In August of 1988, Kevin Rendino walked onto the Merrill Lynch trading floor in New York City’s World Financial Center for the very first time.
Like many others starting their two-year analyst program, Kevin was in love with the stock market and spent the past several years in school determined to work on Wall Street.
Fresh off of watching the 1987 blockbuster film, Wall Street, starring Michael Douglas and Charlie Sheen, Kevin was motivated and fired up to finally start the career he had always dreamed of.
As if he was the next Gordon Gekko, he showed up to the trading floor on his very first day wearing his favorite pair of suspenders and his suit draped over his shoulder – an outfit he would soon never forget.
Having to walk the entire length of the floor to get to his desk, Kevin began to feel a bit out of place.
Something wasn’t right.
“Feeling adrenaline rushing to my head as I walked the floor, I began to feel that with each passing step, people were starting to stand up and, was it possible, staring at me? It couldn’t be. But maybe they were.”
His instincts weren’t wrong.
By the time Kevin approached his trading desk that was perched up overlooking the entire floor, he turned around only to see the entire trading floor – almost 1,000 other employees – standing up, staring at his desk, and slow-clapping en-masse.
Was it a standing ovation? Nope.
A great, welcoming Merrill tradition? Not quite.
Then, once Kevin’s boss came over, out came the moment of truth…
His boss took out a pair of scissors, cut his suspenders in half on both sides, and whispered these kind words:
“Bud, we don’t do freaking suspenders on this floor. Don’t ever wear them again. Ever. Welcome aboard.”
As if the last snip of his suspenders was the draw of a red curtain, the entire trading floor erupted in cheers as if the Yankees just won Game 7 of the World Series on a walk-off homer.
Classic.
I recite this story not only because it’s worth a good chuckle, but also to paint a picture of the underdog story we’re about to enter.
Kevin’s first day at Merrill Lynch is a classic, ordinary tale of 20-something year old bullies picking on the new kid.
“Think you can be a hot shot on Wall Street?,” says the crowd of egos… “Good luck!”
But guess who’s laughing now?
Here we are nearly 30 years later, and the truth is that Kevin’s life on Wall Street is actually far from ordinary.
Little did his old coworkers know, Kevin Rendino would one day walk the path less taken – on the fringes of deal making – to the likes of Wall Street’s elite.
And using the same strategy that has created Wall Street legends such as Carl Ichan and Warren Buffett.
You probably have never heard of Kevin Rendino.
But today, he’s about to become your new best friend.
A Deeply Discounted Closed-End Fund Trading Well Below Its Liquidation Value
180 Degree Capital Management (TURN) began life as an operating company with the unfortunate name of Sovereign Thoroughbreds. In 1983 they convinced enough people that they had a fantastic future investing in private companies and pulled off an Initial Public Offering (IPO).
The company was eventually renamed Harris and Harris and was a Business Development Company (BDC) that invested primarily in small biotech companies.
They had some success that drove enormous returns, including a trip above $80 per share during the internet bubble and another big splash up to more than $60 per share in 2004 but for the most part, the companies, like most clinical-stage biotechs, fell short of hopes and dreams disguised as expectations.
Returns from 2008 to 2017 were lackluster at best.
After years of less than stellar results, in 2017, the company proposed withdrawing as a BDC and converting to a closed-end investment fund with a change in management and basic approach to investing.
That was when Kevin Rendino took over the firm.
For the 20 years preceding his appointment as CEO of 180 Degree Capital, Kevin Rendino had worked at Blackrock, where he helped manage their Basic Value Fund with a great deal of success. He was also the firm’s value team leader, overseeing 11 funds and $13B in assets. He used a strict Graham and Dodd value approach to investing, and for his entire career, he has been in the top quartile of fund managers.
Over the last six years, he and his team have consistently worked to transform the company.
Their goal was to move from a company primarily focused on small private investments, to a portfolio focused on microcap deep value stocks.
He also uses an activist approach and is not even a little bit afraid to get in management’s face to force actions to increase the stock price. Mr. Rendino calls this, “constructive activism.”
