Yuliya Taba
2024 was an eventful 12 months, with our largest place, Nvidia (NVDA), appreciating over 170% as enterprise remained strong, to say the least. Nvidia continues to face a very good drawback: product demand considerably outpaces provide. Their aggressive benefit retains widening as they announce and launch superior GPUs and knowledge middle infrastructure. In March 2024, Nvidia revealed the Blackwell GPU structure, introducing the B100 and B200 knowledge middle accelerators. These GPUs achieved substantial efficiency beneficial properties for AI workloads, surpassing the prior Hopper-based H100 GPUs. The B100 featured enhanced tensor cores and reminiscence bandwidth, enabling quicker AI mannequin coaching and inference. You’ll discover how related paragraph 1 sounds in our This autumn 2023 and This autumn 2024 letters.
In our This autumn 2023 report, I made three predictions: Prime picks for the 12 months – 5 Level Holdings (FPH) and AerCap (AER); a prime 25 place is acquired; and the top-performing index for 2024 – Russell 2000.
Outcomes
5 Level Holdings & AerCap Grade: A-
In our earlier letter, we talked about Luxor’s exit from 5 Level Holdings, as Robert Robotti acquired a considerable portion of their stake, lowering promoting strain. From September twenty third to October third, 5 Factors inventory value elevated ~31%. A number of days later, longtime shareholder Castlelake introduced the sale of their stake to the Glick Household Workplace, led by CIO Sam Levinson, who was added to the board and has a background in actual property. The inventory subsequently retreated, ending the 12 months up 23%, outperforming the Russell 2000 (RTY) and on par with the efficiency of the S&P 500 (SP500, SPX). It was a unstable finish to the 12 months amid a comparatively secure asset. Enterprise efficiency was sturdy all through the primary three quarters, as land gross sales and land costs continued to development positively. In Q2 2024, 5 Level offered 12 acres of Nice Park land for a median value of $7.8m/acre, up from $4.3m in the identical interval the earlier 12 months. Administration additional acknowledged that land costs have moved greater, with costs per acre within the $9m vary. We imagine the inventory stays enticing and count on 2025 to be one other good 12 months.
AerCap carried out properly in 2024 attributable to a strong secondary marketplace for used plane stemming from provide shortages. All through 2024, the inventory rose steadily, ending the 12 months up 29.8%, whereas initiating its first dividend in Could. Our thesis stays unchanged as secondary transactions happen at vital premiums to carrying values. We’re most excited that lease renewals signed in 2023-2024 will lastly affect outcomes, enhancing profitability. We count on AerCap to compound ebook worth within the mid-teens over the subsequent a number of years. We count on one other 12 months of above-average returns because the inventory trades at tangible ebook worth, 7.5 occasions our 2025 EPS estimate, and optionality associated to Russian insurance coverage claims.
Prime 25 positions acquired in 2024 Grade: F (That is both an A or F – go/fail)
Whereas we maintain positions in a number of markets ripe for consolidation, Lina Khan and the FTC sued to dam seemingly any and each acquisition, deterring firms from pursuing M&A. Pricey authorized battles and elevated odds of a deal falling via made the deal math more and more complicated. Getting into 2025, with a brand new, extra business-friendly, and certain much less restrictive administration, we count on M&A exercise to enhance.
Prime performing index – Russell 2000 Grade: D
Small caps proceed to lag considerably behind giant caps. Firms driving large-cap (S&P 500) efficiency are the all-too-familiar names (Magnificent 7). Enterprise outcomes at these firms proceed to defy the regulation of enormous numbers, constantly outperforming what look like elevated expectations. That mentioned, it was a story of two halves from July tenth via the top of 2024, because the S&P SmallCap 600 index (SP600) delivered a complete return of 9.6% in comparison with the S&P 500’s 5.1% return. Small caps are our favourite searching floor, as they’re underfollowed and low cost, making a promising setup.


2025 Predictions
- Prime picks for 2025 – Past Inc (BYON) and Donnelley Monetary (DFIN). We posted our up to date Past write-up to SumZero on 12/19 as a part of their 2025 prime inventory picks contest (we positioned third within the micro/small cap division; please e-mail if within the full write-up, or it may be discovered right here).
- One other wave of Canadian lumber mills curtail manufacturing as a result of 30% responsibility price set to be applied in August 2025.
Past Inc (BYON)
Past operates as an asset-light e-commerce firm, proudly owning and managing a portfolio of retail manufacturers equivalent to Overstock, Mattress Tub & Past, Child & Past, and Zulily. With a excessive EBITDA-to-free-cash-flow (‘FCF’) conversion and low capital necessities, it’s positioned to scale effectively. Current acquisitions, together with Mattress Tub & Past (2023) and Zulily (2024), have expanded their attain whereas revealing administration missteps and rising pains associated to model integration and operational execution.
Thesis
- Management and Imaginative and prescient – Chairman Marcus Lemonis employs a hands-on, performance-driven management fashion. His compensation is equity-based, with choices linked to vital inventory value appreciation ($45, $50, and $60 strike costs).
