TURN Q3 update – margin of safety and upside, increasing position

“Q4 has gotten off to a strong start,” added Mr. Rendino. “As of the close of the markets on November 9, 2021, 180’s cash and securities of publicly traded companies was $79.1 million, or $7.63 per share, which is higher than our closing stock price of $7.2024 and does not include the potential carried interest from our SMA at the end of 2021. If the year ended today, we would receive $2.4 million in carried interest. Management purchased 52,585 shares of TURN stock with after-tax dollars during Q3 2021. As you have seen almost every quarter, if the valuation gap doesn’t close, our management team will continue to be buyers in the open market.”

TURN Q3 press release

The 180 Degree Capital story to me is summed up in three points:

  • Company trades basically at less than cash and public securities for reasons I don’t understand ($7.63 per press release above versus $7.50 as I write this)
  • Company’s private portfolio I’m highly confident is marked correctly and may be conservative
  • CEO Kevin Rendino has now been frustrated by the stock price for some time and is actively buying the stock with after tax dollars and doing whatever possible to unlock value

Q3 really hit on all these points despite the fact that the public portfolio declined in value by 8.2%. 

TURN had its worst quarter on the public side since I owned the stock, yet the discount to NAV widened because the company’s private value went up.

As I write this the stock sits at $7.50 and was trading at about $7.20 when the slide below was published. Let’s put this in perspective with some very simple numbers courtesy of the company:

The market for the first time in a while was assigning negative value to the private portfolio of TURN. It just in the last two days became slightly positive again, but still at fractions of a percent of what TURN carries on its books (which may be conservative). This is insane to me; the market even now is saying TURN’s private portfolio is worthless.

Let’s remember TURN has produced cash from the portfolio historically and this very quarter, when oh by the way the private portfolio by TURN’s account increased in value:

The actual assets in the private portfolio are real- the military and Jeff Bezos are invested in D-Wave; Bill Gates is invested in AgBiome and it just had their Series C; I literally asked myself on their Q2 call on Petra Milestone Rights and the company again reiterated it expects to receive a payment of at least $5mm from it.

Not only do I think these assets are correctly marked, I think it’s highly likely some may prove conservative. I expect AgBiome to go public via SPAC – Rendino strongly hinted at this on the call:

By the way, if you listen to that second paragraph, it really sounds like TURN has a private company that will be a part of a SPAC that they can’t disclose right now. One more time:

“And so there’s a reason why I’ve been adamant in saying that we’re getting closer to some news in our private portfolio than any time since I’ve been here… And it pains me not being able to answer any questions.”

It’s at 31:50 – 33:22 here if you want to listen to it (trust me when I say the intonation matters). It is not hard to see what he’s hinting at here. One of the private companies is going to go public via SPAC. When that happens, the portfolio will shift even more to being public & cash, at which point if the NAV discount simply stays the same, the stock will go up. If it doesn’t, the stock will then be trading at an even stupidly larger discount to NAV.

So from here, I think it’s a no-brainer to own TURN if you think Rendino’s public picks will trade flat. I think he’s a better PM than me so if I think Rendino trades flat, I probably am negative on my own portfolio (and I think I can outperform the market). So if I think the market goes up from here, I think TURN can outperform if the NAV discount decreases. If you assume Rendino can market-perform on the public portfolio, the bet you’re making on TURN is whether the private market will get assigned any value. I will make that bet every day of the week and as a result TURN is one of my largest positions.

Why does this opportunity exist? Here’s my best guess:

  • Company is a microcap and basically comprised of a couple people in an office managing ~$100mm of assets. Market cap right now is $77mm
  • Stock price is single digits ($7.50). Interesting, TURN reverse split at the beginning of the year for this very reason
  • Institutional investors even if TURN were bigger might be turned off by the fact that the company invests in illiquid microcaps

Who knows. Overall, I am extremely comfortable buying here. Last thing I want to pay out is as has been the case for many quarters, management is stepping up and buying the stock with after-tax dollars because they think the stock is grossly underpriced. Let’s close with a quote from the CEO:

It is my humble opinion, given our performance in the public markets combined with a stock price that “only” trades at the value of our cash and liquid securities, TURN’s stock is grossly mispriced. And as you have seen almost every quarter, if the valuation gap doesn’t close, our management team will continue to be buyers in the open market. Management purchased 52,585 shares during the quarter. I will remind you that these purchases for over $350,000 were made using after-tax money from our management team.

TURN CEO Kevin Rendino