OUR RESEARCH

Initiating research coverage on long and short investments

Current Investment Writeups

September 12, 2019

Precision Optics: Ross Acquisition Makes Long Case Intriguing

  • Expected Value vs. $1.42 Market Price (as of 9/11/19) = $2.85/share

  • 101% Upside To PEYE’s Price Target, Which Reflects a P/S Multiple of 3.7X

  • Comparable Companies Trade at an Average 5.7X Revenue Multiple, Versus Just 1.7X for PEYE

Precision Optics Corporation (ticker PEYE) is a microcap medical device company whose products include microprecision lenses and micro medical camera, 3D endoscope, and robotic surgery systems. Over the past five years, PEYE has basically been treading water, with annual losses ranging from $350,000 to $1.2 million and annual revenues relatively flat in the $3 million to $4 million range. However, PEYE recently completed the acquisition of Ross Optical Industries, Inc., which appears to significantly improve PEYE’s investment risk-reward calculus. On a pro forma basis giving effect to the transaction, PEYE was solidly profitable in FY 2018 and basically breakeven in the first three quarters of FY 2019. Moreover, the Ross transaction will cost PEYE shareholders just $2 million at most, pending a $500,000 contingent earnout payment, meaning PEYE acquired Ross at just a mid-single digit P/E multiple, a seeming bargain.

Acquisitions can really move the needle for an acquirer’s investors, occasionally for the better, unfortunately more often for the worse (normally acquisitions are value destructive because they are made primarily for management’s empire building purposes). Happily, however, in PEYE’s case we think the Ross acquisition falls clearly in the former category. With high insider ownership (major shareholders hold around 45% of the outstanding common stock), one can expect the merged company’s assets to be put to their highest and best use, with the benefits thereof accruing to the company’s owners (PEYE longs). Given a recent stock price of $1.42/share, there is ample 101% upside for shareholders to our target price of $2.85/share (or ~3.7X our pro forma FY 2019 revenue estimate). This multiple appears more than reasonable given the combined company’s nearly 25% organic revenue growth and near breakeven underlying operations. (For comparison purposes, peers in the medical device space trade at an average revenue multiple of 5.7X.) In sum, with the Ross Acquisition, PEYE’s pie just got quite a bit large for shareholders, but with minimal dilution. Enterprising small and micro-cap investors should carve a slice out for their portfolios.

July 31, 2019

CCUR Holdings: Alternative Finance With an Entrepreneurial Bent

CCUR Holdings Inc. (ticker CCUR) presents an investor the chance to partake in an entrepreneurial alternative finance company with high insider ownership for less than two-thirds of book value. The company has recently transformed its business model into one that could prove quite profitable, which would necessitate a re-rating of the stock to a more conventional 1.25X book value, implying a target price of $7.47/share (or double the current market price). Compared to mainstream financial stocks, such as mega-cap JPMorgan (which trades at ~1.6X book), 1.25X does not seem too much to ask, considering we believe that CCUR can eventually earn a mid single-digit return on assets (versus just a ~1% ROA for JPM). At JPM’s multiple of 1.6X book value, CCUR would trade at $9.56/share, nearly 160% higher than the recent market price.

Often the best values in the stock market are companies that are underfollowed and misunderstood (and, hence, underpriced), because they are small enterprises undergoing significant change (think Berkshire Hathaway circa 1965, then trading around the same P/B multiple as CCUR currently). Investors cannot see what the finished product will look like, so they refuse to pay up for it. CCUR clearly falls into this category: no analysts cover it, so there are no earnings estimates; social media chatter is virtually nonexistent (one finds only bot mentions); a Google News search returns no legitimate results (just bot- produced “articles”); and there is but one lonely Seeking Alpha article on the company since its transformation began. Bottom line? Investors have the chance to get in on the ground floor at CCUR. So if “buying low” is one’s principal investment goal, we believe this stock fits the bill.

July 16, 2019

Merrimack: Relatively Safe Pharma Play with Significant Upside

****NOTE: SEE JULY 29TH BLOG FOR MACK LONG THESIS UPDATE (LINK HERE)****

 

Merrimack Pharmaceuticals (ticker MACK) is an interesting pharmaceutical play for the enterprising small cap stock investor. Following a long history of drug trial failures and the 2017 sale of its main commercial drug assets to drugmaker Ipsen S.A., the stock now effectively trades as a low-priced contingent value right (or CVR) regarding the future approval by the FDA of the cancer drug Onivyde for several indications. Ipsen is running two Onivyde drug trials currently, one for first-line treatment of pancreatic cancer (or FLPC) and the other for small cell lung cancer (or SSLC). MACK would receive from Ipsen $225 million for approval for the former and $150 million for approval for the latter, or $375 million if treatment for both indications is approved. In addition, MACK would receive $75 million for FDA approval of Onivyde for any other indication (although no trials are currently active).