- Asset-Mild Mannequin – Past’s capital-light method minimizes mounted prices and facilitates excessive FCF conversion, with incremental return on invested capital (‘ROIC’) close to 100%. This positions the enterprise for worthwhile development as income scales.
- Valuation Alternative – Past trades at distressed ranges, with a market cap of $234m and a price-to-sales ratio considerably beneath friends. Analyst FY25 income estimates of $1.49B are overly pessimistic and extrapolate current developments, that are prone to reverse. Market share beneficial properties and a stabilizing furnishings market ought to drive income above estimates, bolstered by enhancing buyer acquisition metrics and app utilization developments.
- Strategic Partnerships – A current $25m funding in Kirkland’s affords a number of synergies:
- A brick-and-mortar presence for Mattress Tub & Past via “shop-in-shops” and standalone shops (each operated by Kirkland’s, as Past will keep an asset-light mannequin with no retail footprint or stock possession). Diminished e-commerce return prices by using Kirkland’s places. Enhanced model visibility to deal with client misconceptions relating to Mattress Tub & Past’s chapter.
- Optionality in Non-public Fairness Investments – Past’s investments in Tzero (blockchain-enabled securities buying and selling) and GrainChain (digital agriculture options) present mispriced optionality. Each property are valued conservatively on the steadiness sheet regardless of optimistic developments equivalent to Tzero’s regulatory approvals and GrainChain’s rising traction within the trade.
Catalysts
- The sale of headquarters to Salt Lake Metropolis leaves the corporate debt-free.
- Continued stabilization within the furnishings market alongside improved market share metrics.
Why the Alternative Exists
- Execution Missteps – Earlier management dedicated a important error in shutting down the Overstock model. Present management set overly formidable income development forecasts, lowering credibility. These points have negatively affected investor sentiment.
- Money Burn Considerations – Excessive advertising and marketing bills and the relaunch of acquired manufacturers have quickly strained money circulate, elevating fears of insolvency.
- Tax Loss Promoting – Past’s inventory declined ~82% in 2024 and 21.5% in December alone. Tax-loss harvesting possible resulted in extreme promoting strain because the 12 months closed.
Dangers
- Money Burn and Profitability – The enterprise stays unprofitable, and extended money burn might drive Past to monetize its personal fairness investments at much less favorable valuations. Failure to attain value self-discipline or income development may worsen these considerations.
- Execution Dangers – Administration has a historical past of missteps, together with poorly timed web site launches and almost investing in distressed firms like The Container Retailer. Ineffective advertising and marketing spending may impede buyer acquisition and retention efforts.
- Trade Dynamics – A reversal within the current stabilization of furnishings gross sales may adversely have an effect on income development. Rivals like Wayfair keep a considerable lead in market share (~9%) in comparison with Past (~1%).
- Index Elimination Danger – Falling beneath the market cap threshold for the Russell 2000 index may heighten promoting strain, additional miserable the inventory value.
Donnelley Monetary Options (DFIN)
Donnelley Monetary Options (DFIN) is a market chief offering compliance, regulatory, and transaction-related options to companies and funding firms. It operates two essential segments:
- Capital Markets (68% of TTM income) – Providers embrace IPO filings, M&A help, and ongoing compliance options.
- Funding Firms (32% of TTM income) – Aids funding administration companies (mutual funds, ETFs, and different investments) with ongoing regulatory submitting necessities.
In contrast to opponents providing solely partial companies, DFIN stands out as an end-to-end supplier with options encompassing a enterprise’s lifecycle.
Thesis
- Recurring Income Progress – Software program options account for $322m in TTM income and are experiencing speedy development with excessive incremental margins. Administration initiatives mid-teens development for this phase, supported by enhancements in retention (Gross Retention Price elevated from 89% in Q1 2024 to 93% in Q3 2024).
- Occasion-Pushed Enterprise Restoration – Transactional income tied to M&A and IPOs (~25% of TTM income) will profit from enhancing exercise ranges.
- First-Mover Benefit in Regulatory Options – DFIN’s Tailor-made Shareholder Studies (TSR) platform is predicted to generate $11m-$12m in annual recurring income, capitalizing on new SEC mandates.
- Robust Aggressive Place – Main SEC submitting agent for funds and companies. Regardless of trade headwinds, rising market share within the Digital Information Room (Venue) phase.
- Administration Alignment – Government incentives are tied to software program gross sales development and EBITDA margins, aligning with shareholder pursuits.
Why the Alternative Exists
- Inventory Overhang – Director Jeffrey Jacobowitz, beforehand a 7.7% shareholder, has considerably lowered his stake, creating near-term promoting strain and suppressing the inventory value.
- Transition Challenges – The shift from transactional to subscription fashions has quickly elevated churn and subdued development metrics.
- Market Skepticism – Weak IPO and M&A exercise has overshadowed the corporate’s transition to higher-margin recurring income streams.