“Our ultimate goal is to constructively engage with existing management teams and boards to help unlock value. Some companies may need to realign their financial performance to achieve growth in cash flows, not just focusing on increasing revenues. Others need to improve their investor relations strategies and outreach. Others may need to evaluate strategic options including mergers, acquisitions, sales, and divestitures. Some may need access to management talent. The constructive part is entering into a collegial dialogue with our investee companies to work together on what is required to increase the value of the company’s stock. To 180, activism means that when and if required, we will not be averse to pursuing change through other routes, including proxy solicitations.”
To say it has worked is a gross understatement.
By focusing on his bread and butter, Mr. Rendino is able to significantly outperform any microcap focused benchmark.
Since the fourth quarter of 2016, TURNs investments into publicly traded companies have returned more than ~225% as compared to the S&P 500s 100% and the Russell Microcap Index’s 35%.
That’s why it is in Mr. Rendino’s best interest to exit the funds private investments and focus entirely on extracting shareholder value from microcap stocks.
When Mr. Rendino took over the portfolio, the company had more than 70% of its money in a collection of private companies, mostly biotechs, and less than 30% in cash and public securities.
Today those percentages are flipped as Mr. Rendino continues to exit the private companies when there is a profitable opportunity to do so and focus on micro cap deep value activism.
Let’s take a look at the kinds of companies TURN has invested in and just how powerful “constructive activism” can be.
Betting on Gamers
On April 27, 2018, TURN announced an investment in Turtle Beach Corporation (HEAR), a provider of headsets to the gaming industry.
Simply put, Turtle Beach had a problem: a complex balance sheet that included $19.3 million of preferred stock accruing interest at a relatively high rate.
So, TURN negotiated the ability to purchase the preferred shares for $7.45 million, using $1 million off of their balance sheet. As a part of the transaction they also bought shares at $3.50.
42 days after making their original investment, TURN had turned their $1 million investment into $4.89 million, booking a 389% return.
Now, not every company will perform like this and even Mr. Rendino was quick to point out that they are “investors, not traders,” but this is still indicative of the kinds of returns investing in microcap stocks can create.
The Future
Looking at the public portfolio today, we can see:
Arena Group (AREN)
You may not be familiar with Arena Group (formerly TheMaven), but you definitely know their media. They are the company that bought TheStreet.com and have a 100-year contract to manage Sports Illustrated.
TURN had originally invested more than $4 million in The Street in 2017 to help fix some problems similar to our Turtle Beach example above. TURN would help retire the company’s preferred stock and would appoint a board seat (Mr. Rendino). Immediately the stock began to appreciate with Arena Group eventually acquiring the company in 2019. Over the life of its investment, TURN realized a gain of approximately $7.2 million on an investment of approximately $5 million, or 144% in a little over two years. Through this process though, TURN ultimately became interested in and invested in Arena Group itself.
After The Street acquisition, TURN invested $7 million into Arena and purchased convertible preferred stock. They have continued investing in the company since then and instituting changes such as replacing the CEO and getting the company’s financials up to date with the SEC.
We expect to see these changes positively impact TheMaven’s share price and ultimately TURNs as well. Mr. Rendino agrees as he has recently stated regarding Arena Group:
We believe that over time, AREN can be a $500+ million market cap company, which would equate to a $30+ stock price at its current shares outstanding.
Potbelly Corporation (PBPB)
Founded in 1997, Potbelly runs a chain of fast casual sandwhich restaurants around the United States. The company IPOd in 2013 with poor performance leading to the stock dropping more than 80% over the next six years.
TURN came in contact with the company in in 2019. As TURN noted in a stock writeup:
At the time, the enterprise value had fallen to $80 million despite $300 million in revenues; and the stock was trading at 3.5x enterprise value to EBITDA.
After doing due diligence , TURN initiated a position in October, 2019, and ultimately acquired greater than 6% of the outstanding shares by early 2020.
