TURN update – highest NAV in company history, low correlation to public markets and plenty of shots on goal

I wrote about 180 Degree Capital Corp (TURN) prior to quarterly earnings last week, recommending selling puts or outright buying the stock because the company was trading at a substantial discount to NAV and its public securities and cash portfolio was becoming a larger and larger percentage of NAV (meaning any NAV discount based on the private portfolio being worthless should disappear). TURN posted its highest NAV ever at $10.60 this latest quarter. That $10.60 includes the largest percentage of liquid public securities and cash in the fund’s history under CEO Kevin Rendino:

Over a single quarter, the company increased cash & public securities NAV from 60.6% to 66% of its portfolio – if you believe Rendino (who has been a rockstar for shareholders up to this point), that percentage should go to zero. Here’s Kevin on the Q1 call:

 So 5 years from now, I — in my mind, I’m trying to get to a $20 stock that’s based on $200 million or so of assets. Hopefully, portfolio will no longer be a thing at all. We’ve got it down to 33%. In 5 years, I hope it’s 0, and I hope it’s 0 not because it’s going to zero based on valuations. I don’t think that’s going to be the case, but I hope it’s 0 because of monetization events and the rest. And then, of course, we’ll take on added people only if we find investment excellence in them, anybody that can come in the door here and help us make money, that’s the only thing I care about. I don’t care if you live in California, Florida, New York. I don’t care where you are. I don’t care how often I see you. If you can help us make money, if you can help us pick stocks and create alpha, you can get paid at 180. And so I think over the next 5 years, we’ll probably have a couple of more analytical people in here as well.

TURN Q1 2021 call

Wow. CEO guiding to 100% liquid portfolio and suggesting the stock can double and more from here. And publicly saying he’s hiring. 

It seems inevitable to me the discount to NAV on TURN will close from its current level of 30% to 0. While I think it’s possible the private portfolio NAV is overstated, I certainly don’t believe it’s the paltry $0.72 the market is valuing it at. To put that in absolute dollar terms, the market believes TURN’s private portfolio is worth ~$7.6 million. If you believe the company, AgBiome (the largest private holding) is worth 1.7x that:

TURN private portfolio

See the #2 private source of value, Petra Milestone Rights? I actually asked about that on TURN’s Q1 call (call me Unidentified Analyst from here on or Benjamin Bairstow if you believe Seeking Alpha), and here’s what Rendino had to say:

So the first payment (which will show up as cash eventually) is going to come in “a year or two” and is the most likely to happen. That first payment is worth close to $7mm – less than what the company marks on the balance sheet (note Rendino acknowledged this on the call). From a few quarters back:

If TURN gets this payment, the market will once again be valuing the private portfolio at close to zero and ignoring a company in AgBiome that could IPO in the next few years. The company also has founders shares in an upcoming SPAC and receives incomes that could run up to a few million dollars for a separately managed account.

In short, I think you can conservatively look at the private portfolio and still have it come out to $2 per share or more easily. If you take this extremely conservative approach, TURN should trade at $9.42, or 13.5% above today’s price.

That view again is conservative, and it’s my opinion the private portfolio is close to what the company says it is and the public securities portfolio has room to run. While some readers of this newsletter may look at TURN’s collection of microcaps and feel less than great about Potbelly’s (PBPB), TheMaven (MVEN) (Sports Illustrated and theStreet.com holding group that hasn’t released financials in years but will in the next year, per TURN company has exceeded projections, TURN also invested in a financing round for them) and turnaround name Armstrong Flooring (AFI), I view this as an investment in a great portfolio manager who has an alpha-generating understanding of this space. You can read TURN’s investment thesis’ for each of these stocks in their decks and investor letters. The track record is excellent – TURN’s public portfolio under Rendino has handily outperformed the market and my own portfolio. From their slide deck:

TURN public portfolio performance

Honestly, I’ll take Rendino managing stocks generally uncorrelated to the market over my own stock picking abilities.

Like the CEO (who remember puts his money where his mouth is – he has been buying the stock in size for years), I believe the stock can go to $20. This is one of my largest holdings with the potential to be the largest.