Valuation
The present valuation displays skepticism about DFIN’s capacity to attain software program development targets. The inventory is undervalued as margins increase and income development accelerates. A profitable technique execution may lead to $7+ EPS by 2027, supporting a $140+ inventory value at a 20x a number of.
Catalysts
- Completion of the share overhang from Jacobowitz’s sell-down.
- Restoration in M&A and IPO exercise.
- Continued enchancment in key metrics equivalent to ARR and retention charges.
- Enhanced investor confidence via earnings outperformance.
Dangers
- Execution Danger—Failure to attain software program gross sales development. The brand new administration’s lowered regulatory burden may lead to much less submitting exercise.
- Market Dependency – Extended weak spot in IPO and M&A volumes may delay transactional income restoration.
- Insider Promoting – Jacobowitz’s continued sell-down might recommend inside considerations or restrict near-term inventory appreciation.
The whole write-up is accessible on our Substack (The Lion’s Roar)
Reflecting on 2024 – How Our Course of Advanced
Leads to 2024 had been passable, with Nvidia and Fannie Mae (OTCQB:FNMA & FNMAS) exhibiting optimistic efficiency, whereas Warner Brothers Discovery (WBD), Graftech (EAF), and GreenFirst Forest Merchandise (OTCPK:ICLTF) considerably underperformed. In Andrew Walker’s But One other Worth Podcast, he ceaselessly asks visitors, “The market is a aggressive place; why do you assume this chance exists?” I discover myself asking this query extra usually. Though we take into account ourselves extremely analytical and considerate traders, the market is fiercely aggressive and continues to develop. We compete with companies with limitless assets, entry to different data, and administration groups on velocity dial. We don’t have to have interaction in the identical sport as everybody else. Endurance is vital. The long-term method is turning into much less aggressive as extra individuals enter the quarterly earnings video games. (no quantitative knowledge to help this) Volatility on earnings day appears to be amplified as merchants place themselves primarily based on their thesis for a way the quarter and information will play out. Protecting, put up outcomes. We by no means place portfolios primarily based on what we predict will happen within the subsequent quarter or two; as an alternative, what’s the enterprise’s long-term outlook, holding via the short-term noise or headwinds.
Understanding who’s promoting and why has turn into a precedence in our analysis, and subsequently, understanding who’re shareholders and their thesis. We purpose to establish conditions the place patrons and sellers are detached to the costs they transact. Within the write-ups for Past and Donnelley Monetary talked about above, it ought to have been clear why we believed these two alternatives existed. Each shares confronted extreme promoting strain attributable to components unrelated to their fundamentals. Particularly, relating to Past, we recognized when the promoting strain would ease—year-end. As for Donnelley, though the timeline stays unsure (Jacobowitz stepped down from the board in November and not must file Kind 4s), we will moderately estimate the period for him to exit his place totally. Moreover, the shares are held via Simcoe Capital, enabling us to observe 13F filings to realize insights into the remaining shares to be offered (if the plan is for a whole exit).
Understanding this dynamic is more and more related as personal fairness turns into a significant component within the public house. Many securities we analyze have substantial personal fairness shareholders who will possible exit in some unspecified time in the future. When a inventory faces promoting strain, enterprise outcomes could also be sturdy, but the inventory may not transfer — the traditional voting versus weighing balance. Figuring out who’s voting helps us establish higher entry factors. That is the place endurance turns into important. Recognizing that upside is proscribed throughout the personal fairness sell-down (or bigger shareholders), we will wait patiently till the top is close to. Markets have gotten extra rule-based—index inclusion/elimination, factor-based guidelines, and the shift to passive investments drive every day inventory value fluctuations. We proceed to hunt concepts which will finally profit from these guidelines (BGC – index inclusion, LAZ – C-Corp conversion). Discovering concepts the place market members want to purchase the inventory no matter value are ones we’re actively looking for.
Analysis Studies Throughout the Quarter
Throughout the quarter, we didn’t provoke any new positions. Nevertheless, we up to date our earlier analysis reviews on Donnelley Monetary and Past Inc., the summaries of that are posted above. You possibly can learn the Donnelley report right here and the Past report right here. In case you are fascinated about discussing these positions, please attain out! These firms have nearly no protection and are ones the place we really feel like we’ve got an edge.
Portfolio Prime 5 Holdings
On the finish of the quarter, our prime 5 positions had been NVDA, QCOM, BGC, GLW, and OTCPK:BKRIF.
Regards,
Dominick D’Angelo, CFA | Dominick@okeefestevens.com | 585-497-9878
DisclaimerThis doc is for informational functions solely. O’Keefe Stevens Advisory shouldn’t be offering any funding suggestions with the publishing of this doc, and no agency efficiency knowledge is included on this doc. Advisory companies supplied via O’Keefe Stevens Advisory, an funding adviser registered with the U.S. Securities & Trade Fee. |
Editor’s Be aware: The abstract bullets for this text had been chosen by Looking for Alpha editors.
Editor’s Be aware: This text discusses a number of securities that don’t commerce on a significant U.S. trade. Please pay attention to the dangers related to these shares.