market folly

Continuing coverage, we're posting up notes from the Value Investing Congress.  Below are notes from the presentation of Guy Gottfried of Rational Investment Group.  His talk was entitled 'Underfollowed and Undervalued: More Small Cap Bargains.

Over the last 3 meetings, his 4 ideas on average have been up 55% in the 8 months after the conference (we've posted up Gottfried's presentation from the last conference as well).

His Checklist:
1.  Do I understand the business?
2.  Is the balance sheet sound?
3. Am I partnering with the right people?
4. Am I getting a great deal?

Two Small Cap Ideas

ClubLink Enterprises (TSE:CLK) - Gottfried pitched a company that operates 51 golf clubs in Canada and the US (in addition to a tourism business in Alaska with port and docks for tour ships). Owns white pass and Yukon route tourist excursion railway in Alaska.

$7.55, 26.7M shares, $201M market cap, 0.30 dividend, 4% yield.

Illiquid.  Financials in Canadian dollars.  Trades at 5.5x FCF.

Each segment, golf and tourism, worth more than stock price.  No sell-side coverage, illiquid, no need to raise capital. High insider ownership.   Gottfried says EBIT has been stable even through the recession.

CEO Rai Sahi is a control investor, outstanding capital allocator, aggressive buyer of stock.  Has issued options only once in 8 years, owns a majority of outstanding shares.  Company has bought back 19% of shares in past 12 years.

Since 2010, has acquired 11 clubs at fraction of replacement costs.  Spent $25M on gulf clubs with replacement value of $100M. Debt: ave maturity 2022, most of it is fully amortizing mortgages.

Valuation: FCF $26.5M, $0.99/share, 7.6x Catalysts: FL results get better, and incremental acquisitions in FL. Tourism grows at the port, expected to grow 10% next year.  Continued stock repurchases.



Canam Group (TSE:CAM) - His second idea was a maker of steel joints and decks, structural steel, steel bridges that he argues is undervalued and very well-run.

$5.05/share, 42.1M shares, 213M market cap, 476M EV. (lots of debt)

Largest producer in Canada, 75% market share, #3 in US with 15% share (top 3 control 90%)  20 plants in Canada and US. Trading at 3.8x normalized FCF, 2.7x FCF excluding non-core assets being actively monetized.

Trades at 69% of understated book value. Why cheap? 1.  US operations (2/3 of revenue) mired in severe cyclical downturn 2. Recent acquisitions during industry slump haven't paid off yet. 3.  Multiple non-core investments Run and 16% owned by Dutil family.

From 2008 to 2011, made $200M of acquisitions. 2 US steel fabs.  $263M in debt, only 27% subject to covenants, has $527M of net WC, land and buildings at cost.  Owns all of its plants and real estate, 2097000 sq ft, average year acquired 1989.   Valuation: average EBITDA last cycle $63M, adjusts to get to $56M FF, $1.32/share, or 3.8x P/FCF.  (He admits that the numbers he used as "normalized" were during the boom years, but says it's justified because they've bought more fabs since then.)

Catalysts:  Rebound in US operations, continued monetization of non-core assets, debt repayment, eventual resumption of dividends.


Embedded below is Gottfried's slideshow presentation from the Value Investing Congress:





Be sure to check out the rest of the hedge fund presentations from the Value Investing Congress.