On Saturday I posted July’s top stock pick. This is an idea I have taken a major position in as I think it is at least a double from here. As free cash flows are generated and leverage ratios come down, the stock could easily go up 3-5x from the current valuation.
Here is a quick run-down why I am extremely bullish on the future.
The company recently just recapitalized their balance sheet into a much simpler structure. Not only is the balance sheet a lot more simple, but it will save the company millions in annual interest expenses and will allow the management team to focus on growing the business for the first time in years.
The stock is up over 1,000% YTD, but there is more room to run. The valuation is incredibly attractive. I am forecasting the company to generate as much free cash flow this year as their current market cap. In addition, the stock trades 2-3x under their peers yet is more profitable. A few of their peers have went ballistic lately (one up 500% YTD).
Wall Street has completely forgotten about this name. For the past five years the company has been technically in default. The company delisted from the major exchanges and is now “dark”. Given the non-filing status, absolute low market cap and the inability of any institutional investor to really touch these shares, retail investors can take advantage of this special situation.
The business is now booming. During the Q1 2021 conference call, the management team was as bullish on the future as you could hope them to be. Growth is coming back to this business along with two key “revenue” catalysts I highlighted in the write-up.
Costs have been eliminated. Given the nature of the company’s status for the past few years, a significant amount of real costs have been completely eliminated from the structure. If and when revenues return to base level years (I am estimating by the second half of 2021) there will be significant operating leverage that will drop straight to the bottom line.
If this company can generate real free cash flow, in 2-3 years they will be able to refinance their debt at much lower levels, which would significantly increase the valuations. Given the historical performance of the core business, I don’t see really any scenario where they won’t be able to generate meaningful free cash flows.
If things go wrong, the assets this company owns are extremely valuable to a third party and could fetch more than the current enterprise value in an all out sale. There is real margin of safety here.
Over the next 12-18 months I think the valuation will be much higher as investors begin to realize the earnings power this corporation has relative to their peers.
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