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All information provided herein by Cedar Grove Capital Management, LLC (“CGCM”) is for informational purposes only and does not constitute investment advice or an offer or solicitation to buy or sell an interest in a private fund or any other security. CGCM may change its views about or its investment positions in any of the securities mentioned in this document at any time, for any reason or no reason. CGCM may buy, sell, or otherwise change the form or substance of any of its investments. CGCM disclaims any obligation to notify the market of any such changes.
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One of the most infamous battles of World War II was the “Battle of the Bulge,” which launched just nine days before Christmas in 1944 and lasted 41 days. This battle was accurately portrayed in the HBO Max hit series Band of Brothers, where the U.S. Army's 101st Airborne was sent into the area around Bastogne, Belgium, to stop a surprise German offensive meant to cut American and British forces in two and reach the critical port of Antwerp, effectively severing supply lines to the Allies in the region.
Cut off, surrounded, low on food, ammunition, winter clothing, and most of all, men (outnumbered 4:1), it seemed like it was just a delay of the inevitable → being killed or captured.
In an effort to rally his soldiers and improve morale, Brigadier General Anthony McAuliffe gave an incredible speech to flip the script on the near-impossible task that the 101st Airborne was facing at the time. This is the same speech where he replied to the Germans’ request for surrender with, “Nuts!”
"Men, we are surrounded by the enemy. That means we have the greatest opportunity ever presented to an army. We can attack in any direction we choose."
This speech would later lay the foundation for what the military would label as being in a “target-rich environment.”
Why do we bring this up? Well, this year has been an interesting one, to say the least, with lots of ‘head-scratcher’ movements having taken place already. For an investor, it’s hard enough to get the underlying business fundamentals right (i.e., the business is growing, inflecting, expanding, etc.), but not getting rewarded for being ‘right’ makes it even more frustrating.
But just because we’re not getting rewarded for being right on the underlying, primarily due to the deteriorating macroeconomic conditions caused by this administration, this does not mean that there aren’t opportunities out there.
Historically speaking, investors who have made money in the market have done so due to dislocations of equity prices derived from many reasons that, at the end of the day, make those stocks mispriced.
In a perfect world, investors would like to see those mispriced assets close the gap as quickly as possible so they can realize a large real return, brag about their IRR figures, and move on to the next opportunity to deploy capital into.
However, the reality is much different. Mispriced assets, outside of pure luck (ex, meming, short squeezes, etc.), take time to work out to the degree that most investors underwrote originally.
This is where the ‘timing’ edge comes into play for investors who understand that great investments do not necessarily yield results overnight, or even in a few months.
But given the macroeconomic changes that are taking place right now with surging yields, geopolitical degradation, oil prices rising, risks to inflation, and a deficit that keeps rising, we’re seeing that investors are entering a “target-rich environment,” which long-term investors should be able to benefit from as long as they don’t have short-term expectations.
Don’t just take our word for it; let us prove it to you.
First and foremost, we have to say that we don’t typically do screens for stocks. It’s pretty easy to accidentally miss out on a promising opportunity when you’re filtering for low P/E ratios or high FCF yields. You never really get the ‘story’ that allows you to hop on an investment before anyone else does.
But, for the sake of this exercise, we’re using screens to prove our point.
The aggregation below is using screens from Koyfin, and we’ve limited our search to the parameters below due to our own universe coverage.
Stocks between $50 million and $2 billion.
Trade in the U.S., with the primary security being in the U.S.
Excluding all REITs and biotech stocks.
Average daily volume of at least 20,000 shares.
Notional volume of at least $200k.
This yielded us with a universe of 1,608 stocks to work with.
What’s interesting is that there’s a tale of two cities here when looking at the bottom end of the spectrum and the rest.
Market Cap | $50 - $200 million | $200 million - $2 billion |
|---|---|---|
No. of Companies | 354 | 1,254 |
Median YTD Return | (17.3%) | +5.3% |
Median Distance from 52W High | (53.1%) | (24.3%) |
>= 25% below 52W High | 78.8% | 48.9% |
Cheap + Dislocated* | 30.8% | 26.2% |
*More on this in a bit.
Now, just because there are plenty of ‘targets’ under their 52W highs, that doesn’t mean that every target is worth shooting at. This is why we needed to drill down further.
To double-click into the “cheap + dislocated” bucket, we then screened for any companies that fit at least one of the criteria below.
NTM EV/EBITDA ≤8x
NTM P/E ≤12x
EV/Sales ≤1x
FCF/EV yield ≥8%
That gave us 109 stocks between $50 and $200 million (30.8%) and 328 stocks between $200 million and $2 billion (26.2%).
But when you dig into the numbers further, you come to understand that there really isn’t one area where the “opportunities” are living. Cutting into the 437 companies that we filtered (109 + 328), the largest industries are:
Industry | No. of Companies |
|---|---|
Capital Markets | 30 |
Software | 30 |
Specialty Retail | 26 |
Interactive Media & Services | 17 |
Professional Services | 14 |
Hotels/Restaurants/Leisure | 13 |
Machinery | 13 |
Pharmaceuticals | 12 |
No single industry accounts for even 7% of that group.
