Quarterly Letters Ideas: Q2 2021
Every quarter, I scourge through a countless number of quarterly letters for the best micro/small-cap stock ideas so you don’t have to.
Welcome to my first Quarterly Letters Ideas report.
Digging through 40+ letters can be tedious and I seek to alleviate this for you by compiling what I believe are the best ideas. Solid under-the-radar investment managers provide interesting ideas within their quarterly letters, and I will focus on them. I do not discriminate between long/short ideas but will always focus on small/micro-cap stocks. I will be trying out this concept over the next few quarters, posting the ideas on the last business day of the month following the quarter-end.
I want to emphasize that I will not be conducting an in-depth analysis of each stock. Rather, I will summarize the key points and leave it to you, the reader, to determine if the idea is worth pursuing. I will also try to stay away from letters that massively move small/micro-cap stocks (Altafox, Kerrisdale). Feedback is welcome.
Long Idea by Greystone Capital Management: Thunderbird Entertainment (CVE:TBRD)
I initially found TBRD through a Twitter account I follow, @everyonehatesp1. The individual started a blog as well, providing in-depth analysis on various micro-cap names (with a niche focus on insurance). I highly recommend you check out everyonehatespoetry’s substack.
More recently, Greystone Capital Management profiled the company in their quarterly letter. Thunderbird is a production and entertainment studio. Mr. Wilk argues that movie studios are generally bad businesses. They rely on blockbuster hits to gain traction and most studios spend millions of dollars on IP that generate little to no profit. TBRD, however, has been able to circumvent that. Here are a few key points:
Canadian Tax Credits for content creators typically cover almost 75% of the production costs. In addition, the company’s projects are usually pre-sold to streaming platforms before major costs are incurred. These two factors significantly de-risk its business model and insulate TBRD against project flops.
It has developed successful franchises: Atomic Betty, Kim’s Convenience, Highway thru Hell, among others. The company also owns an economic stake in well-known franchises, such as Blade Runner and The Last Kids on Earth.
TBRD is backed by a solid management team and has Frank Giustra, Lionsgate’s founder as a shareholder. Mr. Giustra currently owns a 14% stake in Thunderbird.
The company’s top line and bottom line are growing double-digit but the stock trades at 10x EBITDA. If you would like to further pursue the idea, I have included the original tweet that leads to Greystone’s quarterly letter.
Long Idea by Immersion Investments: Basic-Fit (AMS:BFIT)
Immersion Investments profiled Basic-Fit NV in their inaugural quarterly letter. Basic-Fit operates low-cost fitness clubs across various European countries. Immersion believes the stock to be both an interesting value and growth story for the following reasons:
COVID's impact and growth initiatives have masked the company’s strong unit economics.
The management team aspires to grow its footprint from 973 units today to 2000 units by 2025 and serve over 5M individuals.
Two comparables trade at a significant premium to BFIT. Pricing the company is at half of its comparable’s multiple could make this name a three-bagger by 2025.
To tie it all up, Bit-Fit is managed by Rene Moos, a former professional tennis player. Mr. Moos has founded several fitness centers and currently owns 16% of the company. The letter delves deeper into the company’s unit economics and some of the key risks to the thesis. I encourage everyone to read it. The letter can be found via the tweet below.
Long Idea by McIntyre Partnerships: Garrett Motion (NASDAQ:GTX)
Chris McIntyre from McIntyre Partnerships appeared on the investing podcast “Yet Another Value Podcast” in May, profiling the stock following the company’s bankruptcy. GTX is a turbocharger supplier for major OEMs. Here are a few key points:
Garrett operates in an effective duopoly and enjoys a significant MOAT around its turbocharger business. Many believe turbochargers will quickly become obsolete from the advent of EVs. However, Chris makes a solid rebuttal, believing the market will actually grow in the medium term before declining.
Following a “non-fundamental” bankruptcy, GTX now trades at a steep discount to peers (BWA, CON GY) despite growing well above the auto market sector.
The stock has virtually no coverage, and institutional interest is low. This should pick up as they continue to print solid results.
For those interested, GTX released their Q2 2021 results on July 29th. I encourage you to go through the earnings call as many of Chris’ points are validated by management. He has also uploaded a PowerPoint presentation with his key assumptions. McIntyre Partnerships quarterly letter can be found in the tweet below.
Long Idea by Laughing Water Capital: TransAct Technologies (NASDAQ:TACT)
Laughing Water Capital profiled TransAct Technologies, a legacy hardware business that is quickly transitioning to a software-based business model. Some of his key points include:
The company’s legacy hardware business sells printers that issue tickets in casinos and racetracks. The industry is structured as a duopoly and a stringent regulatory approval process creates strong barriers to entry. This is a high-margin business that generates significant cash flow and helps fund their new business;
BOHA, the company’s foodservice technology, is both a POS system and a data-driven software that helps restaurants manage inventory, monitor food & equipment. TACT has a sales partnership with Apple and the company’s pipeline grew to $140M as of the latest quarter.
Their POS/Software platform trades at a meaningful discount to other players in the space. The management needs to continue executing for the multiple disparities to shrink, but recent data points are promising.
If you would like to further pursue the idea, I have included the original tweet linking to Laughing Water’s quarterly letter. He has other interesting names within the letter.
Short Idea by East 72 Holdings: Sezzle Inc (ASX:SZL)
Andrew Brown, Executive Director at East 72 Holdings provided his clients an in-depth analysis of Sezzle Inc, a ‘‘Buy Now, Pay Later’’ financing company based in Minnesota, but listed in Australia. East 72 questions Sezzle’s business model through seven components. I will highlight two of them.
Sezzle’s lending practices are poor. Nearly 60% of its losses over the past four years are linked to credit losses. While most other fast-growing companies attribute the majority of their losses to sales & marketing, Sezzle has only spent $7M in marketing expenses (and that will increase significantly). Delinquency trends in 2021 are similar to the second half of 2020 and continue to be elevated.
Sezzle’s funding structure allows merchants to re-invest the proceeds from a sale into Sezzle’s facility at a LIBOR+3% rate. East 72 argues that this is not common practice and is likely a way for “unbankable” merchants (e.g. marijuana retailers, escort services, etc.) to park their money. While this is not illegal, the company might not be sufficiently well-funded to repay merchants, which hints at continued rounds of equity offerings. The company might also lose some of these assets if the U.S. legalizes marijuana at a federal level.
To tie it all up, East 72 argues that hardly any investors have dug deep enough to uncover some of the ugly stuff due to its Australian listing.
If you would like to further pursue the idea, I have included the original tweet linking to their quarterly letter (press on it to see the link).
Disclaimer: I do not have a position in any of the aforementioned securities. The information contained above is not and should not be construed as investment advice, and does not purport to be and does not express any opinion as to the price at which the securities of any company may trade at any time. The information and opinions provided herein should not be taken as specific advice on the merits of any investment decision. Investors should make their own decisions regarding the prospects of any company discussed herein based on such investors’ own review of publicly available information and should not rely on the information contained herein.
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