The past two months have seen the S&P 500 rocket higher, up more than 16% since the end of October. Whether you call it a Santa Claus rally or a holiday season rally, whatever you want, it’s been a very good time for bullish investors.
Assuming the index keeps it up -- there are six trading days left in 2023 -- investors will have received one of the best annual returns of the 21st century.
The downside of such a productive year is that value plays aren’t nearly as prevalent as at the end of 2022, after the index laid an egg, losing almost 20%.
While pondering what to write about today, I somehow zoned in on a company I’ve followed for years but never invested in. Maul Land & Pineapple (MLP) owns 22,000 acres of land on the Hawaiian island of Maui, where it operates the Kapalua Resort.
If you’re a golfer, you’ve probably watched the PGA Tour event held yearly at the beginning of January. Given the terrible wildfires in August, it’s great to see the golfers returning there in the new year.
Anyway, I did a stock screen for low-float stocks (40% or less) trading over $10, and there it was. Unfortunately, I wanted stocks with price-t0-cash-flow ratios of less than 20, so it didn’t make the cut.
Here are three that did.
Steel Partner Holdings
Steel Partner Holdings (SPLP) is a small-cap diversified holding company based in New York. It owns businesses in multiple industries, including industrial, energy, and financial services.
The company was founded by Warren Lichtenstein in 1990. It was listed on the NYSE in 2012. Today, it has operations in 11 countries. Lichtenstein owns approximately 46% of the stock. Jack Howard, the President, owns 29%. Together, they control the company.
According to Barchart data, Steel Partners current P/CF is 4.39, with a float of 24.80%. Its shares are down nearly 9% on the year but up 184% over the past five.
In Q3 2023, its revenue increased 15.6% to $492.3 million, while its adjusted EBITDA was $44.5 million, 26% lower than a year ago. Its adjusted free cash flow for the year's first nine months was $148.4 million. On an annualized basis, that’s $198 million.
Based on an enterprise value of $743.4 million, its free cash flow yield is 26.6%. Anything over 8% is value territory.
In addition to the various wholly-owned businesses it operates, it also owns 85% of the stock of Steel Connect (STCN), a company with two operating businesses: ModusLink Corporation, a global supply chain management services and solutions provider, and IWCO Direct, which provides data-driven marketing solutions.
It has many moving parts. You’ll want to take a closer look.
Kelly Services
Kelly Services (KELYB) is a Michigan-based provider of staffing solutions. Its current P/CF ratio is 5.46, with a float of just 6.87%. Its shares are up 23% YTD but down 15% over the past five years.
How high can it go? Well, it once traded around $60. However, that was in 1987. Since the beginning of the 21st century, it’s been on a topsy-turvy trajectory, primarily headed lower. In recent years, it’s traded in a wide range between $10 and $32.
The company was founded in 1946 by William Russell Kelly. He started by getting women office work in Detroit. Naturally, changing the name to Kelly Girl Service in 1957 made sense. It took on its present name in 1966. Kelly’s grandson, Terrence E. Adderly, became CEO in 1989, adding Chairman to his title in 2012, remaining on the board until he died in 2018.
The Terence E. Adderley Revocable Trust K controls 94% of the company’s Class B shares. Its Class A shares are non-voting.
Kelly is in the middle of transforming its business. In May, it announced the creation of a Transformation Management Office that would report to CEO Peter Quigley, working with a consulting firm to restructure its business to accommodate profitable growth.
Two months later, it announced strategic restructuring actions, including flattening its management structure and reducing its workforce. In addition, it is selling its European staffing business. That should net the company more than $140 million. It will reinvest the proceeds in its other operating regions.
Its transformation is already paying dividends. In Q3 2023, its adjusted earnings per share were $0.50, double the amount a year earlier, on a 5.8% decrease in revenue.
If it keeps this up, I could see $30 by the end of 2024.
Bain Capital Specialty Finance
Bain Capital Specialty Finance (BCSF) is a business development company (BDC) formed in October 2015, going public in November 2018 at $20.25 a share.
The BDC is managed by an affiliate of Bain Capital Credit LP, which in turn is a subsidiary of Bain Capital LP, the Boston-based alternative asset managers, the home of Mitt Romney for many years.
The BDC focuses on opportunities within Bain Capital Credit’s Senior Direct Lending Strategy, which seeks to provide investors with risk-adjusted returns and current income by investing primarily in middle-market companies with between $10.0 million and $150.0 million in annual EBITDA. It makes investments that are structured as both debt and equity.
At the end of September, its investment portfolio had a fair value of $2.39 billion. First-lien senior secured loans accounted for 64% of the portfolio. The weighted average yield on the portfolio was 13.1%. It is invested in 143 portfolio companies operating across 30 different industries.
Its net asset value (NAV) per share as of Sept. 30 was $17.54. Its shares trade at an 11% discount to its NAV with a 10.7% dividend yield based on a 40-cent quarterly dividend.
Since its IPO in 2018, BCSF stock has traded between $10 and $20. BDCs must pay out 90% of their taxable income, so the yield is high. With banks tightening their lending, BDCs will become more prevalent in 2024.
This is one of those plays where you pick up some shares whenever the price moves closer to the bottom end of its historical range. Otherwise, sit back and enjoy the income.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
