A Cheap Special Situation With Multiple Catalysts

The stock market abhors uncertainty and our favorite investments tend to come when a good business runs into a period of short term uncertainty. Even when the long-term future of a business is almost surely sound, short-term anxieties can create dislocations in price. It appears that may be underway at present with a company that owns a high-quality, recurring revenue, and cash generative underlying business and is on the verge of divesting a lower quality segment for substantial cash proceeds, much of which will likely be returned to shareholders.

Confusion around the upcoming transaction and a large pending customer contract renewal have created a depressed stock price that has created a margin of safety such that regardless of the outcome of the contract, abundant upside remains. Additionally, optically high leverage that will be immediately reduced following the close of the transaction creates the appearance of higher risk than is present.

A control investor ownership structure, messy trailing financials, and a foreign domicile aren’t helping either. Fortunately, a myriad of catalysts and a rock bottom valuation have created a highly asymmetric risk/reward for the stock. Let’s dig in.