Excerpt from the Stanphyl Capital letter to investors for the month of April 2018 discussing their long positions in two micro-cap plays. Stanphyl was profiled in the second edition of HVS and has had some of the best picks among all the funds we have profiled with 200%+ returns on some pitches.
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We continue to own XXXXXXXXXXXX, a designer and manufacturer of XXXXXXXXXX companies, which in February reported a Q4 2017 roughly in-line with previous guidance. Following extensive restructuring, XXXX is now a GAAP profitable company with around $X50 million of annual 3X% gross margin revenue, $X million in free cash flow, $3X million of net cash and approximately $34X million of U.S. NOLs, $1X million of U.S. tax credit carryforwards, $23X million in foreign NOLs and $4 million of foreign tax credit carryforwards. Assuming 5.X million shares outstanding and valuing the company at just X0% of revenue on a EV basis plus adding in just $3X million for all the NOLs and tax credits makes this a mid-$X0s stock vs. our basis in the $15s. The company has an ongoing process to investigate “strategic alternatives” and may sell itself, buy something that can utilize the NOLs or return some cash to shareholders, or it could decide to simply follow its current course of gradual improvement. I’m comfortable owning it at our price basis in any of those circumstances.
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