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In the small cap space, Privet Fund LLC has been one of the most active capital funds of the year. The company has initiated or built on a position on at least eight separate occasions year to date, across a range of industries, at a cost of between $45 million and $50 million. The fund takes a value-driven, long-term approach to its allocations, and as such, for an investor looking to gain exposure to the small cap space, could be an attractive operation to piggyback. With this said, let's catch up with Privet's 2015 allocations.
First, for those not familiar with the fund, its strategy is:
"…focused on making event-driven, value-oriented investments in small capitalization companies across all levels of the capital structure. Privet's goal is to produce high long term absolute returns with low correlation to the broader markets. Privet utilizes a research intensive approach, delving deep into business and situational fundamentals to identify low valuation investments tied to specific catalysts."
Here is a look at the company's 2015 trades.
Noble Roman's Inc. (NROM)
On Jan. 28 Privet reported an extension of its position in Noble Roman's (initiated in December) to 13.6% of the company's outstanding common stock versus the 12.2% it reported at the end of 2014.
Noble Roman's is a pizza retailer and franchise operation based in Indianapolis. The company kicked off the year in promising fashion, gaining 19% on year open to reach $2.40 a share in February, but has since lost ground and –Â at last close –Â traded for a little over $1.50 a share.
On May 12 and subsequent to the introduction of a new director at the recommendation of Privet, the fund extended its holding with a $5 million purchase of 2.9 million shares – bringing its total ownership to 14.5%. Declining revenues and the contraction of its bottom line has put pressure on Noble Roman's stock over the last couple of quarters, but with Privet expanding its exposure, it looks as though the fund expects a medium-term turnaround in fortunes.
The company has made a number of new hires over the past couple of months and, alongside its Q2 earnings for 2015, said it expects revenue growth in each quarter until year-end 2016, while maintaining costs at the current levels. If this is the case, could the company could see an expansion in net earnings going forward.
Keep in mind that this company is not well-capitalized. Current assets are $4.76 million –Â with just $280,000 of that in cash and cash equivalents. Current liabilities total $2.27 million, with further bank debt of $2.6 million reported as a longer-term liability on its balance sheet. This is not necessarily damning, though it does suggest that additional capital raises will be necessary if the company is to make good on its plans to expand. These could be dilutive to an early stage investor's allocation. On the other side of the coin, expanding through its franchise model requires less capital than in-house expansion.
Norsat International Inc. (NSAT)
Next up is Norsat. On Feb. 4 Privet reported the purchase of 876,500 shares of Norsat for an approximate total of C$4.88 million ($3.69 million). Just over one month later, on March 11, Privet reported the purchase of a further 1.71 million shares for an aggregate value of C$5.86 million ($4.43 million) bringing Privet's total holding to 17.6% of Norsat.
Based in Richmond, Canada, Norsat is a close to 40-year-old radio frequency and satellite communications company with global operations that include Canada, the U.S. and Europe. This has been another near-term loss for Privet, with Norsat currently trading at an 18% discount to the aggregate price at which Privet picked up its exposure.
The company generated $4.2 million in net income during 2014 and, with close to $3 million in net earnings reported in the first two quarters of 2015, is set to grow year over year. With a market capitalization at a little over $24 million, Norsat is trading at just under six times net earnings and expanding first and second quarter revenues to the end of the year (assuming similar revenues during Q3 and Q4) is trading at about a $10 million discount to full-year sales. It is likely this discount on which Privet is focused, as this falls in line with the "value-oriented investments" element of its strategy, as described earlier.
The company also has a relatively strong balance sheet, with $23.6 million in current assets reported at the end of 2014, $5.51 million of which is cash and cash equivalents. Total liabilities come in at $11.5 million, and stockholders' equity at $28.98 million –Â an increase on the $26.42 million and $24.23 million reported at year-end 2012 and 2013, respectively.
Hardinge Inc. (HDNG)
One of Privet's more controversial allocations this year has been Hardinge –Â the global machine tooling company based out of Elmira, N.Y. The company is substantially bigger than the two already mentioned, with a market capitalization of $132 million at Tuesday’s close.
