Premium Post: July Monthly Thoughts and Updates
One idea and four updates.
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Lots to talk about this month (though I feel like I say that every month)! But, first, thank you so much for subscribing to the premium site!
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Anyway, on to the update: one new idea and four updates
SSSS special situation
Updates
INTL / SNEX
WOR
COOP
IWG
SuRo Capital (SSSS) special situation
It’s tough to look at the current market without getting serious flashbacks to the tech bubble. Retail day traders are making a fortune trading unprofitable tech companies, analyst upgrades can drive huge swings in stocks, and IPOs of unproven business models are rocketing higher (I mentioned one of the more egregious ones, Lemonade, here),
It’s all very frustrating for a value investor. What’s the point of looking for quirky undervalued stocks when you can just own FANG and seemingly make 10% a month (or buy speculative SPAC stocks and make 50% a day?).
I’ve recently spent more time looking for value ways to participate in these type of spec stocks. Worthington Industries (WOR), which I wrote up earlier this month, is one such stock: they own a bunch of NKLA stock, and the market seems to ignore how large their holdings are. I view it as something of a win/win situation: if the market keeps screaming speculative stocks higher, WOR will make a fortune on their NKLA shares. If the bubble pops, WOR is still probably worth more than today’s share price.
This idea is another way to play the “bubble.” It’s a bit higher risk, but it’s probably higher return on a shorter timeline.
The idea? Buy SuRo Capital (SSSS).
It’s actually a pretty simple idea, so I’ll try not to make it too complicated.
SSSS is an internally managed BDC that invests in pre-IPO tech companies (the company used to be known as GSVC; they were externally managed then).
At the end of June, NAV for SSS was ~$12 versus today’s share price of ~$10. A BDC trading at a ~20% discount to NAV is interesting but not atypical. Here’s where things get interesting. There are three main components to SSSS’s NAV: Palantir, Course Hero, and Coursera. Combined, at the end of March (we don’t have updated June numbers yet), those three companies made up ~55% of SSS’s portfolio value. Another ~30% of SSSS’s value at March was in net cash / T-bills, so it’s not a huge stretch to say that those three investments will more or less drive the value of SSSS’s NAV in the short to medium term.
That’s actually really good news for investors, as the outlook for all three seems really good.
The headliner here is Palantir. Palantir filed for IPO earlier this month. The NYT article suggests a valuation of $20B for Palantir. I’m not sure if that’s right or wrong. Late last year, Palantir was looking for a valuation of $26B in fundraising; however, there has also been some weird buzz around Palantir, so it’s possible the IPO gets called off or goes below those numbers. Still, SSSS carries their Palantir shares at $12b, so any mark above that number would drive a pretty nice increase in Palantir’s NAV.
I don’t think it’s crazy to imagine a scenario where Palantir IPOs at a $25B valuation and sees their stock pop by 20%. If that happened, SSSS’s Palantir shares would suddenly be worth $75m, and book value would increase by ~$2.70/share (from ~$12/share now to ~$14.70).
Is that likely? I don’t know. In this market, it’s certainly possible, and at today’s share price it doesn’t seem like you’re paying for that optionality.
The other two major pieces of SSSS’s NAV, Course Hero and Coursera, also stand the potential to benefit from a mammoth increase in value in the current environment. Both are online ed-tech plays (Coursera helps universities shifting online, while Course hero offers online tutoring) which are likely massively benefiting from the current environment. As private companies, it’s difficult for an outsider to know exactly how they’re doing, but based on peer companies I bet they’re seeing a mammoth increase in demand and their valuation has screamed higher.
An example might show this best: Coursera is a peer to TWOU, whose stock is up 65% on the year.
We don’t know exactly where SSSS marked Coursera and Course Hero in their prelim Q2’20 numbers, but I would almost guarantee their mark is far below where the two would trade in today’s market if they decided to IPO. There’s never been a better time for those two companies; I wouldn’t be surprised if we started getting wind of an IPO for either or both in the near future. If that happened, SSSS’s NAV would likely explode upwards, and its share price would follow higher.