But let’s cut it another way to show it from a different lens. For the next view, we cut the same high-level data based on a negative-performing stock price against an increase in analyst revisions (i.e., my stock price is going down despite estimates going up).
This filtered 753 companies with both YTD share-price performance and EBITDA-estimate revision data:
Stock Performance | EBITDA Estimates Flat/Up L6M | % of Total | Revenue AND EBITDA Flat/Up L6M | % of Total |
|---|---|---|---|---|
Stock down | 125 | 16.6% | 70 | 9.3% |
Down ≥10% | 91 | 12.1% | 48 | 6.4% |
Down ≥20% | 60 | 8.0% | 28 | 3.7% |
Down ≥30% | 34 | 4.5% | 15 | 2.0% |
Down ≥40% | 16 | 2.1% | 5 | 0.7% |
Price action and business expectations are increasingly telling two different stories.
Among companies where we have comparable consensus data, 60 stocks have fallen at least 20% since the beginning of the year even though forward EBITDA estimates have held steady or risen over the past six months. 34 are down more than 30%. And in 15 of those cases, the stocks have fallen more than 30% despite analysts simultaneously raising or maintaining expectations for both revenue and EBITDA.
We’ve included those 15 stocks below.
Ticker | YTD Performance | 6M Revenue Revision | 6M EBITDA Revision |
|---|---|---|---|
PAR | (50.4%) | +5.3% | +30.8% |
BL | (48.7%) | +0.1% | +3.5% |
SFIX | (43.8%) | +0.6% | +20.9% |
NAKA | (41.7%) | +11.4% | +151.3% |
PLTK | (41.5%) | +0.2% | +0.3% |
GENI | (38.1%) | +24.9% | +57.2% |
OSG | (37.8%) | +9.6% | +7.6% |
REAL | (37.7%) | +2.5% | +8.9% |
EVI | (35.5%) | +4.6% | +8.7% |
MBC | (32.7%) | +34.0% | +23.4% |
SEAT | (31.4%) | +2.6% | +15.8% |
TASK | (31.0%) | +0.6% | +0.04% |
DOYU | (30.9%) | +3.6% | +824.5% |
EVLV | (30.9%) | +9.9% | +13.8% |
CURI | (30.0%) | +1.5% | +73.8% |
*Disclaimer: Cedar Grove Capital Management (CGCM) does hold positions in REAL and EVLV.
Some of those stocks undoubtedly deserve to be down. But when the number of companies experiencing that kind of price/fundamental divergence grows large enough, the odds of finding something mispriced begin to improve.
That's what we mean by a target-rich environment.
And to reiterate, the whole point of this post was to show that even though the market might be testing your ability to pick stocks or weather volatility, the beauty of being in an environment where there are tons of stocks getting crushed is that you can take a step back and look almost anywhere to find the next best idea.
Similar to what Brigadier General Anthony McAuliffe said earlier about taking what seemed to be a really crappy situation and turning it into a positive.
And, while we arguably only highlighted criteria that would be considered “value” or “deep value”, this universe doesn’t even cover CA or EU names, which could easily double, if not triple, the number of names given to you.
We just feel that given the situation we’re all in, it really does seem like the number of opportunities that don’t necessarily deserve to be down are growing with each passing week.
If you’d like to utilize our Koyfin screen, we’ve attached a link to the Google Sheets version of the Excel file here for you to download. (Beehiiv doesn’t do Excel file attachments).
As always, we appreciate your support of our work. If you have any questions, please message or comment below. If you think others would benefit from the research/commentary we release, we would greatly appreciate your sharing.
Until next time,
Paul Cerro | Cedar Grove Capital Management
Personal Twitter: @paulcerro
Fund Twitter: @cedargrovecm
Fund Website
Disclaimer: All information provided herein by Cedar Grove Capital Management, LLC (“CGCM”) is for informational purposes only and does not constitute investment advice or an offer or solicitation to buy or sell an interest in a private fund or any other security. An offer or solicitation of an investment in a private fund will only be made to accredited investors pursuant to a private placement memorandum and associated documents.
CGCM may change its views about or its investment positions in any of the securities mentioned in this document at any time, for any reason or no reason. CGCM may buy, sell, or otherwise change the form or substance of any of its investments. CGCM disclaims any obligation to notify the market of any such changes.
The enclosed material is confidential and not to be reproduced or redistributed in whole or in part without the prior written consent of CGCM. The information in this material is only current as of the date indicated and may be superseded by subsequent market events or other reasons. Statements concerning financial market trends are based on current market conditions, which are subject to fluctuation. Any statements of opinion constitute only current opinions of CGCM, which are subject to change and which CGCM does not undertake to update. Due to, among other things, the volatile nature of the markets, an investment in our separately managed account structure will only be suitable for certain investors. Parties should independently investigate any investment strategy or manager, and should consult with qualified investment, legal, and tax professionals before making any investment.