But the team at TURN wasn’t just going to hope for the stock price to appreciate. As they stated:
Following all of this diligence, we had become convinced in our belief that the franchise value of PBPB far exceeded its enterprise value at the time. We saw PBPB as a real brand, with a quality product, and with what we believed to be real untapped potential. At the same time, we viewed the current management team, led by a CEO with a marketing background rather than experience as a restaurant operator, as needing to be replaced.
Of course, we all know how 2020 went, with the COVID pandemic decimating the hospitality industry. But TURN didn’t sit on their hands. The fund used this slow time to push for management change, replacing the CEO and COO with previous executives from Wendy’s and Panera respectively.
Since then, the stock rallied from a pandemic low of $1.50 to more than $9.00 per share, a more than 500% return.
We aren’t going to take you through the entire portfolio, but we will say that it is full of deep value microcaps that have the potential for gains measured in multiples of the current stock price and not just percentages. In addition, they have taken activist approaches with many of the companies in the portfolio and are actively engaging with management to find ways to unlock shareholder value.
For the uninitiated, “unlock share value” is code for “get the damn stock price higher!”
You may be asking yourself that if the stocks in the portfolio are so good, why not just buy the stocks themselves?
You could could, but we don’t like paying full price for investments.
The net asset value (NAV) of all the stocks, bonds, private investments, and cash that 180 Degree owns is $7.08 right now. The share price is about $4.80.
Why?
Because there isn’t a broker-dealer with a massive marketing company pushing shares of 180 Degree Capital higher. It is a small investment company, so the big players can’t even think about getting involved in a meaningful way.
Most retail investors have never heard of it, but we think that will change as their results continue to be outstanding and they have success on the activist front.
Exits from more of the private portfolio over time will also help reduce the discount to the NAV. For example, one small private company was sold in the most recent quarter, and another should return more than a million dollars that can be redeployed in the micro-cap deep value activist strategies that have been blowing Wall Streets’ doors off the past five years.
Investing in closed-end funds is a strategy of buying funds with large discounts to NAV and then selling them at a nice profit when that discount narrows, all the while collecting fat dividends. You can learn more about this strategy here.
If you can find a partner with deep pockets to help us achieve that task (i.e. narrow that discount so that the investors can earn a premium on their shares), then it makes a whole lot of sense to work with them.
Kevin Rendino and his team at 180 Degree Capital easily checks both of these boxes.
Skin In The Game
Kevin Rendino and his team have high expectations for the fund. They clearly believe in their ability to continue to produce high returns. With the shares trading at the massive discounted asset value, they have been buying significant amounts of stock in their personal accounts.
Rendino himself, President Daniel Wolfe, Treasurer Alicia Gift, and several other executives have been buying large blocks of stock on a regular basis.
Mr. Rendino now owns over 600,000 shares of the stock. Mr. Wolfe has more than 200,000 shares and Robert Bigelow, the VO of Fund Development, owns more than 100,000 shares.
The insiders clearly expect that buying shares of 180 Degree Capital at this level will make them an enormous amount of money. They can’t hit a big money home run without taking us along for the ride.
A Rational Outlook
As of Q1, 2023, TURN is trading at a more than 30% discount to net asset value (NAV).
But here’s the thing, if you add up all of the company’s securities of publicly traded companies, cash, and other assets, and subtract any liabilities, you’d end up with more money on a per share basis than the stock is trading at today.
On a recent earnings call, an analyst asked Mr. Rendino where he sees TURN at in five years (right after suggesting that TURN should be trading at a premium due to the company’s track record).
Here was his response:
We turned about $12 million of cash and liquid securities (which is what we had at the middle of 2016) to close to $80 million today.
And I humbly suggest that it’s a lot harder to turn $12 million into $80 million, than it is going to be turning $80 million into $200 million. And $200 million is nearly $20 a share in cash and liquid securities and that essentially means our share price should be about $20.
Finding this kind of opportunity – a business that is worth more than the stock price– is fairly difficult to do.
Finding a deeply discounted company where insiders are also showing their agreement with cash, on the other hand, that’s what I call a once-in-a-decade opportunity.