That’s the bulk of the investment thesis here. There are other negatives (BDCs are historically poor stewards of capital, and given SSSS’s small size there’s likely to be negative adverse selection effects in any VC investment they make as they’re competing against top players with huge networks) and positives (SSSS has been rather shareholder friendly since internalizing, repurchasing a significant amount of shares at a nice discount to NAV and accelerating those repurchases in March at the height of the crisis).
Yes, this is a a little speculative, but I think the odds are well in your favor here. At a discount to NAV and with clear near to medium term catalysts (and a great operating environment!) for all three of their major investments, SSSS is worth a shot.
(PS- I wrote this up last week; over the weekend, Barron’s published an article touting SSSS for much the same reasons I did. I hate to publish ideas overlapping with a mainstream publication, but the idea was already written and I tend to think this write-up hits a few extra points, so I figured I’d keep it).
Updates
INTL / SNEX-
A quick update on July’s first idea, INTL. Right after I posted the write up (and as expected), INTL changed their name to SNEX.
More importantly, GCAP (the company INTL is stealing) reported June metrics. Recall that GCAP mints money when markets get more volatile, and as part of the merger process they disclosed how much money they earned in March and April. While they have not disclosed earnings for May and June, given both month’s trading metrics were roughly in line with or better than April, it’s reasonable to assume that GCAP’s earnings in May/June roughly matched April. If that’s right, GCAP earned another >$25m combined in May and June, which is >$1/share in value for INTL/SNEX. That might seem small versus a current stock price of ~$55/share, but consider it this way: INTL is acquiring GCAP, and their acquisition just earned another ~2% of their market cap in two months. An absolute theft.
INTL’s core business should be benefiting from similar strong trends. I expect the market will be shocked by how much cash the combined company is sitting on / the earnings power of the two once the merger completes and the company can give a clear view of their earnings power and balance sheet.
WOR update-
An update on July’s second idea, Worthington (WOR).
For those interested, I published some additional thoughts on NKLA here.
More importantly, WOR disclosed that they sold 5m NKLA shares basically the second they came unrestricted. WOR at ~$47.50/share for their sales, and will need to pay taxes on their mammoth gains.
I view this as great news for WOR; after taxes, the share sales generate ~$175m for WOR, or >$3/share. For those interested, I’ve posted an updated SOTP and balance sheet for WOR below (it’s the exact same as the one posted earlier this month, just updated to include the NKLA share sales).
COOP
A brief update on Coop (investment thesis from May here; another brief update from end of May here)
Shares have done well since the initial post, but I think it could be argued shares are cheaper today than they were at write up. The mortgage origination business is absolutely on fire; Cooper is going to just mint money originating mortgages in their Q2 and it’s going to drive a huge increase in book value.
Still, I mentioned that in the end of May update. So why bring the company up now? Rocket Mortgage (Quicken Loans) filed an S-1 earlier this month; they’re a loose COOP comp, so if they really explode on IPO, it could bring some more eyes to the sector and lift COOP’s multiple.
IWG
Lastly, an update on IWG (idea posted in April with updates in May and June)
WeWork’s Chair did an interview w/ the FT over the weekend. In it, he notes “strong demand” for flexible work spaces since the start of Covid, flat revenues through the crisis, and that June was the strongest sales month since Feb.
There are plenty of caveats here: WeWork is not IWG, and those are not audited numbers so perhaps WeWork is embellishing a little. But they point in the same direction that a lot of other things I follow (and my own instincts) are saying: COVID is going to be a medium to long term tailwind for flex space providers, and as the largest player IWG stands to benefit immensely from that. The market doesn’t agree based on today’s price; we’ll learn a bit more when IWG reports H1 sales in the next few months, but after the recent equity raise and with the current tailwinds, I expect IWG to be very aggressive investing into growth and I think the market will be (positively) surprised by the results.