180 Degree Capital Corp. (NASDAQ:TURN) Q4 2023 Earnings Call Transcript

180 Degree Capital Corp. (NASDAQ:TURN) Q4 2023 Earnings Call Transcript February 21, 2024

180 Degree Capital Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Daniel Wolfe: [Call starts abruptly] And welcome to 180 Degree Capital Corp’s Fourth Quarter 2023 Financial Results Update Call. This is Daniel Wolfe, President and Portfolio Manager of 180 Degree Capital. Kevin Rendino, our Chief Executive Officer and Portfolio Manager and I would like to welcome you to our call this morning. All participants are currently in a listen-only mode. Following our prepared remarks, we will open the line to questions. [Operator Instructions] I would like to remind participants that this call is being recorded and that we will be referring to a slide deck that we have posted on our Investor Relations website at ir.180degreecapital.com under financial results. Please turn to our Safe Harbor statement on Slide 2.

This presentation may contain statements of a forward-looking nature relating to future events. Statements contained in this presentation that are forward-looking statements are intended to be made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to inherent uncertainties in predicting future results and conditions. These statements reflect the Company’s current beliefs and a number of important factors could cause actual results to differ materially from those expressed herein. Please see our filings with the Security and Exchange Commission for a more detailed discussion of the risks and uncertainties associated with 180 Degree Capital’s business that could affect our actual results.

Except as otherwise required by Federal Securities Laws, 180 Capital Corp undertakes no obligation to update or revise these forward-looking statements to reflect new events or uncertainties. I would now like to turn the call over to Kevin.

Kevin Rendino: Thank you, Daniel and good morning, everyone. Let me start with the conclusion before diving into the details of the quarter. I’ve been managing money for over 30 years and have been an investor portfolio manager since 1988. Never in my life I have been more convinced that we own a collection of companies that I believe have the potential to rise materially in value as much as the portfolio TURN has put together as we start 2024. We’re also at a point where I believe our constructive activism will make a difference in this value creation. While the last 2 years have been incredibly frustrating and disappointing, I’m grateful it’s over and we are off to a flying start in 2024. Just look at what we own at the end of the quarter and look at the performance of those names, companies like Synchronoss.

Having had the 30-year experience of knowing that challenging performance periods happen, during these periods it is crucial that you don’t shy away from talking about them, you don’t become over emotional about them and you stick to your knitting and process no matter how painful the period can be. Somebody sent me a quote once and it said, “The one willing to look the stupidest the longest wins.” Over the last 2 years, we feel stupid, on the one hand, yet, on the other, we couldn’t be more optimistic about what we own, that significant value appreciation is possible in the next few years. The fourth quarter of 2023 we hope was a start of what we believe will be a return to risk asset classes, including the microcap stocks in which we invest.

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Q&A Session

Our 7% gross total return in our public portfolio was the primary contributor to the growth of our NAV per share from $4.91 to $5.02. Our assets on our balance sheet are now almost 100% comprised of investments in public companies and cash. You can see those slides and we posted them on our website for details of the sources of change in our portfolio during Q4 2023, the full year and inception to date. On the macroeconomic front, the resilience of the U.S. economy combined with the apparent end of the Fed’s tightening cycle and potential future reductions in interest rates should be one tailwind for our investments in general in 2024. For 180, we believe 2024 will be a year defined by our constructive activism and by long awaited catalysts at certain of our portfolio companies that together could lead to material value creation for 180 Degree Capital’s stockholders.

On Slide 4 — this will be the very last time we show you this chart. 7 years ago, we embarked on a program designed to recreate ourselves and we did just that. Just to remind everyone, when we started, 75% of our assets were in private companies. During the last 7 years, through good markets and bad, we incurred losses from that private portfolio of $25 million, while at the same time generating $31 million in gains from our public portfolio. As we start 2024, that headwind is gone. No longer do I have to sit on pins and needles at the end of a quarter hoping our VC investments and the marks we take wouldn’t offset good public stock performance. We worry no more. That chapter is shut. And in 2024, we’re off to a great start. We’re a pure-play markets small-cap activist.

In terms of what helped and hurt in the quarter, please turn to Slide 5. Potbelly had the biggest positive effect as the company delivered yet another strong quarter of same-store sales growth and record weekly sales per store. On the franchising side, the company has announced nearly 200 new shop commitments to date. Comscore went up by 36% in the quarter, because although missing the top line, the company did exceed estimates for EBITDA. We have continued our activism there and we’ll have more on that in a few minutes. Despite selling its noncore messaging and digital assets, Synchronoss stock declined in the quarter by 28%. We joined the Board late in the year. And as you can see, the performance of the stock since that time through yesterday has been stupendous.

We’re very excited about the potential to work with the management team and the board there and we’ll talk about that involvement shortly also. Arena reported weaker-than-expected results due to softness in the advertising market and changes in search display information that reduced click-through rates. Subsequent to the report, B. Riley sold its stake in Arena to the owner of Bridge Media Networks, who previously announced an agreement to buy 65% of the company. There’s been a series of management changes, delays in completion of the S-4 and the potential end of the partnership with ABG to license the Sports Illustrated brand. This has become a work in progress all over again but one with significant opportunity to create value. Look at this chart on Slide 6.

This “recession” which has been one of the drivers of capital away from risk assets to perceived safer assets has been the most fun and awesome one ever. Every recession should look like the one that everyone has called for or said we’re in. But sarcasm aside, persistent predictions of a return to arguably more normal interest rates have absolutely not led to an economic calamity. Instead, GDP rose 3.1% in 2023; wages and salaries grew 4.7% which is good for consumer spending; real private fixed investment in manufacturing structures reached all-time highs; and employment remains strong. I didn’t live through the 1929 recession but I did experience 1990, 1998, 2000 and the near depression in 2008 as well as 2020. And 2023 I’m comfortably saying looks absolutely nothing like those recessions.

Despite strong macroeconomic trends in 2023, somehow a basket of microcap companies that comprise the Russell Microcap Index underperformed the Nasdaq-100 by over 4,600 basis points. In our last shareholder letter, we incorporated a plethora of chart showing that microcap companies are historically inexpensive and undervalued relative to larger-sized companies. While substantially all of this data and charts remain applicable today, I’m not going to regurgitate them. You can see them from my last letter and you can visit that on our website. Instead, I’ll note commentary regarding Q4 2023 from Royce Investment Partners, who we hold in very high regard. They talked about the valuations for small-caps and how highly attractive they are versus large caps.

We think “it bears repeating that even with the terrific fourth quarter ’23 and a positive return in 2023, the Russell 2000 finished the year well shy of its 11/8/21 peak, while large caps continue to establish new highs in the fourth quarter of ’23.” In fact, it’s been 563 days since the current cycle low for the Russell 2000, the third largest span without recovering the prior peak on record. Fallout from the investment bubble — Internet Bubble, saw small-caps need 456 days from their trough to match their previous peak, while it took 704 days for small-caps to recover their prior peak following their trough in the 2008, 2009 financial crisis. Each of these periods saw dramatic developments: the implosion of high-flying technology stocks in 2000 and a global financial catastrophe in 2008.