 

Conservatively assuming (1) FDA decisions on the two active Ipsen drug trials are received within four years and (2) just a 20% chance of FDA approval of Onivyde for either FLPC or SSLC, we reach an expected value for MACK’s Ipsen CVR revenue stream by 2023 of $75 million, or $5.62/share. MACK has other assets (mainly cash and investments) which we currently value at $4.19/share, bringing our total valuation for MACK’s equity to $9.81/share, or 75% above the current market price. Importantly, the de-risked nature of these other assets puts a solid floor under the stock and means that investors are receiving, for less than $1.50 ($5.61 minus $4.19), two CVRs that could be worth up to $28/share. To top things off, MACK has also announced that it will pay a special dividend to shareholders of between $1.27 and 1.42 per share, which should further de-risk the investment proposition.

 

While most pharma stocks fall firmly into the speculative category (at best), we believe that MACK right now represents an old-fashioned value play with major (75%) potential upside. Smart investors would be wise to “take their medicine” and put some MACK in their portfolios.

March 20, 2019

A Multi-Step Rx for Rite Aid's Woes

  • In mid-March, Rite Aid issued a press release announcing comprehensive change in the C-­suite, with the CEO "stepping down" and the COO and CFO being replaced.

  • While a good (albeit partial and belated) first step, further refreshment of the board of directors, as well as the adoption of corporate governance and operational best practices, is necessary.

  • We provide herein a tailored, multipart and long­-acting prescription to revitalize Rite Aid over time. The time to implement the revitalization process is now.

  • We continue to hold a long position in Rite Aid stock, believing that the investment is attractive on a risk/reward basis.

February 06, 2019

Rite Aid: Promises To Shareholders Not Kept

  • Last September, Rite Aid promised that the separation of the CEO and Chairman roles was just the "first step" in corporate governance reform at the company.

  • Since then, the company has been silent on further governance reforms.

  • The recent reverse split proposal appears to us yet another shareholder­unfriendly entrenchment device employed by the board and management.

  • Rite Aid can never fulfill its potential unless it attains best­in­class governance. Fortunately, the company is now a promising target for activist investors.

January 28, 2019

Is A Snap Buyout In Store? Unlikely.

  • Snap longs are probably hoping for a buyout to mitigate some of their losses.

  • Unfortunately they have no say in the matter, only CEO Evan Spiegel and CTO Bobby Murphy do.

  • For tax and other reasons, it makes little sense for the two founders to sell the company, nor are there logical buyers other than Facebook.

  • Hence, Snap longs will need to pin their hopes on a turnaround of the flagging underlying business.

January 23, 2019

Tesla: End Of Customer Referral Program Weakens Bull Case

  • Tesla bulls love to proclaim that the company does not pay (and never has paid) for advertising, implying that Tesla is not "demand­constrained".

  • This claim is demonstrably false.

  • Tesla CEO Elon Musk recently stated that Tesla's customer referral program (essentially a paid advertising campaign) will cease on February 1st due to budget constraints.

  • Will demand for Tesla's EVs and solar products weaken when the company's proselytizers cease being compensated?

November 02, 2018

Genworth - Stakeholder Incentives And Facts On The Ground Point To Ultimate Approval Of China Oceanwide Merger

  • In October 2016, Genworth and China Oceanwide executed a Merger Agreement pursuant to which China Oceanwide will acquire Genworth for $5.43/share in cash.

  • The final approvals for the merger are now lining up, with Genworth's principal insurance regulator holding a public hearing on the merger in less than four weeks (on November 28th).

  • Given the incentives of the parties involved and the facts on the ground, we believe the China Oceanwide merger is very likely to be approved by the remaining applicable regulators.

  • A recently published Genworth short thesis regarding the merger will in our opinion inevitably be disproven for the reasons stated herein.

October 25, 2018

Rite Aid ­- Last Chance For Shareholders To Effect Change

  • Rite Aid's 2018 Annual Meeting is just a few short days away.

  • Final opportunity for another year for shareholders to actually exercise their rights as the owners of the company.

  • The more we examine Rite Aid, the more we believe that new leadership is essential for the future success of the company.

  • Shareholders must act now, while they still retain leverage over Rite Aid's management and board of directors.

October 19, 2018

Rite Aid - Vote 'Em Out On October 30th

  • Rite Aid's incumbent management and board of directors have failed shareholders repeatedly.

  • Insanity is keeping the same people in power and expecting a different result.

