A week or so ago I went through a grab-bag of bargains out there; the market has kept rallying so some/all of those are all a good deal higher. I’m actually fairly bearish on the broader market as I think price action of late looks very much like a prototypical bear market rally. It seems inconceivable to me that we are about to have the worst economic performance since the Great Depression, with up to 25% of the US labor market out of work – and yet the stockmarket (SPX) is <20% from all-time highs. Yes I know that’s a simplistic take and the monetary/fiscal stimulus is different this time – but then so is the economic devastation we are likely to suffer.
Nevertheless, this is not a post about the broader market. I consider picking the direction of the whole market perhaps the most difficult of all prognostications, and it has never been my strongest suit. In general I try to run a neutral (or close enough) book, balancing longs against shorts. And – as I highlighted in previous posts – I am still looking for idiosyncratic longs in this environment, that can outperform even a tough bear market. Again, I’m looking for performance on a mid-term (1-3 years) view, not the next two weeks. No doubt many of the names I have mentioned or written up will trade lower, with the market, in the near-term, if my worries re the broader market prove well-founded. But I’m looking for returns over the next 18 months or more – if I get nearer-term returns than that, great, but that’s ultimately gravy, not the main course.
Keeping that perspective in mind, I still think there are some incredible bargains to be had out there. Once again, this is more of a ‘quick hits’ summary than in-depth investment write-ups, in keeping with the fast-moving markets and the prior post on this topic.
A few (more) good ideas…
GAN Plc (LSE: GAN, and soon to be NASDAQ: GAN)
I previously wrote up GAN, the B2B provider of back-end software for online gaming and sports betting, here. At the time the stock was 180p and I thought it was substantially undervalued. Since then it has been through the ringer: the stock fell as low as 65p in mid-March (!!) during the height of the COVID liquidity squeeze, before returning to current levels around 140-145p, after a reassuring trading update. I have added substantially to my position, both in recent days and during the correction. Why?
In my first article looking for bargains lately, I suggested you wanted to look for businesses who’s stock had been punished but who’s fundamentals were either intact or benefited from the current maelstrom. The main takeaways from GAN’s trading update were that a) business is actually doing better than before, since people stuck in their homes are gambling more often; b) with no live sports occurring, patrons are invariably gambling on online casino games instead – hugely beneficial for GAN since their take-rate on casino is much higher (perhaps double) that of sports; and c) with physical casinos all closed, most land-based casinos are investing heavily in simulated gaming – another core GAN offering – such that GAN won Penn National (PENN) as a client, a new business opportunity that could see Sim Gaming revs grow 30-40% sequentially this year and next.
All in all, then, the business is quite likely to continue growing aggressively this year (30%+) – yet with BETTER margins due to product mix. I would also wager (haha) that when sports do return, it will likely be in the absence of live crowds, thus driving alternate forms of engagement for those watching (hence: gambling), and of course we will see explosive interest given the pent-up demand of 3+ months without sports. Naturally, the mid-term thesis re expansion of sports betting and gaming across the rest of the US remains (and is probably strengthened) post this temporary pause.
The main catalyst near-term for a rerating is the pending relisting on the Nasdaq – something that is going ahead this month (ie, within 3 weeks). Since the stock on LSE is borderline untradeable (due to illiquidity), I could see the stock remarking back to the highs (>200p equivalent) purely on the liquidity benefit alone. But mid-term I am increasingly confident this is a secular grower in the nascent online sports gaming/betting industry; and has no other profitable, cash-flowing peers like it listed in the US. At <10x FCF on this year’s numbers, and as low as 2.5x EV/sales on ’21E – when Draft Kings is at >8x sales and burning mountains of cash to acquire customers – it seems a singular value. This is currently my largest position.
Tanker stocks (TNK, STNG, DSSI, NAT, etc)
A quick word on oil tanker stocks. I have a reasonable position in a few of these (TNK and STNG are my favorites). I am far from the authority on tankers or shipping – see my friend Kuppy’s blog here for the full story and far more all-encompassing analysis – but the crux of the investment here is really one of time arbitrage. That is, it is well known that current oil tanker rates are at record highs, driven by a huge glut in oil globally and the lack of traditional storage to hold it; it is also fairly simple math to see that if current rates can be maintained anywhere close to current levels then many of these stocks trade between 0.5x and 2x FCF. Yes, they will earn between 1x and 2x their market caps, over a single year, if rates are maintained…but will rates be maintained?