The controversy surrounding this one derives from an 852,000-share purchase by Privet back on March 3 that amounted to 6.6% of the company and a letter dated the same day criticizing the company's board of directors for its leadership. Privet highlighted the reluctance of Hardinge management to consider a takeover bid, as well as poorly allocated capital as two key factors behind the 40% decline in Hardinge's market capitalization since June 2013. An analyst upgrade quickly followed the Privet allocation, and the company reported $1.58 million in net earnings on $82 million in revenues during Q2 2015 – a turnaround from the $1.4 million net loss reported during the first quarter of the year.
Perhaps more interestingly, the company recently released an in-depth press release concerning its "exploration of strategic alternatives to enhance shareholder value." It is reasonable to conclude Privet has exerted some shareholder influence in the publication of this release, with a possible sale or merger reported as two of the most likely possibilities. On the release, Hardinge shares turned from yearly lows of $8.23 to quickly recover much of this year's lost strength. Trading around $10.34 on Wednesday, Hardinge is about 15% down on the aggregate Privet purchase price.
The key thing to look out for going forward will be any news related to a potential buyout. The company turned down a takeover bid of between $7 and $8 a share but is now trading at a little over $10 – it is reasonable to assume a buyout would add at least a few dollars’ premium on its current price.
Frequency Electronics Inc. (FEIM)
Privet announced a 9.8% holding in Frequency Electronics on June 4. Another New York-based company, Frequency Electronics manufactures time and frequency control products and components for microwave integrated circuit applications. Frequency Electronics gained close to 100% over the last five years, though it currently trades at a 20% discount from 2015 highs.
Privet picked up its exposure around Wednesday’s levels, suggesting the fund sees the current discount as an opportunity to buy low in anticipation of the recent dip turning out to be a correction rather than a longer-term reversal.
Revenues have grown consistently over the last three years, reported at $68.93 million for 2013, $71.55 million for 2014 and $76.56 million for 2015 (to April 30). Net income during 2015, however came in at $2.82 million versus $4.04 million during 2014.
There is a near-term upside driver in the form of Q1 fiscal 2016 earnings expected before Sept. 11, where there may be abeat on last year's comparable quarterly earnings of $719,000 (on revenues of $19 million) to suggest an expansion of the company's bottom line moving forward.
Again, this company has an attractive balance sheet, with cash and cash equivalents of just short of $8 million on April 30 and current assets of a little over $83.5 million. Total liabilities come in at $26.01 million, of which current liabilities account for $0.35 million. With a current market capitalization just shy of $100 million, Frequency Electronics is generating approximately 0.75 times its market price in annual sales, meaning it could be an attractive allocation at its current price.
Keep an eye on its bottom line, however. In order to generate $5 million more revenues during 2015 than it did during 2014, cost of revenues increased by $6 million - hence the narrowing annual net earnings. It would be good to see a reversal of this pattern (i.e. a more effective allocation of its cost of revenues) during the coming quarters.
IZEA Inc. (IZEA)
Finally, there is IZEA. IZEA is a tech company that operates in the social media advertising space. To simplify its operations, the company runs a platform that connects advertisers with socially influential online media publishers (blog owners, well-followed Facebook accounts, etc.). Advertisers coordinate and manage campaigns through IZEA's platform and IZEA takes a fee for allowing them to use its technology.
On Aug. 14, Privet reported a 5.44 million-share purchase that amounts to 5.2% of the company. The allocation comes as part of a wider capital raise by IZEA, in which it generated $12.9 million in the middle of August.
IZEA's market capitalization has followed a similar pattern to that of Frequency Electronics, gaining nearly 100% through the first half of this year before peaking in June and giving away some of the gains over the last couple of months. However, a range of positive releases including record quarterly revenues, the settling of a long-standing patent dispute and an expansion of its operations into Canada with a newly established Toronto-based team have reinitiated some upside momentum in IZEA's stock.
IZEA generated $4.6 million revenue during the second quarter of 2015 for a gross profit of $1.71 million, yet is currently valued at only $40 million based on Tuesday’s close. Additionally, and just as with a couple of the other companies in which Privet has taken a position this year, IZEA has a strong balance sheet: no debt, $2.52 million in cash and cash equivalents (the recent $12.9 million not included) and total current assets of $6.38 million. Near-term upside potential lies in a pending NASDAQ uplisting for which IZEA applied earlier this year and that it could complete during the next eight weeks.
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