Thesis: A PA only idea of a Mario Gabelli majority owned public small cap value focused asset manager whose market cap is 90% cash and is trading at 2x very depressed earnings. Essentially its "free option" on the rebound of small and microcap / value market segments or eventual fold-in into GAMCO.
Theres almost no liquidity here and this company should be public but occasionally 1,000-5,000 share ask will pop across the screen so one could build up a few hundred thousand dollars worth position over a few months.
Profile: This one fits into "theres no way this should be public" but this is a company that is approximately 70%+ controlled by GAMCO and Mario Gabelli. The company has 8 micro, small and mid cap value focused funds and an SMA biz whose split is about 70/30. The AUM is at $1.3b down from over $2.3b in 2019. A likely scenario for most small cap managers post-Covid. Its lost a substantial amount of assets to outflows offset by market appreciation, down 10% in 2023 but seems to have stabilized.
Despite substantial outflows the company still earned approximately $1.00 of cash earnings in 2023.
Why own this?
First, margin of safety:
As of 12/31/23 (i have not seen a quarterly report yet) the company had $21mm of cash on balance sheet and $28mm in book value vs a $24mm market cap (at $15.00 per A share). The company is likely to acquire other asset managers (on the cheap) but has not done anything with cash yet. Any acquisition would likely be immediately accretive when combined with Mario's/GAMCOs distribution channels/brand.
Second, substantial operating leverage optionality on rebound of value/small cap/microcap:
Its no secret that small cap and/or value have severely underperformed almost all other market segments last 5 years. Historically, prior to 2020, Russell 2000 and Russell Microcap, have averaged a CAGRs of 8-9% (see table) however, last 4.5 years those CAGRs have been in the 4-5% range while S&P 500 has averaged 13%. A big part of this thesis is believing that this gap is unsustainable and will need to compress even a little.
- In last 29 years Russell 2000 had 10 years of over 20% and 17 years of 10%+
- In last 29 years Russell 2000 Value had 13 years of over 20% and 16 years of 10%+
- In last 23 years Russell Microcap had 9 years of over 20% and 13 years of 10%+
- In last 23 years Russell Microcap Value had 10 years of over 20% and 11 years of 10%+
That is all to point out that these are volatile assets that are bottom-ish that have 50%+ chance to rip in high double digits in next few years and at the very worst an opportunity for the company to keep adding to its cash pile.(They don't seem like the capital destructive type).
Realistically, and what I consider my base case for next 2-3 years, we'd need about a 50% rip in those markets to get the assets back above $2b and get back to $20mm in revenues (80bp ish fees are still pretty nice) without inflows. The company has $7mm of operating expenses ($9mm if they resume marketing) and approximately 30bp of variable expenses. So the quick math is 50 net bp on $7-$9mm of expenses. So just getting back to basic small cap value performance doubles your cash earnings to $2.00 per share. If they resume marketing and get back to positive net inflow levels and a 2019 baseline you get $3.00+.
In the end is a "meta" value investment as a value play on the operating leverage of value coming back.
The Mario option:
- companies like this are always a mystery to me. Per brief convo w CFO the public company opex is relatively small because its OTC but I havent come up with a good case for being public as a 22 employee firm. If the stock remains low its just economical to spend $8-10mm on remaining 30% outstanding via a tender (vs $6.5mm now) as a premium buyout. Alternatively, as a risk below, Mario could screw you and not pay fair market value.
Valuation
Current cash per share is $13.20.
Downside case is theres an aforementioned downside operating leverage. Ouflows accelerate and cash gets to $12 (presumably they'll have a plan for not getting to this level again) and with liquidity haircut gets you to $11.00.
Base case is no inflows but value comes back and drives AUM back to above $2b and $2.00 per cash earnings. I'm using a 10X multiple which is a big discount to most asset managers today and plus cash gets you to $32-$34 per share target and in a couple of years you get a double.
Best case is assets are back at $3b with inflows and with $24-$28mm in revenues and $6mm+ in FCF or $4.00 per share. Cash builds up to $20.00 and cash earnings multiples are at 15x so you're looking at an $80.00 stock. Its a stretch but possible.
I'm expecting somewhere between $30-$45 per share for 100-200% upside for about 20-25% downside.
Risks:
The obvious ones
- value is dead forever and outflows continue till they become a cash drain. company plows along but never recovers.
- fee compression: the benefit of small and micro caps is that they are harder to index/ETF (and to scale) so theres less competition and fees seem to have stabilized but race to bottom can certainly continue.
- liquidity of stock: obviously this is one of those thats a very long term hold that will need a liquidity event exit. Alternatively you can probably call GAMCO and ask if they are interested in buying your shares.
- he could but not sure he'd want to damage his reputation but Mario could take this private at below fair market value
- i think the real risk here is dead money with low exit liquidity
