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A Hidden Value Stock With 40% Upside

By Rupert Hargreaves. Originally published at ValueWalk.

Below is an excerpt from the summer issue of ValueWalk’s exclusive quarterly magazine, Hidden Value Stock investing.

In this issue, we talk with Verdad Capital and GrizzlyRock Capital, two small-cap focused funds with unique strategies. Below is an excerpt from the interview with GrizzlyRock regarding one of its small-cap picks. If you’re interested in finding out which stock is being discussed head over to our site, www.hiddenvaluestocks.com and subscribe today. In the summer issue, we highlight four hidden value stocks and also take a look back at previous picks.

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A Hidden Value Stock With 40% Upside

Some might consider the business highly risky. What is your view on this?

There is certainly leverage inherent in the business model, but we take comfort in the fact that at the prices at which we have been purchasing shares, the downside would be an incredibly draconian scenario for the equity. In this case, it’s important to separate the business model risk from the valuation risk; when we first purchased shares, the price implied over $190 million of write-downs, which we obviously didn’t think would be the case. Over the past two-quarters, book value has remained relatively stable at over $14 per share, when in the most recent quarter, net originations were positive, which we see as an additional positive catalyst.

What’s your bull and bear thesis for the stock?

We don’t have strict bull and bear price targets, but we believe we do have the edge in handicapping the range of outcomes as overwhelmingly in our favor. As book value has remained relatively stable over the past two-quarters at over $14 per share, we have become incrementally more confident that it will be difficult to lose capital if we’re buying under $10 per share.

If the stock traded to book value, it’d be worth just over $14 per share vs. the current price of just under $10. Thus, an investor should be able to garner 40% upside.

Why do you believe the market does not correctly understand the value in the business?

The former shareholder base has rotated out of the stock, and management has only recently begun seeing interest from institutional investors as they “clean up” the assets. We believe that XXX should continue to stair step higher as investors regain interest in the stock and see the stability of the current asset value relative to the current price. As a REIT, we also anticipate that when management cleans up the assets, the board will reinstate the dividend (in a sustainable manner), attracting more investor interest.

Under draconian assumptions, if we assume that XXX posts losses of $10 million each quarter for the next five quarters, we’re still left with a book value well over $12 per share. Based on positive net originations seen during Q1 2017, these losses should be less of an impact going forward. We are confident that management is being prudent in ensuring they receive the highest prices they can for the assets, so we’re happy to wait. Overall, if it takes 2-3 years to achieve a ~40% return, our investors will do well holding a relatively uncorrelated asset.

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The post A Hidden Value Stock With 40% Upside appeared first on ValueWalk.

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