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General Category => General Discussion => Topic started by: kab60 on March 17, 2020, 03:21:34 AM

Title: Levered small cap value...
Post by: kab60 on March 17, 2020, 03:21:34 AM
According to research by Verdad, the highest expected returns after a large correction is typically in small cap value - and obviously levered small cap can be explosive. I understand why everyone, including myself, are attracted to strong balance sheets and low leverage in times of crisis, but coming out of the GFC a lot of multibaggers were found in small, levered equities that made it through.

Considering everything is getting soldt indiscriminately, the proverbial baby might be thrown out with the bathwater. Not saying the time is right now, but it would be nice with a list. It seems the biggest risk for many companies atm is liquidity, and that risk is real, but perhaps well stacked debt at low rates isn't such a big issue unless companies have to refi in the current environtment.

Personally, I have a large investment in Berry Global. But that has actually held up quiet well despite high leverage (it was sold down prior to coronavirus scare due to company specific issues).

Ashbury Automotive is interesting in that they have high recurring revenue from service, and it's a high quality business, plus they can terminate an acquisition (and probably will) that otherwise would've take leverage to 4x.

It's down almost 2/3 in a short while, but I'm still not sure one gets compensated for the risk versus say Cambria Automobiles or Vertu Motors that has low to negative net debt.

So, what's your favorite levered value small/mid/large cap? Possibly throw in some cyclicality too for maximum YCK factor.
Title: Re: Levered small cap value...
Post by: Broeb22 on March 17, 2020, 03:34:29 AM
In fairness, I actually committed the sin you just described by selling these more levered names, but I plan to re-buy after the wash sale period.

CVET - pet product distributor with about $100 mil OCF and over $1 billion in debt

MOD - Commercial HVAC OEM for datacenters (CyrusOne is a big customer I think), and an auto business they are trying to partially separate. Separation has been challenging because they are trying to keep the off-road part of that business which shares mfg. facilities with the on-road auto biz. They claim pro forma cash flow after the separation of auto will be very high relative to market cap. I donít recall the debt figure but itís a transforming auto name with some debt.
Title: Re: Levered small cap value...
Post by: james22 on March 17, 2020, 04:58:03 AM
I like the idea:

Companies that generate free cash flow do much better coming out of a recession than companies that donít. And, whatís most interesting is that buying cheap and illiquid companies does massively better.

So if you go into the market and say, Iím going to take advantage of this recession by buying small companies, where the stock price has just gotten puked out because people are panicking, but itís profitable and cash flow-generative, but itís so cheap and itís illiquid, which means that the small change of the market was down five, this thing is so illiquid it went down ten that day Ė you go and buy that stuff, your returns coming out of the recession are extremely attractive.

But almost by definition seems too hard to make a list? A Small Value fund seems to make more sense.

I'm building up my position in Vanguard's VSIAX.

Title: Re: Levered small cap value...
Post by: valuedontlie on March 17, 2020, 05:06:28 AM
i think this is more likely to work with a large(r) basket of "cheap" companies that look on the brink of failure / are down significantly... get a big list with some parameters like YTD down %, low p/b, low p/cf, and maybe even single digit stock price... some likely go BK, some do OK, and some have huge returns (reminds me of HSNI coming out of GFC)...
Title: Re: Levered small cap value...
Post by: kab60 on March 22, 2020, 03:06:42 AM
Great suggestions. Covectrus looks interesting. If one is looking for a gamble, GTX also looks interesting. Optically huge amount of debt, but they can defer asbestos liability payments which is not used to calculate leverage. Cash flow machine with high degree of variable cost, but auto parts and they might trip covenants. No position in GTX, but I have one in Australian AMA Group, which is smash repair shops. Those usually do fine in a recession since insurance pays. Down 80 pct on weak H1 and slashed dividend which probably scared retail. Company has Lots of liquidity and there has been insider buying. Blackstone almost acquired the Company for 10xebitda in 2018.
Title: Re: Levered small cap value...
Post by: stahleyp on March 22, 2020, 03:31:46 AM
speaking of small cap value, if you look at IJS, it's getting pretty close to 2007 levels.
Title: Re: Levered small cap value...
Post by: ratiman on March 22, 2020, 06:34:06 AM
This is going to a cash squeeze recession. Tthere are going to be a ton of otherwise healthy businesses / assets that simply run out of working capital or immediate cash and face a very difficult cash squeeze (many of these will be private companies). Buyers with a good balance sheet should do very well. I think you'll be better off holding the acquirers instead of the companies short of cash. So maybe a company that has a history of acquisitions and a good balance sheet. Radiant Logistics has a history of acquisitions and just increased its credit facility to $150M.
Title: Re: Levered small cap value...
Post by: kab60 on March 25, 2020, 02:50:55 AM
Radiant has a history of acquisitions, but I'd say it has been quiet poor. I was actually invested some years ago but didn't like what I saw.

Otherwise I agree, this is a real cash crunch for a lot of Companies. And many will breach their covenants. But, I think that's a huge opportunity.

I'd expect, and do see signs of that, of banks' willingness to work with lenders. Banks have been vilified since the GFC, and this is their time to shine - this is their time to keep main street and businesses afloat.

Thus, companies working with bank lenders shouldn't have any trouble getting a waiver on the covenants. No banks wants to take a writedown due to 3 months of liquidity issues - nor risk getting in the headlines for bankrupting sounds companies hit by government mandated lockdowns. I can't say I'm hunting for Companies that risk breaching covenants, but there'll be multibagger among those that look dicey and will eventually make it through.
Title: Re: Levered small cap value...
Post by: kab60 on March 25, 2020, 02:53:44 AM
I haven't pulled the trigger myself, but GTX looks like a potential multibagger from here. I think a basket of equity stubs with huge FCFE would do well.