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Seeking Alpha: Can you briefly summarize your bullish thesis for readers who may not have seen it yet?
Kabir Mathur: Sure, so first of all, The Dixie Group, Inc. is not likely to resonate with value investors looking for growth stories or great businesses - it’s a contrarian idea about an unglamorous floorcovering manufacturer that has hit a rough patch in recent years. The reason I became interested in this stock was because I saw multiple catalysts for repricing and a bargain price at ~0.4x tangible book value. Over the next year, I believe the company will be able to significantly reduce its debt while executing its newly authorized $5.9 million share buyback authorization, which, at its most recent price, would account for nearly 30 percent of its outstanding shares. The source of this cash will be the completion of an upcoming sale-leaseback of one of its manufacturing facilities set to close in October 2019. To give readers some perspective, the sale-leaseback will generate $40 million in proceeds, amounting to twice DXYN’s current market cap for just one of six manufacturing/distribution facilities the company owns as of today. As an added bonus, the business may finally be turning around, with the most recent quarter’s profitability excluding restructuring costs and as it completes a cost-cutting program. I believe that the market’s pessimism towards DXYN, created by years of underperformance, has caused it to ignore these positive developments occurring within the business today.
SA: Discounts to NAV/SOTP/book form the basis for many value theses. In general, what factors or catalysts do you look for in these types of ideas to avoid value traps and ensure that the discount closes?
KM: I wish there was a formula for avoiding value traps, but unfortunately for deep value investors, they sort of come with the territory. That’s why size limits and diversification are so important. But generally speaking, I think there are some red flags investors can watch out for during the due diligence process that can help avoid NAV/SOTP value traps. For example, niche assets that are not readily salable or have fewer buyers may not be worth the value that they’re carried for on the balance sheet. Or, those assets may be so encumbered by debt obligations that even with a transaction, they wouldn’t net much value for shareholders. It’s also helpful to avoid entrenched management teams who care little for share price undervaluation and are unlikely to act opportunistically to bridge any stock market discounts.
SA: How did you find this during the idea gen process, as this seems very under the radar given the nano cap size, lack of analyst coverage and screening poorly (at least on earnings)?
KM: I like to keep my idea generation process flexible, so I’ll often begin with stock screens, news reports, and investor forums, then follow-up on new names, competitors and peers, and any other interesting stocks that come up during my research. Stocks that fly under the radar and have the characteristics that you mentioned are the ones that I like to spend some time looking into, because there are probably fewer people doing the work and that might give me an edge. That’s basically how DXYN came to my attention.
Thanks to Kabir for the interview. If you'd like to check out or follow his work, you can find the profile here.
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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: Kabir Mathur is long DXYN.