In this newsletter, I share the most intriguing investment ideas I've come across in the past week from a variety of sources, including Value Investors Club, various investment blogs, hedge fund letters, and more. I aim to present you with concise and easily digestible investment idea summaries that quickly capture the essence of the thesis.
This week's newsletter includes:
National Vision (EYE, $1.3bn) - Oversold discount eyewear retailer.
Clipper Realty (CLPR, $234m) - Multifamily REIT with near-term catalysts.
SharkNinja (SN, $5.7bn) - Recently spun-off appliance maker.
Okamoto Industries (5122:T, ¥89.7bn) - Cheap manufacturer of consumer and industrial goods.
Civitanavi Systems (CNS:MI, €119m) - Potential multi-bagger in the aerospace and defense industry.
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National Vision (EYE) - Oversold discount eyewear retailer
A recent short-term price dislocation at National Vision presents an opportunity to buy one of the leading eyewear retailers at a discount to its intrinsic value. EYE shares have plummeted over 30% since Walmart announced plans to end its shop-in-shops partnership with National Vision, accounting for 10% of EYE’s EBITDA. The market seems to have overreacted as the actual EBITDA loss is likely to be lower. EYE has been preparing for the partnership loss and built the vast majority of new stores (70%) in close proximity to Walmart’s shops-in-shops. Moreover, the contract allows National Vision to keep customer contact information which the company might use to convert these customers to its own stores. While the short-term thesis revolves around temporary sell-off, there is also a longer-term value play here as EYE appears to be on the cusp of a profitability inflection. EYE margins have declined markedly over the recent years due to temporarily elevated capital expenditures and inflationary pressures. However, there is a clear path for profitability to return to pre-COVID levels as capital expenditures normalize and inflationary pressures are offset with price increases. EYE is currently valued at 10x 2025 EBITDA. Recent private equity buyouts of large retail chains were done at 13x-17x EBITDA multiples, including Goldman’s acquisitions of MyEyeDr (17x). A potential acquisition at the lower-end of this range would imply a 50%+ upside. Full EYE write-up on Value Investors Club (free guest account is required).
Clipper Realty (CLPR) - Multifamily REIT with near-term catalysts
Clipper Realty is a multifamily REIT that owns several apartment buildings in New York. CLPR presents an event-driven setup where a couple of near-term catalysts should boost NOI which is expected to drive the share price 20-30% higher. Recently, the company announced that it has reached a tax abatement agreement on its Flatbush Garden property with New York city regulators. The key point of the agreement - which seems to have been overlooked by the market - is that CLPR will stop paying $7.4m in taxes and will be eligible to receive an additional $8m in reimbursements per year. Moreover, CLPR has been recently successfully converting larger single bedrooms to double bedroom apartments in its Pacific street project which is expected to boost NOI by a further $4m by Q3’23. Combined, these positive developments will drive EBITDA upwards by incremental $18m, which is a material improvement vs the current run-rate of $77m. Despite the expected 20%+ NOI boost, CLPR is currently trading at the same levels as before the tax abatement announcement. The market’s muted reaction could be explained by CLPR purposefully not highlighting the amount of tax savings in the press release in order to not irritate the regulators. Going forward, NOI might also benefit from increasing rents in New York. CLPR’s multifamily rental peer Veris Residential has recently reported a 22% increase in same store NOI. Full CLPR write-up on Value Investors Club (free guest account is required).
SharkNinja (SN) - Recently spun-off appliance maker
SharkNinja is a household appliance producer that was recently spun off from its Chinese parent company JS Global Lifestyle. SN shares have experienced significant downward pressure since the spin-off. This seems to have been driven by forced selling as JS Global Lifestyle’s shareholder base is comprised of Chinese institutional investors that cannot own assets in the US due to capital controls and/or mandates. The sell-off has created an opportunity to own SN at 17x TTM P/E. While this might seem like a fair valuation, SN is a rapidly growing business that holds dominant positions across multiple appliance industry sub-segments in the US and the UK. The company also appears inexpensive on a relative basis as its peers (including SEB SA and De’Longhi, among others) are valued at 18-33x P/E multiples. Given that SN has displayed superior margins, returns on equity and growth rates vs the comps, the company might reasonably be valued at a 25x P/E which would imply a potential upside of 40%+. The current valuation discount might be partially explained by the market's worries over SN's corporate governance as the controlling Chinese shareholder holds a 57% ownership stake. However, these concerns do not seem warranted given the controlling shareholder's solid track record of capital allocation at JS Global Lifestyle. As the forced selling subsides, SN shares are expected to re-rate. Full SN pitch on Alex’s Investment Memo blog.
Okamoto Industries (5122:T) - Cheap manufacturer of consumer/industrial goods
Okamoto Industries is a Japanese manufacturer of consumer goods (condoms, heat pads, etc.) and industrial items (vehicle seat covers, construction wallpaper, etc.). While Japan boasts numerous companies with substantial cash reserves that may appear attractively priced, their valuation discounts are typically justified by a lack of shareholder returns. However, Okamoto Industries stands out as a rare case of a company that combines an attractive valuation with a strong track record of capital allocation. The company holds 67% of its market cap in cash + marketable securities. While at first glance Okamoto shares might seem reasonably valued at a 15x FY24 P/E, adjusting for cash and marketable securities investors are currently paying less than 5x FY24 net profits. Okamoto's management has been consistently executing share buybacks (share count has been reduced by over 40% since 2000) while maintaining a regular dividend payout (current yield of 2.3%). At current share price levels, Okamoto offers a highly asymmetric bet on the planned international expansion of the condoms business and the potential rebound of the historically profitable industrial segment (two-thirds of total revenue in FY23) that suffered from volatile energy prices. The downside is well protected by robust fundamentals and large cash/marketable securities position. Valuing the business at a reasonable 14x EV/2024 net profits would imply an upside of more than 60% from current share price levels. Full 5122:T pitch from Ennismore Fund Management.
Civitanavi Systems (CNS:MI) - Potential multi-bagger in the aerospace/defense industry
Civitanavi Systems is a producer of navigation and inertial stabilization systems primarily for aerospace and defense end-markets. CNS is an impressive business with high growth rates (63% 10-year topline CAGR), solid margins (26-36% EBITDA margins over the last 4 years) and high returns on equity (mid-20 ROEs). Despite its high business quality, CNS is currently trading at only 8x 2023E EBIT and 10x 2023E P/E (ex-cash). The opportunity to invest at a low valuation exists as CNS shares plummeted c. 20% in Dec’22 driven by a cut in 2023 topline growth guidance (31-44% vs 46-51% sales CAGR for 2021-2024 guided previously). The market seems to have overreacted as the guidance cut was primarily due to delays and supply chain shortages as opposed to any structural changes in the market. CNS is likely to continue displaying solid growth going forward due to increasing number of orders, as indicated by bookings growing 72% in Q1’23 year-over-year. Other potential growth drivers include the expansion in the UK, a larger production facility in Italy and numerous R&D projects. Incentives are well-aligned as the management, including the two co-founders, owns over 60% of outstanding shares. Full CNS:MI pitch from Kip Johann-Berkel.