That Giant Sucking Sound
A recent Wall Street Journal article from Jason Zweig notes that the trailing 12-month inflows into passive market tracking mutual funds and ETFs (through Oct 31) were a positive +$273 billion. This stands in stark contrast to the -$218 billion taken out of U.S. active equity funds during that time frame (I believe that’s called a giant sucking sound?) The passive market now represents around 40% of U.S. mutual fund holdings. I was reminded recently of a nice trick when you are reasoning out any choices—take things to the extreme. If everyone on the planet invested in passive indexes but you—would you as an active manager be happy? You should be. The movement of funds in to passive strategies over time will make it that much easier for the active managers who are willing to dig to find solid investment opportunities-you are fighting against “dumb money” that is willing to buy every crazy stock in an index no matter what the company does, its valuation or its outlook (just one analyst’s snarky opinion-the outflows truly hurt, but it should make it more profitable to be an active investor).
Just two new microcaps to draw your attention to as we move in to the new year in this Opp Knocks issue. The first is a $77 million market cap company in the business of owning and operating regional ski hills (very timely I think given the winter storm battering the East Coast today). Peak Resorts (SKIS) was founded in 1997 and IPOd in 2014. They were hit with some challenges on the timing of a release of EB-5 capital project funding. After getting those funds released, a number of internal growth projects that should lead to a growing level of EBITDA over the next couple of years, an easy “weather compare” for their Midwest locations this year, and a decent valuation should help this stock move from the current $5 and change trading levels to the $6-8 range over time. PDF attached for your reading pleasure.
Salem Communications (SALM) is a $109 million market cap media company with 118 radio stations, over 100 website properties and a publishing and mobile app business. A large portion of Salem’s radio revenue doesn’t rely on typical spot market rates, but is much stickier programming revenue (think Christian/Conservative market focus) that helps them to consistently bring in around $50 million in EBITDA yearly. Trading around 7* historical normalized EV/EBITDA ratios and sporting a 6%ish yield, a move back to the historical $6-8 trading range and a more normalized valuation could lead to a nice percentage gain for interested investors. PDF attached for your review.
The main push-back we’ve received on this business model so far has not come from the buyside at all, but rather from the company managements themselves (“we’ve always heard the buyside won’t read company-sponsored research”). If any of our reports do hit a hot spot for you (all are at www.oppequity.com), any mentions to the management teams that Opportunity Equity sparked your interest in them is much appreciated. We are now live on Thomson Reuters and Factset, with S&P Capital IQ in the works. Our focus on the consumer ramp continues, and we’re moving in to other sectors into the new year-now back to work-good luck to you all as the new year starts!
The discussion of specific securities is for research purposes only and is not to be construed as an offer or the solicitation of an offer to sell or buy the securities mentioned. Please see our disclosure page on www.oppequity.com for a full list of disclosures.
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