Maran Capital’s Three Under-the-Radar Micro-Cap Picks

Clarus was a primary contributing factor to our negative performance during the quarter, just as it has been a primary contributing factor to our favorable results over the last few years. It’s our largest position, so no surprise that it moves the needle. While Clarus declined following last quarter’s earnings release, (in which the company reiterated, but did not raise, its EBITDA guidance for the year), I believe the longterm drivers are intact and that value continues to build in the company’s brands. The disappointment in the quarter surrounded the lack of upside in the company’s Sierra Bullets segment, which continues to operate against a difficult industry backdrop. Eventually (and within our investment horizon), this segment should inflect back towards mid-cycle conditions (and perhaps beyond), but in the meantime, it continues to take share and generate good cash flow while the industry bounces along the trough.

We have held Clarus as a core position for the past four years and have lived through similar mark-to market drawdowns in the past ($7 to $5, $12 to $9). Armor Holdings, the prior public company run by Warren Kanders, the current chairman of Clarus Corp, experienced multiple drawdowns of over 30% (and one of over 60%) as the stock appreciated from $0.75 to $88 (a 100+ bagger) in 12 years. Long-term compounders will inevitably experience short-term declines. Maintaining conviction in the face of a 30- 60% drawdown may be difficult, but it can prove extremely rewarding when warranted (and can lead to problems when unwarranted, so solid analysis and judgment are paramount).

Clarus continues to execute on its “buy and build” strategy. Several new under-the-radar initiatives have the potential to create very significant value relative to the current size of the company. Could a recent acquisition made for $375k grow to be worth tens or hundreds of millions of dollars in the next five years? I think it’s possible, but it is not in anyone’s model. 2020 looks to be a very exciting year for the company with respect to both growth and margins, yet many investors don’t seem to have horizons that extend even that far. I believe risk-reward is asymmetrically skewed to the upside (limited risk of permanent capital loss with multi-bagger upside potential over three to five years).

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Atento is our extremely cheap Latin American business process outsourcing firm (the number one BPO in Brazil, Mexico, and Colombia). While dealing with the vicissitudes of currency swings and shaky governments, the company continues to improve its business, driving its mix towards higher value-added revenue streams and cutting costs. While global peers trade at 8-12x EBITDA, ATTO trades at closer to 3x on a normalized basis. The free cash flow yield is very high, and the company is buying back stock (I believe two recent block trades comprising almost 3mm shares were purchased by the company).

Atento will host its first investor day this fall. We believe Bain, the controlling shareholder, has an incentive to sell the company or otherwise realize the value in a reasonably short timeframe (by May 2020). I believe fair value is at least $8+/sh, if not something in the double digits.

A third stock Dan Roller talked about extensively was RCM Technologies:

RCM Technologies is a small and very far off the beaten path conglomerate, run by a sensible capital allocator with skin in the game (he and his partners own almost 25% of the company and have added materially to their position this year). The company is fairly small, with a market cap of less than $40mm, though it has over $200mm of annual sales. RCM has three main business lines: a fast-growing healthcare staffing segment (staffing nurses into schools and other institutions), an engineering segment (nuclear, aerospace, process solutions), and an IT Services segment (business process and IT outsourcing).

On the surface, the company is trading for around 7-8x EBITDA, which may not appear to be particularly compelling at first glance. But the company has a few “hidden” assets and attributes. First of all, I believe RCM has $20mm of excess working capital on its balance sheet, which if it can free up would put the valuation at closer to 5.5x EBITDA. Second, the profits that would accrue to an acquirer of this business would be vastly higher than what are currently being reported. If one makes the adjustments that an acquirer might make to the financial statements, the business would be trading for 2-2.5x EBITDA. That is more interesting.

On what I believe is a conservative sum-of-the-parts basis, the healthcare staffing business is worth at least $70mm (~8x look-through EBITDA or .8x sales), the engineering business is worth at least $45mm (0.5x sales), and the IT business is worth at least $10mm (0.3x sales). In other words, I think RCMT could be sold today for $8.50 per share (~190% upside)."