Up 64% And More Room To Run

Distressed Equity Investment is up more than 60% since April and Wall Street is just getting started

In April I wrote up a distressed auto manufacturing company trading significantly below their replacement value. The management team was buying shares. They were selling assets. Costs were going to get cut and prices were going to be raised. The stock was trading at $6.27 and before the downturn the stock was over $140 per share. It just looked too cheap. If the management was able to turn the company around and survive the downturn the equity would re-rate, much higher.

Today the stock is at $10.30. Tom Hayes was talking it up on Fox Business News as a top position. The management team sold assets. They refinanced their debt. And management put their money where their mouth was and bought over $740,000 worth of stock.

Despite the runup in the stock price, I haven’t sold a single share. I sized the position pretty small given the debt and risk of bankruptcy and planned to hold the name through a multi-year period. If the thesis plays out I don’t see why this isn’t a ten-bagger.

So while browsing stock forums the other day I stumble upon a writeup of this company. I thought the writeup was so good I decided to publish it below for all Alpha Letter Pro subscribers. The author calls the thesis similar to legendary investor Charlie Munger’s play in Tenneco back in 2001.

As Munger detailed in the 2017 Daily Journal Annual Meeting:

"I’ve read Barron’s for 50 years. In 50 years I found one investment opportunity in Barron’s, out of which I made about $80 million. For almost no risk. I took the $80 million and gave it to Li Lu, who turned it into $400 million or $500 million. So I have made $400 million or $500 million out of reading Barron’s for 50 years and following one idea…I didn’t have a lot of ideas. I didn’t find them that easily, but I did pounce on one."

The author wrote the name up two months after I wrote it up but since he did such a good job I thought I would share it. Plus I think the thesis still holds true (besides the slight increase in the share price) that I think everything here is still actionable. Has a note, the author has a $75 per share price target over a 48 month period. I think that is more than reasonable.

Hope you enjoy the work here.