The very fact that many of these stocks trade at <0.5x NAV AND a minuscule multiple of current cash flows tells you the market doesn’t think these rates are sustainable. While others will twist themselves into knots pretending to figure out how long the super-contango in oil will last (the factor driving the insane premium in rates), I’m here to tell you it doesn’t matter. That’s because 1Q is already in the books for these names, at close enough to record levels; and given we are printing most all of 2Q charters right now – when the Saudis are still pumping record levels and won’t even cut supply per the new OPEC deal until May 1 – its guaranteed 2Q will be a cornucopia of riches as well. Meaning, you don’t even need to capitalize the current boom extending beyond the next month to get paid here: most all of these names will earn half their market caps – and thus be massively delevered – by the time 2Q earnings roll around in mid/late July. If all these names were trading at high multiples of steel value (NAV) then yes, you’d have to think hard about downside payback risk in rates if/when the contango fails.
But at less than half of NAV, whilst accreting 25% of NAV per quarter? NAV accretion alone gets you 50%+ upside in names like TNK and STNG in the next quarter plus (actually this math is conservative). Moreover, a name like TNK will see LTV <20% in 1.5 quarters (a terribly low level of net leverage for a shipper), irrespective of what happens from here with rates – but if the stock stays here it will be at 0.3x NAV at that time. How exactly is the stock price going to stay there (all-time lows on a multiple of NAV basis) when they’ve printed the two highest quarterly earnings on record for the company? With such low leverage the company will simply retire shares hand over fist (or be acquired by the managers who run it and see the value or other shipping companies who do likewise). That is to say – the NAV multiple could remain depressed at 0.5x NAV (with the market thus giving you no credit for the explosion in current earnings on a go-forward basis) but NAV accretion alone will drive massive returns. Of course, it goes without saying underlying NAV – the value of the ships – should be going up at the same time. And God forbid the super-contango lasts even three months longer, or a lot longer (as my more bullish friends postulate)…But you don’t need that to win here. You just need the patience to sit through the next two earnings reports and let the algos and slow sell-side analysts catch up, and you should get paid 50-100%. Hence, time arbitrage.
Shinoken (8909 in Tokyo)
Another name I know well and have owned for a while (see here), Shinoken has not been spared the COVID pain, and frankly I can’t quite figure out why it has traded so poorly (40% down vs pre-COVID levels). I suppose ‘Japanese microcap’ has a fair bit to do with it, as did the delaying of the Tokyo Olympics. Nevertheless, this name should be at least partially if not significantly insulated from the impact of COVID, given that 40% of earnings come from recurring management contracts dependent upon occupancy ratios (and I doubt people are dying to move out of their houses at the moment). Similarly the life care and energy/LPG segments should be mostly unaffected. The general contractor segment may well see a slow down in new bookings – which would affect earnings, probably from 2021 onwards – if the Japanese economy tumbles and doesn’t respond to stimulus, but again Japanese construction has not stopped (unlike other parts of the world) so I doubt the near-term numbers fall off too much.
Really then, it is apartment development segment – about half of EBIT – that seems most at risk. To be sure, I doubt salarymen are rushing to close on investment apartments at the moment, and there will be a near-term hit. But remember that the broader market is still operating at much lower than normal levels (given the loan scandal affecting most of 2018 and 2019) and that key competitor Tateru has since left the market. No doubt there will be a slowdown but how much of one? And how long? At 3.5x P/E – basically back at the lows – and with a MUCH better balance sheet (almost zero net debt, criminally under-levered for a developer), there is no permanent capital impairment risk here and so you have the capital structure to get through this, whatever ‘this’ is. The company appears to share this belief, as they instituted a (small) buyback a few weeks ago, into the teeth of the downturn. I doubled my position over the last three weeks and think on a three year view the stock could well be a 3-4x from here.
Disclosure: long GAN.LN; 8909.JT; STNG, TNK, NAT, DSSI