Special Situation Playing Out

Equity value up 25%, dividend has doubled; is a large transaction from strategic acquirer next?

I’ve done research on hundreds of tiny little companies across my career. Built the models, taken tens of thousands pages of notes in Microsoft Word and spoken with countless management teams. The job of an analyst never ends. Always on the hunt for an undervalued security that has a near-term catalyst that generates a strong IRR for your investors.

Sometimes when you are researching a company you know it is a buy. You rush through the due diligence process and check off all the marks on your checklist. Build the model, done. Read the proxy, done. Speak with management, done. Go through years of earning calls, done. You buy, wait and see if your thesis plays out. That is the hardest part, waiting for the thesis to play out.

But most of the time you end up completing your research on a company and the best thing to do is wait. You explored the assets and have a good understanding how cash flows will be generated. You’ve read all of the annual reports and have a feel for how management will allocate excess capital. Despite all the work, the valuation just isn’t there for you. Or maybe it is something else. Something that prevents you from allocating capital to the idea.

Most of the time this happens to me. I do a ton of research on a company and by the time I complete my due diligence I never take a position in the stock. It might seem counterintuitive and a waste of time, but the best investors I know are the most patient guys in the world. They do all of the work needed to understand a company. Then they wait. They wait a really long time. Then when the right time pitch comes along they load up and swing the bat as hard as they can. When you are this patient you usually end up knocking it out of the park.

A few weeks ago this type of situation happened to me. I have followed this company for over five years. Know the assets probably better than 90% of analysts who follow the stock. I’ve updated my model religiously and listened to almost all the calls. Tracked down all of the hidden real estate assets and spoke with the team. Then an event happened over the Christmas holiday and I loaded up on a ton of the stock. This was the first time I ever bought the stock, despite following the company for years. It was a special situation and since I have been following the name closely for years I could take advantage of the situation before other investors got caught up.

At the time of my original writeup the stock was at $5.52 per share. On Friday after the market close the stock was at $7.01 per share. In addition, there was an 8-K dropped Friday morning that stated the company has doubled their dividend.

The thesis is beginning to play out. And this is a thesis that has already happened with another Alpha Letter stock pick in late 2022. The same thing happen. An extremely odd situation that typically doesn’t happen in capital markets. We have chatted about this situation extensively in the Telegram Group. The thesis played out, a lot of dividends were paid and the stock price went up.

The same thing is happening here. The doubling of the dividend is just the start. My best guess is management is trying to get the share price up so an activist investor or strategic acquirer is less interested in doing a take under. It is the best of both worlds here. A management team that wants to keep their job and the potential for a strategic to come in. Either way, the equity is still undervalued and the doubling of the dividend should bring back the income oriented investors that have been absent since COVID-19.

Let’s dig in….