  • For Rite Aid's equity to ever have significant value, it needs to be entrusted to people who take stewardship seriously.

  • Shareholders have the perfect opportunity on October 30th to register their discontent by voting against all incumbents at the annual meeting.

July 20, 2018

General Motors ­- Time For Activist Involvement

  • General Motors stock has missed out on almost 8 years of the current bull market and has significantly underperformed peers.

  • We believe the underperformance is largely attributable to the lack of financial alignment between board/management and shareholders, as well as subpar corporate governance.

  • An activist in GM shares could change the foregoing dynamic by forcing the board of directors to prioritize the interests of shareholders above those of management.

  • If incentives were properly aligned, we believe GM's stock would re­rate much higher to approximately $64/share, representing 62% upside from the current $39.50 level.

June 12, 2018

Ackman Is Back; Time To Back Ackman Via Pershing Square Holdings

  • Ackman-as­-a-Service is available at a firesale price.

  • Ackman's financial interests are aligned with Pershing Square Holdings shareholders.

  • Recent signs point to Ackman's comeback being firmly underway. The time seems ripe to invest in Pershing Square Holdings.

May 23, 2018

Techpocalypse 2018: Expect Tech Company Valuations To Eventually Mean Revert

  • Google's original corporate motto was "Don't Be Evil"

  • Many large tech companies have failed this test in the eyes of the public.

  • Their respective business models should come under increasing regulatory and public pressure over time.

  • Meanwhile, tech company valuations remain quite stretched and are likely to mean revert.

May 08, 2018

GM's 2018 Proxy Statement: Time To Fix The Flawed Senior Executive Compensation Plan

  • We have reviewed General Motors' 2018 proxy statement from a shareholder perspective; it leaves much to be desired.

  • GM's senior executive compensation system is unnecessarily complex and does not align the interests of management with shareholders.

  • We recommend that shareholders WITHHOLD votes from all four members of the compensation committee (Item 1) and vote AGAINST approval of the named executive compensation plan (Item 2).

  • In addition, we recommend that shareholders vote IN FAVOR OF Item 4 (Separate Chairman and CEO) and Item 5 (Shareholder Written Consent Right).

April 04, 2018

Ligand's Market Valuation Does Not Withstand Scrutiny

  • LGND's "shots on goal" business model is hardly revolutionary.

  • LGND's non­GAAP adjusted financial results do not present an accurate picture to investors of the company's true economic performance.

  • LGND is overly reliant on just three marketed drugs, which will inevitably go off patent.

  • LGND shares are extremely overvalued and due for a fall; we calculate fair value at $75.42/share, implying 53% expected downside.

February 24, 2018

Trump's Tax Plan: Bad News For Amazon, Tesla, And Netflix Shareholders

  • Trump's recently passed corporate tax cut bill should lead to larger deficits, increasing inflation, and higher interest rates.

  • Warren Buffett explained back in May 1977 how inflation swindles the equity investor.

  • Expect marquee tech stocks such as Amazon, Tesla, and Netflix to be most negatively impacted by passage of the tax bill.

February 03, 2018

Netflix - Priced For (And Beyond) Perfection?

  • Netflix has added $35,000,000,000 in market capitalization over the past two months.

  • In order to underwrite even a 15% CAGR for the shares over the next five years, earnings and cash flow will need to increase at a massive clip.

  • We believe that most (if not all) of Netflix's future success is now baked into the company's $118 billion fully-diluted market capitalization.

January 12, 2018

Genworth: Additional Thoughts On Plan-B And Valuation

Seven Corners issued a Follow-up Piece to Our Prior Article Regarding Genworth's Plan B (Options if the China Oceanwide Merger is Blocked by Regulators). Our follow-up article covers the following points: 

  • Required Approvals for Foreign Mortgage Insurer Equity Divestitures Appear Light;

  • IPO of U.S. Mortgage Insurance Subsidiary Should Take Longer; and 

  • Genworth's Intrinsic Value Has Increased Over $1 Billion (or $2/Share) Since the China Oceanwide Merger Announcement.

January 05, 2018

Genworth: Time for Plan B?

Seven Corners today issued its updated long thesis regarding Genworth Financial: "Genworth: Time for Plan B?" Our writeup covers the following:

  • Genworth's acquisition by China Oceanwide for $5.43/share in cash is in doubt due to CFIUS concerns.

  • Genworth's management stlll believes it can complete the merger.

  • Even without the merger, Genworth's shares are worth at least $5.36 based on a sum-of-the-parts analysis.

  • We examine how a "Plan B" scenario for Genworth might play out.

Please see attached PDF for full writeup.

