Best Idea For 2021: SuRo Capital

Summary

• Our best idea for 2021 is to buy SuRo Capital.
• We think SuRo offers the best of all worlds.
• A reasonable margin of safety, the possibility for one or more “call options” to pay off that could result in immediate and significant share price accretion, and a management team.
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SuRo (NASDAQ:SSSS) is an internally managed BDC that invests in pre-IPO tech companies. In general, BDCs are valued on a P/NAV (net asset value) multiple. SSSS’s last NAV was $12.46/share (reported 9/30/20). Since then, the company has paid three dividends worth $0.72/share in total (one in October, November, and December), so dividend adjusted NAV is ~$11.74/share. With SSSS shares currently trading at a slight premium to that level (last trading price = $12.58), SSSS might seem a strange recommendation for a top idea pick. However, we believe there is good line of sight into SSSS’s NAV increasing significantly in 2021.

To understand why, we need to look at SSSS’s investment portfolio. The company is rather concentrated, with their top 3 positions making up ~60% of their investment portfolio and their top 5 positions making up ~71%. That concentration is important, because we think the next year will have catalysts that will result in a meaningful increase in value for each of their top four positions.

To illustrate why we think SSSS’s NAV is set to increase so quickly, let’s highlight the simplest story: SSSS’s investment in Palantir (PLTR). At the end of the third quarter, Palantir’s stock price was ~$9.50/share. SSSS actually carried it on their books at ~$8.70/share at the end of their quarter (likely due to some lockups on their shares). Since quarter-end, Palantir’s stock has skyrocketed to $24.66/share. SSSS has sold some shares since quarter-end, but they continue to hold the vast majority of their position and will have to until two days after PLTR reports their FY20 earnings to sell anymore. Marked to market for PLTR’s stock price, SSSS’s position in PLTR is worth ~$127m, or ~$5.88/share, versus $46.7m, or $2.21/SSSS share, at 9/30/20. That’s a >$3/share increase in NAV from just the share price movement of PLTR in Q4!

Analyst’s Disclosure:I am/we are long SSSS. 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.

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