Not Distressed Anymore!
On Friday an Alpha Letter Pro pick rallied over 90% at the peak and ended up closing on the day up 69% (nice). I wrote the stock up at the end of April and it has went straight down given the global economy and potential restructuring of the corporation. Despite the negative sentiment, I held my small position (extremely small to limit risk) and decided to wait it out. After Q2 results came out Friday, it appears as if bankruptcy risk is off the table with quickly improving results in the back half of the year.
Here was my original high level thesis on this stock:
Insiders have started to purchase at these basement level lows. Since February 2022, insiders have purchased $740,000 worth of stock, including the CEO who purchased $200,000 worth in early March.
The company is looking to sell excess assets including real estate to shore up the balance sheet. From my analysis, I think they could sell all of their real estate and do a sale leaseback to take out their entire debt.
Management suggested at a conference that talks with key suppliers is going well and things could bounce back really fast.
Costs have been removed from the model and contracts are getting amended to include index based pricing which de-risks the business model. A leaner company and passthrough contracts will allow the company to emerge from the downturn as a winner.
Private equity is snooping around the industry with two takeover buys that I am aware of with potentially more to come.
Since the original publication, the thesis has largely played out like I forecasted. The company sold key real estate assets to shore up the balance sheet. Tax assets were converted to cash which further improved the balance sheet. Supplier agreements are now restructured so 65-75% of raw material inputs is covered by inflation. Costs continued to get removed and there will be major working capital benefits in the back half of the year which will translate to free cash flow.
I never took a large position in the company as I typically stay away from highly levered situations. Debt terrifies me. I’d rather be first in line for the cash flows as a business owner in an un-levered stock than last behind a large line of fixed income investors. But when you see situations where the reward on a levered shitco outweighs the risk, it’s usually time to lay some capital on the line and risk a bit. That’s what I did here. And I’m thinking about dropping some additional capital into this stock as the risk has fallen and the potential upside has gotten even juicier.
I hope you enjoy this article. Feel free to reach out.
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