Excerpt from the Stanphyl Capital letter to investors for the month of November 2018 discussing their long position in one micro-cap play. Stanphyl was profiled in the second edition of HVS and has had some of the best picks among all the funds (including Stanphyl with several 100%+ returns) we have profiled with 200%+ returns on some pitches.
At Stanphyl’s price target the micro-cap below would have a 280%+ return from today’s prices.
We continue to own AAAAAA, a designer and manufacturer of XXXXXXXX companies, which in November reported a mediocre Q1 for FY 2019, with revenue up 7.X% year-over-year but a slight increase in net loss (from .X2/share to .X4/share). Nevertheless, the company (mostly) reiterated its guidance for FY 2019, projecting approximately $2XX million of revenue (a $X million cut from previous guidance and approximately X% better than 2018) and non-GAAP EBITDA of at least $1X.5 million (a $X00,000 cut from previous guidance). Because of its approximately $XX2 million of U.S. NOLs, $X0 million of U.S. tax credit carryforwards, $2XX million in foreign NOLs and $X million of foreign tax credit carryforwards, XXXX’s income will be tax-free for many years; thus, GAAP EBITDA less capex essentially equals “earnings.” So if the non-GAAP number will be $XX.5 million and we take out $X.7 million in stock comp and $X million in capex we get $4.8 million in earnings multiplied by, say, XX = approximately $X7 million; if we then add in at least $3X million of expected year-end net cash and divide by X.X2 million shares we get just under $X0/share. However, the real play here is as a buyout candidate; XXXX’s closest pure-play competitor, AAAA sells at an EV of approximately 0.X5x revenue, which for XXXX (based on 2019 guidance) would be around $XX7 million. If we value XXXXs massive NOLs at a modest $X0 million (due to change-in-control diminution in their value), the company would be worth $XX7 million divided by X.X3 million shares = around $42/share.
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