December 22, 2017

Emergent Capital Inc. – Follow The Cash Flows

We have calculated EMGC’s net asset value (or NAV) two different ways: first, using a balance sheet analysis of net book value (Valuation Case 1), and second estimating cash inflows versus cash outflows over EMGC’s remaining expected life (Valuation Case 2). Both analyses lead to the conclusion that EMGC is substantially undervalued. Please see our investment writeup for EMGC attached.

October 25, 2017

Viacom - Content Remains King

Shares of Viacom Inc. (ticker: VIAB) have been discarded by investors like yesterday’s print newspaper. Flung on to the trash heap and now trading meekly in the mid-20s, the stock price reflects investors’ view the company is an aging dinosaur, soon to be put out of its misery by the likes of Netflix. With the likes of MTV, Nickelodeon, BET, Comedy Central, CMT and Paramount Pictures, however, Viacom has been and should for the foreseeable future continue to be one of the preeminent creators of content. Currently trading at an anemic 7X expected 2018 earnings, we believe that Viacom’s B shares remain a compelling investment opportunity for the patient investor, with our blended target price of $58/share representing an expected IRR of 31% over the next 3 years.

September 12, 2017

General Motors (GM) - Divide and Prosper

  • We believe GM's sagging stock is largely due to a lack of confidence in management, caused by misaligned incentives

  • We propose herein a remedy for this undervaluation

  • First, GM management should purchase significant amounts of open market stock using their personal funds; in addition, all long-term equity compensation should be subject to a 3-year rolling total shareholder return test

  • Second, GM should issue a tracking stock with respect to its GM China Operations

  • If our plan is implemented, we believe GM shares (including the GM China tracker) would trade between $51.70 to $58.60, significantly higher than their current $38/share level

  

August 20, 2017

Allergan Inc. [AGN] – Further Downside Ahead

  • Allergan’s non-GAAP financial metrics continue to mislead.

  • Herein we review Allergan’s Q2 and 1H 2017 financial results.

  • GAAP results highlight clearly declining operational performance.

  • We reiterate our $117 target share price for Allergan. 

April 17, 2017

Allergan Plc [AGN] - Bridging the GAAP

  • Allergan’s So-Called "Performance Net Income" Is A Cash-Flow Measure, Not A Net Income Measure.

  • Allergan Has Thumbed its Nose At The SEC, Which Has Warned Against This Type of Misleading Non-GAAP Metric.

  • To Bridge the GAAP (Pun Intended), We Propose a Realistic Calculation of Allergan’s True Economic Earnings.

  • Even Using Extremely Generous Assumptions, Based on Our Non-GAAP Earnings Calculations We Estimate Allergan’s Valuation to be $117 Per Share, Indicating 50% Downside For Its Common Shares. 

January 31, 2017

UPDATE - Genworth (GNW) / China Oceanwide Merger Arbitrage

We reiterate our buy rating on the Genworth (GNW) / China Oceanwide merger arbitrage, believing that the most recent closing price of $3.30/share presents an attractive 49% return to our expected value of $4.93/share.

January 19, 2017

Allergan's "Bold, Imaginative" Non-GAAP Accounting Raises Red Flags

Last year the SEC issued guidance on impermissible non-GAAP financial metrics.

Allergan's "non-GAAP EPS" measure appears to violate these rules.

Allergan will likely need to cease using (or substantial alter) its "non-GAAP EPS" metric.

November 30, 2016

Genworth (GNW) / China Oceanwide Merger Arbitrage

The Genworth (GNW) / China Oceanwide merger arbitrage presents an attractive 26% IRR for a 7-month hold period. Attached please find our writeup of this investment.

September 29, 2016

Syntel, Inc. (SYNT)

Quality Compounder With 30% Upside.

August 11, 2016

Rite Aid Arbitrage

The Rite Aid - Walgreens merger arbitrage presents an attractive 27.5% IRR for a 4-month hold period. Attached please find our writeup of this investment.

August 11, 2016

Rite Aid Arbitrage Supporting Due Diligence

Attached our supporting due diligence slides to go along with our Rite Aid Arbitrage Writeup (posted separately).

July 26, 2016

Winthrop Realty Trust (FUR)

A liquidating trust with 25% upside.

July 18, 2016

Liberty Braves Tracking Stock (BATRK)

A marriage of professional sports and real estate, trading at ~85% of NAV.

December 06, 2015

SoftBank Due Diligence

Based on our due diligence, as of December 2015, the ADRs of SoftBank [ticker SFTBY] represent an attractive investment opportunity, with a NAV of approximately USD 35/share, representing 36% potential upside. Attached please find our due diligence and sum-of-the-parts calculations for this investment.

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