online/mobile payment processing sector with scalable/defensible business model) in an interview with the PRO Weekly Digest in April.

Noteworthy PRO articles

In addition to the 2 top ideas we published this week, we wanted to highlight one of our PRO editors' favorite PRO ideas this week:

SA Editor Jeffrey Fischer, CFA: Investment professional Ben Bortner, CFA evaluates Natural Grocers (NYSE:NGVC) absent management's recent expansionary strategy. Despite some valid industry concerns, which are likely exaggerated, Bortner suggests NGVC is a good deep-value play here.

New Seeking Alpha contributors to watch

Joakim Bull Jespersen shared a bullish thesis on Pandora A/S (OTCPK:PANDY) - that it is (as the title says) a quintessential GARP stock with a ~14x P/E, high single-digit shareholder return and continuation of double-digit growth; mispricing exists due to recent overreaction to slowdown in growth in the U.S. however, there are still multiple growth drivers available.

Idea screen of the week

Each week we use the PRO Idea Filter to find potential ideas based on a recent news event. This week, PRO Editor John Leonard, CFA looks at overleveraged companies as potential short ideas.

A common theme among stocks experiencing significant declines is high leverage. For investors looking to profit from (rather than simply avoid) these types of situations, I ran a screen of PRO Short ideas with the Overleveraged Investment Opportunity tag.

Two ideas turned up in this screen that might be of interest (prices as of August 3 close):

Welbilt (NYSE:WBT) by Rational Short Investor: Published on July 7, 2017, ~unchanged since publication, author's price target offers ~40% downside. WBT needs to improve margins to generate FCF to repay its large debt load however unfavorable product mix and key customer exposure limit its ability to do so. In addition, weak industry trends and poor execution track record mean it is unlikely to meet guidance and stay on side of debt covenants.

Party City (NYSE:PRTY) by Short Investor: Published on June 16, 2017, down ~10% since publication, author's price target offers an additional ~45% downside. Management expects to return to positive comps in 2017, expand internationally, and expand margins - research suggests this is highly unlikely due to significant competitive encroachment and poor business strategy as online pricing is uncompetitive and growth "initiatives" are simply not working. The target price of $8 represents the midpoint of structurally impaired specialty retailers (and PRTY appears to be in this group given its high leverage ratio of 4.2x with 81% floating rate debt).

About the PRO Weekly Digest

PRO members automatically receive the Weekly Digest and other PRO content in their inbox. If you are not a PRO member and would like to be notified of this, click follow at the top of this article to follow the SA PRO Editors account, or click to subscribe to the free newsletter below to receive these in your inbox. You can view all past PRO Weekly Digests here. And if you're interested in SA PRO, check out the details here to sign up or learn more.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Check with individual articles or authors mentioned for their positions.